By J. Sturgeon | Financial Post | Feb. 19
Frank Stronach's debt-plagued Magna Entertainment Corp. appears on the verge of financial collapse after the money-losing horse racetrack business said it may not be able to repay looming obligations, adding to the Canadian entrepreneur's woes as his car-parts company struggles to weather the crisis hammering the auto industry.
The Toronto Stock Exchange placed MEC under review on Thursday for a possible delisting on an "expedited basis" signalling the company is at or nearing insolvency, according to the bourse's listing rules.
The review comes in the wake of a collapsed plan that would have seen MEC's controlling shareholder, MI Developments Inc. (MID), spin off its majority stake in exchange for additional capital support in the form of temporary loans.
That plan disintegrated this week after MID said new debt financing for the deal was "unlikely" to be found, given "current global economic conditions [and] the continued disruptions in the financial markets."
As a result, US$274-million in outstanding loans that MEC owes MID will be called in next month, potentially triggering a feeding frenzy among MEC's other creditors.
If it is unable to repay that sum alongside an outstanding balance on a US$40-million credit facility to an unnamed Canadian chartered bank, "substantially all of its other current and long-term debt will also become due on demand," the company said.
MEC reported in its latest quarterly results it has more than US$600-million in debt sitting on its balance sheet. MEC has been attempting to sell assets including several racetracks for months to service debt.
MEC, the largest owner of horse racetracks in North America including Santa Anita in
The possibility of a reprieve does exist.
"Look who the lender is and look at what the lender has done in the past," said an analyst that follows the company on Thursday. "Payment dates have come and gone."
MID has pumped hundreds of millions into MEC, which has lost at least US$500-million since 2003, and routinely granted extensions on loan repayments.
The latest came in October when MEC's board approved an extension on a $125-million bridge loan.
"The question you have to ask is, is the lender going to continue to?" the analyst said.
Minority shareholders in MID have grown intensely hostile toward the seemingly unbridled financial support it has given the gambling and horse-racing business.
The collapsed deal was designed to rid MID of its interests in MEC and place stringent rules on any future transactions between the two firms.
Shares in MEC plummeted more than 24% to an even 50¢ on the TSX on Thursday. MID's stock price fell 6% to $7.87. Calls to MEC and MID were not returned. Mr. Stronach is the chairman of both companies.
MEC's precarious situation is compounding the magnate's difficulties as Magna International Inc. faces off against the worst crisis to hit the auto industry in the post-war period.
The company, which he founded, reported its first quarterly loss in 17 years in November and said it was braced for a lengthy auto-sales slump in North America and
Magna, which has shuttered plants and initiated layoffs to combat the crisis, is set to report fourth-quarter results next week.
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