Perhaps more than any other state, Nevada understands the importance of the availability of credit to its licensed casinos and gaming manufacturers. The Nevada Gaming Control Act, which forms the basis for all gaming regulation, specifically states that the state’s public policy is “that the rights of the creditors of licensees are protected.” Therefore, not surprisingly, Nevada’s gaming regulatory scheme is quite friendly to creditors. Nevertheless, the accommodation must yield to the broader policies that gaming is strictly controlled to assure that it is honestly conducted and free from criminal and corruptive elements. Some keys to strict regulation are licensing and related approvals of those involved in the gaming industry, and the reporting, review and approval of significant transactions. A result is that lenders to gaming companies must understand the unique regulatory requirements brought to bear as the result of strict regulation.
This booklet is divided into two parts. The first part describes the regulatory requirements that apply before a loan can be made to a Nevada gaming company. These relatively minor regulations involve an understanding that a lender to a Nevada gaming company subjects itself to the jurisdiction of the Nevada gaming regulators including the possibility of having to undergo a suitability review, that loans to Nevada gaming companies must be reported, and in certain circumstance the issuance or pledges of securities require prior approval.
The second part of the booklet deals with the regulatory aspects of loans that go bad. As with most commercial loans, lenders to gaming companies expect that the debtors will repay the borrowed monies according to terms of the credit facilities. In most every case, this is the course of events.
In cases of the exceptions to the rule, however, lenders need to be aware of and make provisions for compliance with gaming laws that may apply to the debtor and its assets. Some lenders may have already experienced gaming regulation because some types of security require prior gaming regulatory approval to be effective (e.g., pledges of stock of privately owned companies). These approvals typically are obtained before a transaction closes and the creditor-debtor relationship begins.
For other lenders, however, the first experience that they may have with gaming regulation involves regulatory compliance relevant to managing defaulting loans. Here, gaming regulation often creates a unique situation that impacts a lender’s ability to foreclose on the collateral. In most industries, a lender’s right may include assumption of the business operations of the defaulting debtor. In the gaming industry, however, a lender generally cannot assume control of a gaming business without prior gaming regulatory approval. Moreover, certain gaming assets like slot machines often cannot be transferred without prior gaming regulatory approvals.
Sophisticated debtors may attempt to use the gaming regulatory structure to their advantage against less sophisticated lenders. For example, a debtor can use a lender’s inability to take over gaming operations without the appropriate licenses as leverage to renegotiate the terms of a loan transaction after a debtor default. Lenders may be disadvantaged because the only quick way to gain control of a gaming debtor’s business would be to cease gaming operations, which would adversely impact the value of the collateral.
Lender’s rights of foreclosure are rarely exercised outside of a bankruptcy action. Historical precedence in the gaming industry demonstrates that defaults on loan obligations by gaming companies end up in bankruptcy court. Of course, exceptions exist. Recently, the senior lender to Progressive Games, a publicly traded gaming device manufacturer, had a priority secured position in that company’s assets. The senior lender noticed the assets for public sale but was able to consummate a private sale of most assets to a junior lender.
To view the full Gaming booklet, please click here.