Another Piece of Magna Heads Into Bankruptcy

MEC Pennsylvania Racing, a subsidiary of Frank Stronach's Magna Entertainment racing empire that somehow was omitted from MEC's bankruptcy filing last spring, has now joined the club. MEC Pennsylvania, which operates racing and parimutuels at the Meadows harness track in Washington, PA, filed for bankruptcy on Friday, saying it had lost $2.6 million last year and that, as of May 31st, 2009, had $4.7 million in liabilities and $4.9 million in assets. MEC Pennsylvania filed under Capter 11 of the Bankruptcy Code, which presumes a reorganization that will allow the company to continue in business, though nothing is ever certain in these cases. A lot depends on the goodwill and forbearance of the creditors.

Magna Entertainment had owned the Meadows track until 2005, when it sold the facility to Cannery Casino Resorts, which operates three casino-hotel complexes in Las Vegas. MEC took back a contract to run racing operations, while Cannery built and operated the slot machine facility. (It's unclear which entity is responsible for the only bowling alley at a US racetrack, which is scheduled to open later this summer.)

If MEC Pennsylvania does default on its contract as a result of the bankruptcy, Cannery would presumably take over the whole show.

More details to come, as well as a look at what's been happening in the main show of the MEC bankruptcy case.

Taking Care of Business, or Not, in Albany

Thanks Dave (Paterson) and Malcolm (Smith). Even by the historically low standards of Albany, your leadership has been stunningly incompetent. And now you've apparently -- one never knows where this circus will end up -- managed to lose Democratic control of the NY State Senate, with unpredictable consequences for a myriad unresolved policy issues. Two of those issues directly concern horse racing in the (declining) Empire State.

First, any upheaval in Albany can only prolong the agony of selecting a contractor to build and run the slot-machine palace promised for lo these many years for Aqueduct. We've been promised the slots, and their attendant boost to purses, for at least the last five years, so we've learned to expect delay, but this latest blow, completely unnecessary, has one feeling like the camel as more and more straw is piled on its back.

Purses in New York are stagnating, while costs continue to increase. Trainers, equally squeezed by cost pressures, are forced to raise day rates, just as owners hit by the financial trauma of the last couple of years scale back their commitment to racing. Day rates in New York for the average trainer -- to say nothing of the Todd Pletchers and Nick Zitos of this world -- are pushing hard against the $100 a day threshhold. Meanwhile, purses, while still quite decent compared to many US racing venues, are stagnating. Allowance races at NYRA tracks carry purses in the mid-$40,000s, while the maiden claimers and conditioned claimers that increasingly are used to fill out the race card often have purses of $20,000 or less. Racing has always been a tough place for an owner to make money, but it's getting tougher.

The slot machines (oops, they're supposed to be called "video lottery terminals," to comply with the NY state constitution) were intended to provide significant revenue to the state, while increasing purses and NYRA revenue enough to make racing a viable business, if not a source of Bernie Madoff-like profits. The legislation authorizing the machines provided for 4,500 of them at Aqueduct. Even at a very conservative prediction of $200 per machine per day, that would mean almost $1 million a day in profits, to be divided among the state, the racino operator, NYRA and the horsemen's purse account, with a little bit going to NY breeders. That little bit to purses might have pushed allowance races up into $60,000 territory, which would be enough, at least for a few years, to help us all survive in the game we love.

I've forgotten how many years ago the process of selecting an operator for the Aqueduct slot machine palace started. MGM was awarded a contract, but that was delayed first, by NYRA's indictment and the appointment of a court-ordered overseer, and then by NYRA's bankruptcy filing. One also suspects that MGM was in no hurry to proceed at Aqueduct, since slot machine play in Queens would inevitably siphon players away from MGM's Atlantic City properties. After NYRA emerged from bankruptcy, a new contract was awarded to Delaware Nort, which runs the slots at Finger Lakes, but that company reneged on its promised up-front payment, and, once again, the search for an operator is on. With the Senate in disarray, no one knows how long the process will take.

Meanwhile, we're still waiting for purses that will cover even a majority of our costs.

The second issue pending in the Legislature concerns funding for the health program that serves backstretch workers, but that's a story for another day.

Handle, Purses on the Down Escalator

Thanks to Ray Paulick for posting the latest Equibase figures on handle and purses. Both figures dropped in May, as compared to a year ago.  Total US handle was off by 8.26%, to $1.375 billion, even though May, 2009 had one more weekend/holiday race date than the same month in 2008.  Purses for the month declined by a lesser percentage -- 6.73% -- to $105.1 million.

For the first five months of the year, through May 31st, total US handle was down 9.22% from the corresponding period last year, while purses declined by 5.54%  

While purses are generally set as a fraction of total handle or takeout, there are a couple of reasons why the decline in purses has been somewhat milder then the decline in total handle.  First, some tracks use slot machine revenue or other gambling income (e.g., the casino supplement in New Jersey) to augment the purse account.  Second, there's a time lag in the calculation of purses; tracks set an initial level for a race meet based on what they estimate the handle will be; when handle doesn't meet expectations, the purse account is subsequently adjusted downward. But eventually, purses will catch up to the drop in handle, making a tough business for owners and trainers even tougher.

While the 2008-2009 declines in betting and purses can be, and are in most industry circles being, blamed on the general US economic malaise,  the longer-term trend, which predates the financial crisis of the past two years, is equally depressing.  As this chart from Equibase shows, total US handle reached a peak in 2003 and has since been on a downward path; the total for 2008 was less than the amount for 1999, even before adjusting for any inflation in the intervening years. The final numbers for 2009, now that the big spring meets at Churchill and Santa Anita are ending, and the Triple Crown races are in the past, seems unlikely to do anything better than continue the trend that's been established so far this year.  Paulick estimates that this year's total handle will be the lowest since 1996.

With purses declining, or, at best, flat, and with costs increasing, owners are getting squeezed even more than is customary.  The rule of thumb used to be that purse money nationwide was equal to about half of the total cost of keeping all US race horses in training. And that's before taking into account the costs of breeding or buying those horses. That was bad enough, but I suspect that, when the final numbers are in for 2009, it'll be more like 40-45% of our costs being covered by purses. It's tough to stay in business on those terms, no matter how much one loves horses. At this point, if slot machines were installed at Aqueduct tomorrow, I couldn't be confident that those of us racing in New York would have a fair chance to break even.

Churchill's First Quarter - Racing Down, Gaming & Online Up

Churchill Downs Inc. has just released its financial results for the first quarter of 2009.  No real surprises: Churchill lost a total of $4.8 million for the quarter, compared to a modest profit of $742,000 for the same quarter last year.  But in fact, Churchill's overall performance this year was substantially better than last, since the 2008 results were inflated by the inclusion of a $17.2 million insurance payment with respect to the damage inflicted by Hurricane Katrina on the Fair Grounds in New Orleans. Without that one-time payment, Churchill would have lost $16.5 million in last year's first quarter, a much bigger loss than the company reported for the current year. This year's one-time payments, by contrast, were much smaller, principally a $4.3 million settlement with respect to source-market fees owed to Arlington Park by TVG.

As we should expect by now, income from live racing continues to stagnate, if not decline, while revenue from gaming -- notably, the new casino at the Fair Grounds -- and from the Twin Spires internet wagering site continues to grow.

Net revenue from racing operations for the quarter was actually up fractionally, from $38.835 million last year to $38.984 million this year, even though Churchill's parimutuel handle dropped by 6%.  Still, that's better than the 9% decline reported by Equibase for handle nationwide in the first quarter.

But the significant increases were in net revenue from online operations, up from 14.144 million last year to $16.650 million this year, and, especially, in gaming revenue, now that the permanent slot facility at the Fair Grounds is up and running.  That segment increased from $12.474 million in net revenue on the frist quarter of 2008 to $17.875 million this year.

So the corporate types at Churchill seem to have the numbers to validate their long-term strategy of focusing growth away from the race track.  And that probably means continued tension between Churchill and the horsemen who race at its tracks.  Unless Churchill is willing to share its Twin Spires revenues with horsemen in the same proportions as it shares on-track betting money -- as the New York Racing Association does with betting handle on its NYRA Rewards site -- the corporate suits will continue to favor the online business over live racing, and the horsemen will continue, rightly, to feel taken advantage of.

Magna Finally Faces Up to the Market

Probably figuring that its latest SEC filing would be thoroughly ignored amid all the focus on its bankruptcy, Magna Entertainment (MEC) filed a Form 8-K yesterday with the Securities and Exchange Commission in which it finally admitted that some of its race tracks and land holdings aren't worth anything like what Frank Stronach paid for them not all that long ago.

The 8-K, which is required whenever there is an event that materially affects a company's business, reports that on Monday MEC's audit committee approved a $136 million write-down in the value of the company's assets. In particular, the write-downs included the value of racing licenses for Lone Star Park in Texas, Golden Gate Fields in California, and the Maryland Jockey Club's tracks, Laurel and Pimlico. Other reductions in value were allocated to The Meadows harness track, to the now-shuttered operations at Portland Meadows and at Stronach's Austrian Racino, and to the value of land that MEC owns in Dixon, California, once the intended site of a thoroughbred track.

No mention in the SEC filing of the value of Santa Anita, Gulfstream or other Magna properties.  But the unforgiving nature of bankruptcy proceedings may sooner rather than later show exactly how much of the value of MEC's assets as carried on its balance sheet has any relation to the real world.

Carolina Fuego Wins At Aqueduct

Most of what I write here focusses on the big picture in racing -- how Magna, Churchill or NYRA are doing, what's happening at the sales, what the economics of various niches in the racing industry are like.  But every once in a while it's fun to just celebrate being part of this great game.  Today was definitely one of those days.

My partnership operation, Castle Village Farm, had been pretty quiet over the winter. We'd retired a couple of horses, sent our better runners off for winter vacations, and had a couple of babies getting ready for their debuts.  And the there was Carolina Fuego.  We'd claimed her as a three-year-old back in June of 2007, and in 17 sytarts before today, she'd been in the money eight times, including a good second in the 2007 Delaware Certified Distaff Stakes. But she hadn't won for us, and the partners were, understandably, getting restless. In fact, back last summer, when her performance tailed off, we'd decided she needed a rest after two straight years at the race track, and gave her a couple of months of R&R at an equestrian facility on Long Island, just for a change of pace.

We brought her back to the races last month, and, despite being left flat-footed at the start, she made a nice run through the stretch to get third.  Today, we entered her back in a claimer for horses that hadn't won in six months -- in most cases, they hadn't won in a lot longer than that -- and she came through for us.

Sent off by the public at Aqueduct at an overlaid 11-1, Carolina bided her time toward the back of the eight-horse field, moved up into the turn, and pushed through to the lead in the stretch.  She then held off a late challenge and prevailed by almost a length.

Lots of high-fives in the box area, where a dozen of us were watching. Lots of smiles in the winners circle, and lots of win photos for the two dozen other partners who couldn't find a good enough excuse to get out of work and come to the track today.  And lots of appreciation for Leah Gyarmati's training and Sheldon Russell's very smart ride.

Sure, the first at Aqueduct on a winter Wednesday isn't the Kentucky Derby, or even the Empire Classic.  But, if you're in this game, there's nothing better than a win.

Mr. Stronach: Build Up That Wall!

For those too young too remember, or old enough to have forgotten, one of actor Ronald Reagan’s best lines as President, delivered on a visit to Berlin, was “Mr. Gorbachev, tear down that wall!” And when the Berlin Wall was indeed torn down – by ordinary Germans rather than by Mikhail Sergeyevich – Reagan’s credentials as an anti-Communist were assured.

Frank Stronach seems to have learned something from Reagan as well.  If nothing else, Magna Entertainment’s bankruptcy filing today was a remarkable exercise in tearing down walls, especially the walls that are supposed to exist between different corporations with different sets of shareholders.

[The Magna bankruptcy has been dutifully, and reasonably well, covered by the racing press and by the leading newspapers in areas where Magna tracks are located.  The best of the stories are collected at The Paulick Report and at Raceday 360, and quite a lot of detail is available on Magna Entertainment’s own web site.  I’ll try not to repeat any more of that coverage than is absolutely necessary.]

The most unusual aspect of the bankruptcy filing is that “DIP” (for debtor-in-possession) financing to fund continuing operations of the Magna tracks and affiliated companies is being provided not by a commercial or investment bank, or even by a financing company like GE Financial.  Instead, the DIP financing, to the tune of $62.5 million, is being provided by MI Developments (MID), another Stronach-controlled company, which had already lent several hundred million to Magna Entertainment, over the strenuous objections of its minority shareholders.

DIP financing occupies a special, privileged place in bankruptcy proceedings.  Typically, the DIP lender gets a security interest in all the debtor’s assets and moves to the head of the queue of those entitled to repayment. Since MI Developments is already the single largest creditor of Magna Entertainment, one might have thought that MI Developments already had a fairly strong position in the bankruptcy, but Stronach apparently wanted to ensure that his own company wouldn’t have to take second place to any mere bank.

But wait, there’s more.  Not only did MI Developments provide the DIP financing that will keep Magna tracks’ doors open, but it also submitted a “stalking horse bid” for some of the Magna Entertainment assets that will, presumably, be disposed of as part of the bankruptcy proceedings.  Specifically, MI Developments offered a total of $195 million -- $44 million in cash, $15 million for assuming a Magna Entertainment lease and $136 million in partial payment of MEC’s existing debt to MID –- for Golden Gate Fields, Gulfstream (including MEC’s interest in the Gulfstream condo/retail extravaganza), the Palm Meadows training center, Lone Star Park, AmTote and the XpressBet online and phone betting operation.  So, if no other bidder emerges for these assets, MI Developments will end up with them, and Stronach will still have large parts of his tottering empire under his control.

The MID stalking horse bid does not include Santa Anita, the Maryland Jockey Club (Laurel and Pimlico), Remington Park, Thistledown or Portland Meadows.  Nor does it include MEC’s Austrian interests or its real estate in Ocala and Dixon, California.  And it excludes MEC’s interest in the TrackNet simulcasting partnership with Churchill Downs, Inc. Apparently even the captive directors of MID thought that to take on all of MEC’s assets, which have, in the aggregate, produced losses of some $600 million since Stronach got into the race track business a decade ago, would be going too far.

The effrontery of it all takes one’s breath away.  Stronach runs his race track operations into the ground, props them up with money from the real estate company, MID, that he controls, then puts MID in a position to emerge with a bigger share of the debt than outside creditors and with a substantial chunk of the assets.  If he succeeds, it’ll become part of bankruptcy lore that will be taught in the casebooks for years to come.

Of course, there’s always uncertainty any time one goes to court.  Who knows, the bankruptcy judge (the case was filed in the US bankruptcy court in Delaware, a state that, I hear, might even have a race track) may actually know something about racing. There are seven judges on the bankruptcy court in Delaware, and I haven’t seen anything indicating which of them will be handling the Magna case.  Judges in the corporate milieu that is Delaware should, though, be thoroughly cognizant of the corporate shenanigans in evidence in the Magna case. And if the minority shareholders in MI Developments can find a way to make their views known, perhaps the court will be able to rebuild some of those walls that Frank Stronach has so assiduously torn down.