Alexandra Berzon has an enjoyable piece in today’s WSJ about the Cosmpolitan, the new $4 billion casino, fully paid for by Deutsche Bank, which is opening up in Las Vegas next month.
Berzon gets the obligatory isn’t-Wall-Street-a-casino-anyway shot in at the beginning of the piece, and then walks through the chain of events which resulted in a $60 million loan to a Las Vegas developer somehow morphing into ownership of a $4 billion project. But I would have loved to see a bit more detail on the finances:
Deutsche was originally just funding the project, pumping in a loan of $1 billion to build the soaring two-tower development. But its original developer, Ian Bruce Eichner, defaulted on Deutsche loans in 2008…
By the time the Cosmopolitan holds its grand opening next month with a New Year’s Eve party featuring Jay Z and Coldplay, Deutsche will have spent an additional $3 billion from its own coffers. That makes it one of the most expensive resorts in Las Vegas history.
Already, Deutsche has written off nearly $1 billion of its Cosmopolitan investment, according to securities filings…
After Mr. Eichner left the development, the bank was still uncomfortable about getting directly into the casino business. It tried to cut deals with more established players, including Hilton Worldwide and MGM Resorts International, but the deals didn’t come through.
Several other potential investors declined because they weren’t confident the Cosmopolitan could cover its loans, according to people involved in the talks.
What’s missing here is any explanation of its decision from Deutsche itself, beyond a bland statement that Thomas Fiato, the bank’s head of corporate investments, made to Nevada regulators. Berzon has talked to “people involved in the talks”, and there’s nothing about Deutsche refusing to comment, so I assume she talked to Deutsche executives off the record. But after reading her article I’m left with a lot of questions.
For one thing, how did Deutsche come to the decision that the best thing to do with a construction site in the middle of Las Vegas was spend $3 billion of its own money turning it into a new casino? I can see how it might have been a bit overoptimistic when it lent $1 billion to Eichner in the first place. But when Eichner defaulted on that loan and Deutsche defaulted, clearly there were problems in the Las Vegas real estate market. And when big casino operators took a look at the construction site and walked away, that was obviously a sign that Deutsche’s sunk costs were never going to be recovered.
And yet, somehow, Deutsche decided that the smart thing to do was to throw $3 billion of good money after its $1 billion of bad money. Why? What made them think that they could see a healthy return on that $3 billion even as no one else showed any interest in the deal? And given that casino investments are always risky, what justification did they have for adding such a big one to Deutsche’s balance sheet?
Furthermore, when did Deutsche take its “nearly $1 billion” write-off? If Deutsche knew that it was going to write off substantially all of its initial loan in any case, then wouldn’t it have been just as expensive and much less risky to just give the entire construction site away? And if Deutsche has now put $4 billion into the development, does that mean that the Cosmopolitan, which has yet to host a single paying guest, is valued at something north of $3 billion on Deutsche’s books? What would a reasonable valuation be, in this market?
Finally, what does Berzon mean when she says that other potential investors walked away “because they weren’t confident the Cosmopolitan could cover its loans”? What loans? Wasn’t Deutsche the owner of the project at that point, perfectly capable of selling an equity stake unencumbered by any debt?
The tale that Berzon tells is entirely consistent with Fiato and his team getting so caught up in the Cosmopolitan concept when they agreed to finance it that they simply couldn’t let go, wanting to retain at least a substantial debt-finance involvement and ultimately deciding to finish themselves what Eichner was unable to do, placing valuations on the Cosmopolitan that no one else was willing to ratify. But we don’t quite get there: we get hints of that story, but not enough detail to see it clearly. Let’s hope there’s a follow-up.
Felix Salmon is a financial writer, editor, and podcaster. A former finance blogger for Reuters and Condé Nast Portfolio, his work can be found at publications including Slate and Wired, as well as his own Substack newsletter.