History, of a sort, was made in October when Colony Capital sold $960 million in CMBS backed by four casino properties for Resorts International Holdings in a deal led by JPMorgan, with an assist from Deutsche Bank.

It was the first time gambling assets were used as collateral in a CMBS issue, said Jim Sullivan, managing director at JPMorgan, in an interview with The Wall Street Journal after the deal closed.

There's just one problem: JPMorgan and Deutsche Bank never sold the investment-grade portion of the deal, and it most likely remains on the banks' balance sheets, according to one executive who speaks regularly with the bankers involved in the deal. Dan Chambers, head of the new asset group at Fitch Ratings, said he, too, is not aware of its having been securitized. One market participant says that when a commercial mortgage backed bond transaction is structured, rating agencies allow as much as 90% of the transaction to be sold as triple-A-rated debt.

As for the subordinated tranches, "they were sold to high-yield investors who already knew the market - and at high yield prices. In my view, they left a lot of money on the table," said the unnamed executive. A spokesman for JPMorgan declined to comment for this story and a Deutsche Bank spokesman said bankers were unavailable.

Meanwhile, investment bankers said they are coming with more such deals - probably at least $30 billion before the year is over. The massive underwriting effort has sparked internal disputes at some investment banks, according to CMBS sales executives at two different firms. Both said the relationship bankers at their firms are insisting that their banks lend more money than the salesmen are comfortable can be digested by the CMBS market.

But Steve Rattner, head of private equity firm DLJ Merchant Banking, believes there is a deep market for CMBS backed by casinos. "It's already been done with hotels. So if you're going to do it for a hotel, which only has one source of revenue, why wouldn't you do it for a hotel/casino where you could have an additional 40% of your revenues and 50% of your Ebitda coming from the same property?" DLJMB will use CMBS financing to acquire Hard Rock Hotel & Casinos in Las Vegas and related assets for $770 million.

Anthony Orso, co-head of U.S. real estate finance at Credit Suisse, said CMBS allows for higher financing proceeds, with lower debt costs and fewer covenants than the more traditional junk bond financings.

Applying those principles to the bond market allowed Vornado, Bain Capital and KKR to raise far more capital than they would otherwise have been able to do when they acquired Toys R Us for $6.6 billion in March 2005. Other buyouts have followed suit, tapping the CMBS market to allow them to pay more for acquisitions.

When it comes to casinos, however, there are some new issues that investors will have to get comfortable with. If the casino should fail, it is less certain in some instances that physical asset, including the land on which it sits, is clearly valuable. "You can certainly find another operator to run the casino, but there are licensing and regulatory issues that mean it could take some time," Chambers said.

But bankers say failure should not be a concern as most of the casinos being looked at as collateral for CMBS are new, well-run and well-located. That would include a planned $2.725 billion CMBS issue to finance Fertitta Colony Partners' $9 billion acquisition of Station Casinos, a deal announced in February. Most of Harrah's Entertainment's assets are also said to be of superior quality. The $27.9 billion acquisition of Harrah's by Texas Pacific Group and Apollo Management will include up to $8 billion in CMBS.

The Bellagio Hotel & Casino is MGM Mirage's prized asset on the Las Vegas strip and is currently being sized up as collateral for an LBO using CMBS. Financier Kirk Kerkorian has offered to buy it, along with MGM's CityCenter Project in Las Vegas. Other bidders are also circling the company.

Orso said Credit Suisse is in talks with potential acquirers of MGM. He believes a buyout could include 50% more CMBS financing than Harrah's - or nearly $11 billion.

There has also already been one transaction planned that includes a boat: the Resorts International deal still docked on the balance sheets of JPMorgan and Deutsche Bank. Orso declined to comment on competitors' deals, but he said Credit Suisse has no plans to issue CMBS backed by a boat. He would not rule it out, however, and he said more companies are currently shopping for CMBS financing that would use boats as collateral.

(c) 2007 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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