Star Entertainment needs money — urgently.
The company has been walking a tightrope of financial difficulty for months and all signs point to the casino operator losing its balance and falling into administration this week, experts warn.
It entered a trading halt on Friday after missing its deadline to report its half-year results to the Australian Securities Exchange (ASX).
On Monday, in a note to the ASX, Star said it would be “unlikely to be in a position to lodge its [results] until it has secured a refinancing commitment that would enable The Star to refinance all of the Group’s existing corporate debt, as well as to provide additional liquidity”.
“There remains material uncertainty as to the Group’s ability to continue as a going concern.“
In other words, Star needs cash, and a lot of it, to survive.
How is Star still able to operate?
Australian companies aren’t allowed to operate while they are insolvent — that is, unable to pay their debts.
So how is a company like Star, that has sent out multiple distress signals about its finances in recent months, still running?
Jason Harris, professor of corporate law at the University of Sydney, said it’s very likely Star is insolvent and using “safe harbour” provisions to continue operating.
Safe harbour allows directors of a company to take steps to turn their business around once it’s insolvent, and avoid personal liability if the company is ultimately unable to trade out of the crisis.
Directors must continue to act in the best interests of the company, so it’s not a free pass, and courts can judge whether the directors’ actions were the best for all involved.
“You don’t have to tell anyone you’re enacting safe harbour, which has been criticised,” Professor Harris said.
“But if we did have a disclosure regime, all suppliers would hold supply and employees would quit, so it needs to be confidential.”
Star Entertainment has casinos in Brisbane, the Gold Coast and Sydney. (ABC News: Christopher Gillette)
Is voluntary administration likely?
The short answer is yes, insolvency experts said.
Star has been searching for a financial lifeline, after already tapping investors and lenders for extra cash.
As of its last update on Monday morning, that lifeline hadn’t materialised.
Secured creditor Bruce Mathieson told the ABC on Monday he had offered Star “a lot of deals but they don’t know themselves what they’re doing”.
Professor Harris said the company is really only left with two options — appoint an administrator to try and save the business (“although that seems like a challenge”, he notes), or sell the assets for as good a price as they can get.
Voluntary administration is when a company appoints an independent party to attempt to rescue the company as a going concern (keep the doors open), or achieve a better outcome for creditors than immediately selling off assets would offer.
“What’s complicated this is the casino operating license,” he said.
A company, large investors, and key executives have to hold a specific license to be allowed to run a casino.
“I imagine we haven’t seen Star go into administration yet because the moment it does, it [could] lose the ability to keep operating the casino.“
Star’s stake in Brisbane’s Queen’s Wharf precinct has been eyed by Hong Kong investors. (ABC News: Matt Eaton)
Another option is receivership, which occurs when a secured creditor, such as a bank, appoints a receiver to manage or sell the company’s assets.
“The banks that have security of Star’s assets could appoint their own person to take over, but that person would have the same problem — they are not licensed by the casino regulator,” Professor Harris said.
The licensing restrictions also have the potential to impact would-be buyers of the casinos.
Lawyer Trevor Withane from Ironbridge Legal said Star had been “beleaguered by historic regulatory failures and a tightening of the purse by both local and, especially, Asian punters” for some time, and he would be surprised if potential buyers were not already lining up.
But it would be a small pool, given how heavily regulated the gambling industry is.
“If the casino goes into administration, we would expect to see an application made to court to extend the convening period — given the administrators need somewhat more than the standard 25 business days for the creditors to determine the fate of the casino,” Mr Withane said.
Will Star’s assets be sold off?
Liquidation is the end of the road — it means a company is selling off its assets to repay creditors and shutting the doors for good.
Administrators recommend liquidation when it’s the best option for creditors to receive a payout.
Professor Harris believed Star was more likely to go into administration and split off its casino business from the company, describing the parent company as “hopelessly insolvent”.
“They have made very bad business decisions and have taken on a huge amount of debt to build its facility in Queensland,” he said, referring to its 50 per cent stake in the Brisbane Queen’s Wharf development.
“They were banking on government support and it hasn’t come through.
“It suggests the company just needs to be shut down and someone else appointed to run the casino business.
“Star the corporation goes into insolvency and shareholders lose money and creditors take a haircut. I don’t see that as entirely problematic.”
Star’s Hong Kong-based co-investors in the Queen’s Wharf development have already been circling its stake.
“How it can preserve the business and 9,000 jobs and pay contractors and suppliers — that’s the more important question,” Professor Harris said.
Omkar Joshi, founder and chief investment officer at Opal Capital Management, said staff “should be okay for the time being”.
“If [Star] gets a bit more cash in the door then they’ll be okay from a liquidity standpoint.
“If [it] does end up in a voluntary administration situation I suspect you’ll get a restructure, you’ll get some sort of reorganisation and someone starting with a clean state, in which case you do need staff to run the properties at the end of the day,”
he said.
What’s needed, Mr Joshi said, was “fresh blood”, speculating that Oaktree Capital Management remains a possibility.
Asset management firm Oaktree, based in California, made an offer to lend Star $650 million last month.
“They are quite predatory and do turn up to situations like this, so I wouldn’t be surprised if someone like that did end up taking up all the equity.
“The assets are good quality, yes [Star] have had their fair share of problems from a revenue standpoint, from a regulatory standpoint, but at the same time there are good quality assets, so if you can get in there fresh and not pay a whole heap for it you can make it work quite well.”
But whatever happened, it would have to happen quickly, he said.
“I think we need to have a resolution within the next week, if not sooner because they are running out of cash.“
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Will state governments get involved?
The Queensland and NSW governments have each reaffirmed they will not bail out Star, but have offered some assurances to staff.
“Our non-negotiable is around the people who work there,” Queensland Premier David Crisafulli said Friday morning.
“I can’t imagine a federal or state government wants to be seen to be putting money into a casino business,” Professor Harris said.
That doesn’t necessarily mean the doors would close without government intervention, though.
“It would shock me though if there’s no special administrative power where the regulator takes over the business.“