Financial advisers in Magna bankruptcy say settlement is best recovery option for creditors

Witnesses in Magna bankruptcy back settlement

WILMINGTON, Del. — Financial advisers involved in horse track owner Magna Entertainment Corp.’s Chapter 11 bankruptcy testified Thursday that creditors will fare better in the company’s reorganization plan than they would from additional sales of its assets.

Advisers for Magna and its committee of unsecured creditors were among the witnesses called as U.S. Bankruptcy Court judge Mary Walrath resumed a hearing in which she will determine whether to confirm Magna’s reorganization plan.

Closing arguments in the confirmation hearing were scheduled for Monday afternoon, when Walrath is likely to issue her decision.

Magna’s reorganization plan is contingent upon resolution of a lawsuit in which the committee of unsecured creditors accused Magna’s parent company, MI Developments, of sham financial transactions. The committee claimed in the lawsuit that Ontario-based MID and its chairman, Frank Stronach, propped up Magna with equity infusions disguised as secured loans to ensure that Stronach retained control of Magna Entertainment assets.

If the lawsuit is dropped, MI Developments would pay $89 million to holders of most general unsecured claims against Magna while acquiring several of its assets, including the Maryland Jockey Club’s Pimlico track in Baltimore, home to the Preakness Triple Crown race.

Marc Puntus, a managing director for investment bank Miller Buckfire & Co., which is serving as Magna’s financial adviser, said efforts to sell some Magna tracks have proved fruitless.

“The racing industry is in significant decline,” said Puntus, who suggested that the return of about 40 cents on the dollar that holders of general unsecured claims would receive under Magna’s plan is about the best they could hope for.

Nicholas Leone, a managing director at Blackstone, which is serving as the committee’s financial adviser, testified that if MID’s secured debt claims of more than $400 million were allowed to stand and Magna’s assets were sold at auction, the unsecured creditors likely would recover nothing. Even if some of that secured debt were recharacterized, the unsecured creditors likely would receive only about 20 cents on the dollar, added Leone, who described the settlement as “fair and advantageous” to unsecured creditors.

But several Magna shareholders are challenging the settlement, saying it will allow MID to acquire valuable assets, including Pimlico and the Preakness, Gulfstream Park in Florida, and Santa Anita and Golden Gate tracks in California, at bargain-basement prices while leaving them with nothing.

“I think it’s a Mickey Mouse game,” MEC shareholder William B. Bayne Jr. said of Magna’s failure to auction off Santa Anita and the Maryland Jockey Club, whose assets include the Pimlico and Laurel Park tracks in Maryland. Bayne also said Magna’s valuation of its assets fails to take into account the potential for slot-machine gambling at Laurel Park.

“You all bait-and-switched us,” Bayne said in a testy exchange with Kenneth Eckstein, a lawyer for the creditors committee. “We were told that this was a complete liquidation; that they were going to auction off all assets.”

Fellow shareholder Glenn Mattson, a former banking executive, said his analysis shows that Magna’s assets are worth about $2.3 billion, far more than what Magna and its advisers claim.

An affidavit submitted by Puntus suggests that the assets that would be acquired by MID under the settlement are worth no more than about $500 million. After the payment to unsecured creditors and satisfaction of claims held by other parties in the bankruptcy, the net value of those assets would be no more than about $257 million, representing a return of about 62 cents on the dollar for MID’s claims, according to Puntus.