Cash-strapped Hoosier Park racing to restructure $400M in debt

Despite rampant speculation, Anderson’s Hoosier Park is not facing imminent bankruptcy, according to its owner, locally
based Centaur Inc.

But failure is inevitable, Centaur says, unless it can quickly wiggle free from a vice of
pressing debt. Then it must persuade Indiana lawmakers to rewrite the state’s entire gambling tax structure next year.

Ratcliff

A
tall order, to be sure. But Rod Ratcliff, Centaur’s 51-year-old CEO, said his company is ready
to meet the challenge. Ratcliff has been deep in negotiations with his 30 bank lenders for three months, attempting to restructure
$400 million in debt.

“My objective would be to get it done in the next 30, 60 or 90 days,” Ratcliff
said. “I sure would like to have a decent Christmas.”

After years of struggles, the state’s
horse tracks—Hoosier Park and Indiana Downs in Shelbyville—won approval from the Indiana General Assembly in 2007
to install slot machines. Each paid a $250 million license fee in return for the right to add 2,000 machines.

Centaur spent another $150 million to erect a Hoosier Park slots parlor. Indiana Downs operated its slots out of
a tent before investing $250 million to build the adjacent Indiana Live casino, which debuted in March.

But now both venues are weighed down by massive debt and lower-than-projected attendance.
The problems are most severe at Hoosier Park. Centaur is racing to push off further into the future $400
million due to be repaid in 2012. Simultaneously, it’s trying to raise another $600 million for
its stalled Valley View Downs and Casino project, planned 55 miles northwest of Pittsburgh.

Meanwhile, Centaur
might not be able to cover an $18 million unsecured interest payment due this quarter, according to the
rating service Standard and Poor’s, or even come up with the $1 million needed for minimum Hoosier Park maintenance.

In a July 28 report, S&P assigned Centaur a CCC rating with a negative outlook. That’s well into junk-bonds
territory. By S&P’s definition, Centaur is dependent on favorable economic conditions to meet its obligations. Moody’s
rates Centaur a similar Caa3, also with a negative outlook.

As it tries to restructure its Hoosier Park debt,
Ratcliff said, Centaur is attempting to simultaneously kick-start its suspended Pennsylvania project.

Back in
2007, the company inked a broad $1 billion financing plan that earmarked $600 million for Valley View Downs and the remainder
for the Hoosier Park license and related facility upgrades.

But after the company initially failed to receive
a Pennsylvania slots license, the financing pact unraveled. Last September, at the depth of the economic downturn, the company
had to return the $600 million.

Ratcliff believes Valley View Downs still can be salvaged. If he can broker
new financing, he said, the slots license should be approved quickly.

But S&P is skeptical about Centaur’s
efforts to revive its original strategy.

“We don’t think Pennsylvania can, by itself, save or support
the whole debt, including the Indiana side,” said S&P director Benjamin Bubeck, who follows the gambling industry.
“That’s not their lifeline.”

Indiana officials have been paying close attention to Centaur’s
situation.

This summer, the General Assembly’s Interim Gaming Study Committee heard testimony from owners
and managers of both Indiana racinos. Each pleaded for tax relief, pointing out that they pay an effective tax rate of nearly
47 percent, compared with about 35 percent for their riverboat casino competition.

Most of the difference comes
from 15 percent in taxes that go to subsidize the horse racing industry.

Brown

“As a fairness issue, we ought to receive
the same treatment our riverboats receive in the future,” said Hoosier Park General Manager Jim Brown.

That’s true, agreed Bubeck. But it was also true before both Hoosier Park and Indiana Live bought their slots licenses.

“I don’t think the terms with the state are different than when they pursued the racinos, when they
did think they could turn a profit,” Bubeck said.

“[Higher taxes are] clearly a big drain on cash
flows. And the upfront license payment put a drag on building high-end casinos like their competitors. But they understood
all that, I believe, and I don’t think anything has changed since their original proposals.”

Legislators
are somewhat more sympathetic to Centaur’s plight.

State Sen. Luke Kenley, R-Noblesville, noted that Indiana’s
casinos contribute more than $1 billion annually in combined state and local taxes. That makes them a cash cow Indiana can’t
afford to milk dry.

“If we’re going to allow them to exist, we have to make it possible for them
to exist on an economic basis,” said Kenley, who co-chairs the Interim Gaming Study Committee. “All of our gambling
industry needs to be looked at from that perspective.”

The committee won’t make any recommendations,
Kenley said. But it will share its findings, and Kenley expects the Legislature to take up the issue of racino taxes in 2010.

Whether lawmakers trim Centaur’s taxes, or even whether the company fails, shouldn’t affect Hoosier
Park’s patrons, said Ernie Yelton, the Indiana Gaming Commission’s executive director.

He said the
state simply would negotiate a transfer of the license to new ownership—a scenario that occurred when the owner of Evansville’s
Aztar slid into bankruptcy.

“Our experience has been that when casino operators go into reorganizational
bankruptcy, no one loses their jobs. No doors close and tax revenues remain steady,” Yelton said.

“While
this has internal ramifications for the current owners, as far as the state is concerned, we see no immediate threat to the
state’s best interest.”

Indiana Live says it needs the tax relief as well. The horse track and casino
combined lost $50 million in the year after Indiana Live debuted, Chairman Ross Mangano told the Interim Gaming Study Committee.

S&P has assigned Indiana Live a CCC with a negative outlook, the same rating it gave Centaur. Moody’s
puts Indiana Live at Caa2, marginally better than the Anderson racino.

But Indiana Live has more leeway, Kenley
noted, because its primary lender is the South Bend-based Oliver Racing Trust, an affiliate of track owner Oliver Racing LLC.

If necessary, Oliver could convert its debt to equity, Kenley said, a much easier prospect than negotiations with
30 outside lenders.

Indiana Live is trying to capitalize on its greater flexibility by marketing more aggressively.
In April, the month after it debuted its permanent casino, Shelbyville surpassed Anderson for the first time in terms of gambling
revenue. Indiana Live has kept and increased that lead for each of the last six months.

“Our owner was
good enough to ensure we had the money to follow through on the design, which is spectacular. Everybody who comes here feels
that way,” said Indiana Live General Manager Richard Kline.

“Couple it with the best customer service
in the area and I know we’re going to continue to gain in market share. We see that in the numbers we’ve had in
the last few months.”•