Description

GB Holdings’ $110MM 11% bonds of ‘05 are secured by $243MM of tangible book value (including $46MM of cash) with a CY of 12.22% and a YTM of 16.51% at $90. 2002 EBITDA $20MM, Net Debt/EBITDA = 3.3X. The equity has been on a tear, trading at over $6.00 per share, up from $3.00 last week, (please don’t ask me why). I am recommending the bonds, which are exchange-traded under the ticker GBF.

GB Holdings has a single asset, the Sands Hotel and Casino in Atlantic City. Carl Icahn owns 77% of the equity and 58% of the senior secured bonds. With security and a hard maturity, I feel confident that an investment in the bonds is a good way to participate with Icahn in the casino’s upside.

Balance Sheet: (in millions)

Assets:
Cash $46.6
Accts. receivable $4.7
Other current assets $5.0
Net PP&E $168.3
Other assets $13.2
Total assets $237.8

Liabilities:
Sr. Bonds $110


Why are the bonds so cheap?

Everyone knows that at a casino a player’s odds are much better at table games than at slot machines. From a casino’s point of view, an all-slots casino would have lower labor costs (no dealers to pay) and improved odds for the house. Sands tried to capitalize on the high gross margin slots by adding slot machines and reducing its table count from 69 to 29 during the summer of 2002 (their prime season). Gaming revenues fell from $65.6 million for Q3 2001 to $53.9 million for Q3 2002, a decrease of 18%. The problem is that an all-slots casino alienates groups of gamblers traveling together that might be looking for table games. No surprise: revenue declined and the bonds fell.

Why buy the bonds now?

Icahn fired the old management, poured money into CapX and, the table count will be back to 2001 levels by the all-important July 4th weekend. Second quarter numbers should also come in strong - all of Atlantic City had a booming spring as the rain drove people indoors to theaters and casinos. Atlantic City is a drive-to destination and could actually benefit from people’s desire to fly less and stay close to home.

Yield Analysis:

Price CY YTM
95 11.57% 13.65%
94 11.70% 14.21%
93 11.83% 14.75%
92 11.96% 15.35%
91 12.09% 15.97%
90 12.22% 16.51%
89 12.36% 17.11%
88 12.50% 17.71%

The Casino:

The Sands is located half a block away from the boardwalk at Brighton Park, between Indiana Ave. and Dr. Martin Luther King Jr. Blvd. It is situated on 6.1 acres of valuable prime land overlooking the Atlantic. It has 77,000 sq. ft. of gaming space, as well as 511 rooms in its main hotel tower. In addition, the company leases the Madison Hotel which has 113 suites and 13 single rooms. The Sands has six restaurants including Rousi’s and Midici for Italian cuisine, Brighton Steak House and Boardwalk Buffet, and Corner and Corner Express for light food and sweets. The Boardwalk Buffet was recently renovated and decorated by famous artist Charles Fazzino. Finally, the hotel purchased a nine-story 77,000 sq ft. office building from bankrupt Claridge Casino & Hotel for $3.5 million in 2000, which it uses for its offices.

In order to give its customers easy access from the acclaimed Atlantic City boardwalk, the Sands owns a “people mover” which transports customers from the boardwalk to its casino and the Claridge Hotel. Park Place waged a bidding war with Carl Icahn to try and take over the Sands while it was in bankruptcy proceedings in 2000. The Claridge Casino Hotel was taken over by Park Place Entertainment, and has since been connected with its other properties, including Bally’s. The Claridge Hotel is connected to three other adjacent hotels, including Bally’s Atlantic City, Wild Wild West, and Caesar’s Palace. Between the hotel and the beach, Park Place Entertainment owns roughly 4 acres of land, which is used as a parking lot.

Capital Improvements should improve cashflow.

During the last three years, capital improvements totaled over $60 million and had temporarily closed some of the facilities. During 2002, much of the Madison House Hotel, which is connected to the Sands Casino and is leased by the Sands through 2012, was closed for renovation. In addition, the main restaurant, the Boardwalk Buffet, underwent a major renovation and was temporarily closed.

Catalyst

(1) EPS and EBITDA increase from:
(a) increase in the number of table games
(b) benefit from $60MM spent on CapX including:
i. $10 million for new casino entrance
ii. new slot machines
iii. renovations to hotel rooms in Madison House and Sands
iv. physical plant upgrades, such as a new air conditioning system
v. new bus terminal
(c) benefit from a rainy Spring
(d) benefit from gamblers driving instead of flying to a gambling destination

(2) Hard Maturity of 9/29/05