Landry's-noteholder fight underscores credit crunch

Nation's Restaurant News,  Sept 3, 2007  by Ron Ruggless

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GALVESTON, TEXAS -- Tightening credit markets and uncertainties about debt management are setting nerves on edge throughout the industry, as exemplified by the recent courtroom showdown here between Landry's Restaurants Inc. and holders of $400 million in its unsecured corporate notes.

The Houston-based owner of 179 full-service restaurants and two Golden Nugget hotel-casinos reached a settlement Aug. 20 with the noteholders, who were demand ing immediate repayment of the $400 million. Landry's had said that could have caused the company "irreparable harm" and might have forced it into bankruptcy.

The settlement, which was scheduled to be finalized by Aug. 29, gives Landry's only limited breathing room and calls for the interest on the notes to rise from 7.5 percent to 9.5 percent, costing it about $8 million more a year.

In federal court testimony, Landry's chief executive Tilman Fertitta said backup financing at rates of 11 percent or 12 percent would have cost $15 million more a year.

Landry's truce with the noteholders might last only a year and a half, however, as the agreement also stipulated that after 18 months the bondholders could call the notes or Landry's would have the option to redeem them. The original notes were through 2014.

The bondholders, Post Advisory Group and Lord Abbett Bond-Debenture Fund, said Landry's had triggered their demands by violating its formal pledge to file timely financial information, including its 2006 annual report. Landry's belatedly filed the report in mid-August after being delayed by reviews of its stock-option-granting practices.

Landry's full-service restaurant brands include Rainforest Cafe, Landry's Seafood House, The Crab House, Charley's Crab and Chart House. A subsidiary runs the Golden Nugget properties, in Las Vegas and Laughlin, Nev. The company sold off most of its 136 Joe's Crab Shack restaurants in 2006 and converted some of the locations, with executives of the company indicating that it would focus on higher-end restaurants. Landry's, which failed in a bid to buy the Smith & Wollensky steakhouse chain, has seen its same-store sales flatten out recently.

Landry's difficulties were magnified by its relatively large debt load for a company of its size, analysts said. Standard & Poor's Rating Services of New York said it was maintaining Landry's "CCC" corporate credit rating--a non-investment grade indicating economic vulnerability--on its "credit watch with developing implications," where S&P placed the company July 25.

"Once the final agreement between Landry's and its bondholders is executed," said Charles Pinson-Rose, a credit analyst with Standard & Poor's, "we could raise the corporate credit rating on Landry's and its subsidiary, Golden Nugget Inc., by at least three notches to 'B' from 'CCC.'"

Bond analysts also said investors are scrutinizing the company closely, pointing out that Fertitta's pay is high for a company with a $500 million market value. Last year he received a compensation package of $15.3 million, including a $1.5 million salary, a $1.6 million bonus and such compensation as $283,680 in life insurance, $246,912 in security and $31,920 for use of the company aircraft.

Landry's also does deals with Fertitta Hospitality, a company privately owned by Fertitta and his wife. Fertitta owns about a third of Landry s stock.

In its delayed 2006 report filed Aug. 10, Landry's posted a loss of $21.8 million on revenue of $1.1 billion. For 2005, net income was $44.8 million on revenue of $897.5 million. Landry's attributed the loss to the sale of 120 Joe's Crab Shack units, yielding an after-tax loss of $29.8 million.

During testimony in U.S. District Court, Fertitta was quoted as saying that if the bondholders prevailed, all of Landry's major developments--including expansion in Las Vegas--would be put on hold while the company redeployed funding to pay off the notes.

"I'd just as well go on vacation, because we will be just sitting there," he was quoted as saying.

In remarks to the court, Landry's attorney Anthony Buzbee referred to the bondholders as "sharks" seeking to extort the company. He said they had asked Landry s to pay $4 million just to meet and negotiate, and that they were trying to bankrupt Landry's.

However, attorneys for the noteholders called the dispute a contractual matter.

rruggles@nrn.com

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