Plan to redevelop Sahara risky for investors, debt-rating agency says

/ Las Vegas Sun

The Sahara porte cochere and marquee are seen Monday, December 21, 2009.

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Sam Nazarian’s plan to redevelop and reopen the Sahara hotel-casino is risky for investors in the project’s debt, Standard & Poor’s is cautioning.

The debt-rating agency in New York on Thursday issued a preliminary B- rating to a proposed $300 million term loan for the $744 million project dubbed SLS Las Vegas that would open in the second quarter of 2014.

Nazarian’s company isn’t commenting on recent ratings actions for the proposed project, a spokesman said Thursday.

Like a rating issued earlier by Moody’s Investors Service, the S&P B- rating is deep in speculative or “junk” territory.

But while Moody’s outlook on the proposed $300 million loan debt is stable, Standard & Poor’s gave it a negative outlook.

That could drive up Nazarian’s borrowing costs, because the negative outlook implies more risk for lenders and investors.

“Given SLS’ disadvantaged Northern Strip location, a highly-competitive market with many well-established competitors and the vulnerability of new gaming projects to uncertain demand and difficulties managing initial costs, the negative outlook reflects the risks in achieving a sufficient ramp up in EBITDA to meet fixed charges,” S&P analysts wrote in their report.

EBITDA is a profitability measure meaning earnings before interest, taxes, depreciation and amortization.

The budget-oriented Sahara closed May 16 after 59 year of operations, with Nazarian saying it had grown uncompetitive.

Now, he’s hoping to reopen it as a luxury or near-luxury property without its roller coaster and with 1,622 rooms, down from the 1,720 rooms the property had when it closed.

Standard & Poor’s, in its report, revealed more details about SLS that confirm it would be as much about dining and nightlife as about gambling. This is no surprise, given Nazarian’s ownership of the Los Angeles-based SBE Entertainment hotel, restaurant and nightclub company.

S&P said the property would have 12 restaurants seating 1,671 people, 8,000 square feet of bars and lounges and four nightlife venues with a capacity for 5,000 people.

Observers are wondering whether such a concept will work at the Sahara location, given its lack of foot traffic and remoteness from the hottest parts of the Strip, the idled status of the nearby Fontainebleau and Echelon resort projects, the debt default at the nearby Las Vegas Hilton and the inability — so far — of the Cosmopolitan resort to make money with its dining and entertainment orientation.

Still, with business picking up on the Las Vegas Strip, both Standard & Poor’s and Moody’s agree the market could absorb another 1,622 hotel rooms. What they’re questioning is whether the Sahara is the right location for those rooms.

They’re also questioning if Nazarian will have an adequate capital structure to meet debt obligations that include the $300 million loan plus $115 million in junior financing. The debt is on top of $329 million in equity contributed or to be contributed by Nazarian and his partner, a Stockbridge real estate fund.

S&P, in its report, called the SLS business risk profile “vulnerable” and said it’s “highly leveraged.”

Standard & Poor’s said that with its nightlife offerings, SLS could fetch high weekend hotel room rates of $130-$140 but that it would have to substantially lower midweek room rates given its disadvantaged location and limited convention capacity.

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