MORE QUESTIONS THAN ANSWERS ABOUT THE MEC BANKRUPTCY

This posting begins by listing excerpts from the “Frequently Asked Questions” that Magna Entertainment has provided about its bankruptcy filing (the complete list of questions and answers can be found at http://www.magnaent.com/NR/rdonlyres/111964CB-D2CF-4434-90D4-4BC8117E067D/22301/Ch11FAQ.pdf).  At the end of the FAQs, I pose several questions that I would like to have addressed, particularly by an attorney with bankruptcy expertise. The reason for my curiosity is that the FAQs and the explanations appear to raise more questions than they answer.

What is a Chapter 11 filing?

A Chapter 11 filing provides a debtor company (such as MEC) a vehicle for operating its business under protection from its creditors while developing a plan to resolve its financial and liquidity problems. Immediately upon a Chapter 11 filing, an “automatic stay” is imposed which halts the collection of creditors’ claims and protects the debtor company from its creditors. During Chapter 11, the debtor company is able to continue to operate while it restructures its debt. In a successful Chapter 11 case, the bankruptcy court will confirm a plan of reorganization that enables the debtor company to emerge from Chapter 11 and operate in the future relieved of many of the burdens that precipitated its Chapter 11 filing.

Why did MEC file for Chapter 11 protection?

MEC filed for Chapter 11 protection in order to implement a comprehensive financial restructuring. Simply put, MEC has far too much debt and interest expense. Under Chapter 11 protection and with the Court’s approval, MEC will
continue to operate in the ordinary course of business while working with its creditors and other stakeholders to complete a restructuring.

MEC believes that this Chapter 11 restructuring will bring its level of debt in line with current economic realities and take pressure off its operations, which have historically been burdened with significant interest expense and financing fees. In today’s challenging economic environment, many companies are using Chapter 11 to substantially reduce debt and position themselves for future growth.

Is MEC going out of business?

No. During the Chapter 11 restructuring process, MEC’s day-to-day operations are expected to continue without interruption.

What is the difference between Chapter 11 and Chapter 7?

Under Chapter 11, a business continues to operate and management remains in control of the business, subject to required bankruptcy court approvals, while the company’s debt is restructured. Under Chapter 7, a business immediately closes, and a trustee is appointed to manage the Chapter 7 process, which is a liquidation of assets.

MEC is restructuring under Chapter 11 and a trustee is not expected to be appointed.

Will MEC be selling any of its racetracks or other assets?

In connection with the Chapter 11 filing, MEC has entered into an agreement with MID to sell a substantial portion of its assets. MID has made a “stalking horse bid” to acquire the following MEC assets: Gulfstream Park, Golden Gate Fields, Palm Meadows Training Center, Lone Star Park, AmTote International, XpressBet, The Meadows holdback note and MEC’s real estate joint venture with Forest City Enterprises.

The balance of MEC’s assets that MID has determined not to purchase at this time include Santa Anita Park, The Maryland Jockey Club, Remington Park, Thistledown, Portland Meadows, StreuFEX, Magna Racino and MEC’s other Austrian assets, lands in Ocala and Dixon, and MEC’s joint venture interests in HRTV, TrackNet Media and The Shops at Santa Anita with Caruso Affiliated.

MEC’s assets, including the assets MID has chosen to acquire pursuant to its “stalking horse bid”, will be the subject of a marketing and sale process conducted by Miller Buckfire & Co,, LLC, MEC’s financial advisor and investment banker. During the marketing and sale process, MEC is expected to continue to operate in the ordinary course.

What is a stalking horse bid?

A “stalking horse” is an initial bidder who negotiates an asset purchase agreement with the debtor company. The stalking horse bid is subject to higher and better offers. If the stalking horse bid is topped, the stalking horse also has the ability to increase their bid.

Were any of MEC’s subsidiaries or operations left out of the Chapter 11 filing?

Yes. The following MEC operations were not included in MEC’s Chapter 11 filing:

• Lone Star Park
• Portland Meadows
• XpressBet
• AmTote Canada and AmTote Australasia
• Magna Racino and MEC’s other Austrian operations
• HRTV (50% joint venture)
• TrackNet Media Group (50% joint venture)
• Joint venture with Caruso Affiliated at Santa Anita Park
• Meadows Racing Operations

The fact that MEC has filed for Chapter 11 rather than Chapter 7 seems to imply that it intends to stay in business. In fact, it says: “MEC filed for Chapter 11 protection in order to implement a comprehensive financial restructuring.” First issue: suppose a financial restructuring succeeds under court supervision and with the approval of creditors. If MEC were to emerge from bankruptcy at a future time, what most likely would constitute the assets of the streamlined company? Would most of the subsidiaries and operations not included in the MEC Chapter 11 filing be the core assets? Second issue: Why is MID making a stalking horse bid for some of the assets in the bankruptcy filing and for some of the assets not in the bankruptcy filing? What is the distinction? Third issue:  How is MEC able to keep some of its properties out of the bankruptcy filing?  Will the creditors go along?  Fourth issue: a bankruptcy law website states that fewer than 10% of Chapter 11 filings prove to be successful. Isn’t this a strong indicator that the debt-plagued MEC is ultimately going to be liquidated?

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