Red Hawk Casino could be on the verge of completing a state-assisted financial makeover that would remove many of the doubts about its viability.

Long-struggling Red Hawk Casino edges closer to financial makeover

Published: Sunday, Jul. 21, 2013 - 12:00 am | Page 1B
Last Modified: Sunday, Jul. 21, 2013 - 11:19 am

Red Hawk Casino's debts are so crushing, its tribal owner once warned the venue might close and the Legislature had to provide a bailout plan.

Now the Shingle Springs casino could be on the verge of completing a state-assisted financial makeover that would remove many of the doubts about its viability.

If costs are reduced as expected, Red Hawk's "prospects are pretty good," said Ken Adams, a gambling industry consultant in Reno.

But even if it stabilizes its finances, Adams said Red Hawk will never approach the profitability of the area's most successful casino, Thunder Valley in Lincoln. Red Hawk's Highway 50 location is too far from Sacramento to draw the volume of business seen at Thunder Valley.

At best, "they could make a tidy little profit," Adams said Friday.

Red Hawk and its owner, the Shingle Springs Band of Miwok Indians, took a significant step toward alleviating the casino's $500 million-plus debt crisis Thursday. They signed a deal to pay off a startup loan from the casino's management firm, Lakes Entertainment Inc. of Minnesota, at a discount.

Once the loan is cleared off the books, the tribe will replace Lakes as the casino's manager. Red Hawk employs more than 1,300 workers.

Red Hawk still has to restructure an even larger IOU – its $450 million bond debt.

"We're just starting that process now but we hope to have that concluded in the next couple of months," said tribal general counsel AmyAnn Taylor.

With the financial overhaul still in progress, Red Hawk declined to make general manager Brian deLugo available Friday to discuss Red Hawk's operations.

DeLugo is the third general manager in Red Hawk's brief history – a testament of sorts to the casino's failure to live up to the tribe's grand ambitions since opening in 2008.

The Shingle Springs band spent more than $500 million on Red Hawk, including tens of millions for a dedicated interchange to deliver motorists from Highway 50. The casino was supposed to bring prosperity to the struggling 500-member tribe.

Adams, though, said the tribe simply overbuilt and overspent, given the casino's location 40 minutes east of downtown Sacramento. Opening in the depths of the recession didn't help, either.

"They imagined the market was bigger than it was, and they imagined the economy was better than it was," the consultant said. "There's too much cost structure."

In 2010, the casino generated just $214 million in gambling winnings, according to testimony in a lawsuit filed by the tribe's former business partner. That was $100 million less than projected.

Red Hawk's operating results have made some progress. Over the past year or so, Lakes executives have reported increases in customer traffic and spending. In May, the casino "again showed improvements in both top- and bottom-line financial results," Lakes CEO Lyle Berman told investors. He wouldn't go into detail.

But the gains haven't been nearly enough to erase the casino's debt problem – a situation that took a nearly disastrous turn in 2011.

Just before Christmas, an El Dorado County jury awarded the tribe's former business partner – Sharp Image Gaming Inc. – $30 million in damages.

The tribe said it couldn't pay up. It warned in court papers of a "doomsday scenario" – the shutdown of Red Hawk – if the judgment were enforced.

The case is on appeal and the tribe hasn't had to pay yet. But last year state officials felt compelled to rescue Red Hawk.

Declaring the casino couldn't realistically pay its debts, Gov. Jerry Brown signed a new gambling compact easing Red Hawk's woes. The Legislature ratified it this spring.

The casino would only have to pay the state 15 percent of its slot-machine profits. That represents a significant drop-off from the current 25 percent – believed to be the highest percentage of any tribal casino in California. That will save the tribe millions.

The catch is, the new compact doesn't take effect until Red Hawk restructures its other obligations. Last week's agreement with Lakes brings that closer to completion.

The deal with Lakes erases a debt that's been troubling both parties for some time. The tribe halted principal payments in early 2011 but has been paying interest.

Under the agreement, Lakes will accept a lump sum of $57 million by Dec. 31, representing payment in full.

The payment represents a discount of $9 million, according to Lakes' regulatory filings. The tribe's lawyer, Taylor, said the discount is actually "much more."

By taking over the casino's management, the tribe will eliminate another cost. Currently, the tribe pays Lakes up to 30 percent of the casino's profits as a management fee, according to Lakes' regulatory filings.

Not that Lakes has been getting rich off Red Hawk. At times, the casino has done so poorly that Lakes has had to dip into its own funds to loan the tribe the $500,000 in minimum profits it's guaranteed each month.

Call The Bee's Dale Kasler, (916) 321-1066. Follow him on Twitter @dakasler.

© Copyright The Sacramento Bee. All rights reserved.

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