Bankruptcy looms for Magna

Magna Entertainment Corp., the country's largest operator of racetracks, will likely need to file for bankruptcy by early March and face a massive reorganization of its properties, bankruptcy lawyers and racing officials said Friday.

Although it is difficult to speculate on the fate of the company's racetracks, its precarious financial position combined with the global credit crunch suggests a sale or closure of at least some Magna properties, according to the officials, most of whom spoke anonymously because of business ties with Magna.

On Wednesday night, Magna's parent company, MI Developments, scrapped a last-ditch spin-off plan and said that it would seek $171 million owed to MI Developments beginning in mid-March. On Thursday night, the Toronto Stock Exchange, where Magna shares are traded, said that it had initiated an expedited review of the company's listing on the market. Magna shares are also traded on the Nasdaq exchange. Stock exchanges will often seek to protect investors by halting trading in a company's shares if the company is nearing bankruptcy. The price of Magna's stock closed at 30 cents Friday, down 8 cents or 21 percent.

Magna's auditors have said for several years that the company would have difficulty in continuing to operate without improvements in its financial position. But Magna has failed to measurably pay down its debt or stem hundreds of millions of dollars in annual losses.

According to lawyers and racing officials, Magna would likely file for bankruptcy sometime in early March, when the first of Magna's loans come due. Magna owes a Canadian bank $40 million, due March 5. A $45 million loan from MI Developments will come due March 13, and a $126 million loan will come due March 20. Under the covenants governing the debt, any default on one of the loans will automatically place all of its other loans in default.

Typically in bankruptcy cases, the debtor goes into the filing with an agreement with its lenders to devote its future cash flow to both debt repayments and the ongoing operation of the company, the lawyers said. The debtor enters bankruptcy court after a comprehensive evaluation of the strengths and weaknesses of its existing properties, with the goal of "reorganizing around the viable properties" by selling some valuable properties and closing unprofitable ones, according to John Sullivan, a bankruptcy lawyer with Preti Flaherty in New Hampshire. Sullivan is representing Hinsdale Park, a New Hampshire greyhound track, in its recent bankruptcy filing.

"A company with that amount of property is going to be looking to sell off its assets at one end of the extreme and at the other end so that the operation makes sense," Sullivan said.

According to the Magna's most recent annual financial statements, which provide revenue breakdowns for its segmented operations in 2007, Magna's California operations, which include Santa Anita Park and Golden Gate Fields, had earnings before interest, income taxes, depreciation, and amortization of $15.9 million in 2007. Its Florida operations, including Gulfstream Park and the training facility Palm Meadows, lost $12.4 million. The company's Maryland operations had $6.5 million in earnings, and its Southern operations, including Remington Park and Lone Star Park, had earnings of $3.9 million.

Magna also owns an account-wagering company, XpressBet, that could be valuable to other account-wagering operators that are looking to consolidate the market and pick up XpressBet's thousands of customers. In addition, Magna owns a bet-processing company, AmTote, and half of the television network HRTV. Churchill Downs Inc. owns the other half, along with half of a simulcast-marketing partnership that it operates with Magna. Magna owns two other racetracks, Thistledown in Ohio and Portland Meadows in Oregon, both of which have struggled.

Overall, Magna has had $500 million in losses over the past five years and owes $265 million in accounts payable, $71.9 million in short-term debt, $379.3 million in long-term debt, and $112 million in other liabilities.

One question surrounding a bankruptcy filing would be whether Magna could generate enough cash from a reorganization to continue operating while still satisfying its creditors. Typically, companies in bankruptcy obtain additional financing through debtor-in-possession financing or injections from private investors. Magna might have difficulty in obtaining such credit, according to racing officials.

One company with a potential interest in Magna's properties is Churchill, which already owns four racetracks, has a strong balance sheet with only $36 million in long-term debt - compared to total assets of $609 million - and could likely receive a line of credit despite the economy's problems. Citing company policy, Churchill officials declined to comment on its plans.

Casino companies with racing interests, such as Penn National Gaming, Delaware North, and MTR Gaming Group, might also be interested in several of the tracks, but most casino companies have fallen on hard times and are struggling to finance current projects. Halsey Minor, the Internet entrepreneur and horse owner who has had discussions with the owner of Hialeah Park about a possible sale, may also be a candidate.