by Frank Angst

Racetrack owner Magna Entertainment Corp. could default on loans as early as March after its parent company decided not to proceed with a reorganization proposal.

MI Developments, parent company of Magna Entertainment, announced late Wednesday that it would not proceed with a reorganization proposal that would have infused the racetrack owner with $50-million in cash for daily operations and $75-million to fund expanded gaming plans in Maryland.

While Frank Stronach is chairman of both companies, investors in MI Developments opposed the proposal that would have infused money into Magna Entertainment and restructured the racetrack owner. In a February 9 letter, David Einhorn of hedge fund Greenlight Capital urged the MI Developments Board of Directors to not approve the plan.

“The majority of shareholders of MID do not support the use of MID’s valuable cash flows to fund Magna Entertainment Corp,” Einhorn said in the letter. “The plan is just one more egregious attempt to further erode MID’s value.”

With the decision by MI Developments to not move forward on the plan, Magna will be in danger of defaulting on several loans totaling about $250-million.

In accordance with its loan terms, Magna Entertainment could face a March 20 deadline for repayment of a $126-million bridge loan owed to an MI Developments subsidiary, $100-million in financing of its Gulfstream Park project, as well as an additional loan of $48.5-million owed to the MI Developments subsidiary. That additional loan was made in December 2008.

Magna also faces a March 5 due date on a $40-million credit facility with a Canadian chartered bank.

“If MEC is unable to repay its obligations when due or satisfy required covenants in its loan agreements, substantially all of its other current and long-term debt will also become due on demand as a result of cross-default provisions within loan agreements, unless MEC is able to obtain waivers, modifications or extensions,” the company said in its Wednesday release. “In the event MEC is unsuccessful in its efforts to raise additional funds through an alternative transaction with MID, assets sales, by taking on additional debt, or by some other means, MEC will not be able to meet such obligations.”

Magna had hoped to obtain more capital from MI Developments to pay off some of its loans, which would prevent additional loans from coming due. But investors opposed the plan, noting that it included provisions to convert secured loans into shares of Magna Entertainment equity.

“As for the value of MEC equity, Mr. Stronach sold over 600,000 shares of stock just prior to announcement of the proposed plan,” Einhorn said. “What does that tell you about the value of the MEC shares? In the second quarter of 2005, the carrying value of MID’s investment in MEC equity was $355-million. Those same shares are now worth under $2.5-million.

With its increasing debt and failure to receive a new infusion of capital, Magna Entertainment was unable to submit a required $28.5-million license fee with its request to add slot machines at Laurel Park. Without submission of the fee, the Maryland Video Lottery Facility Location Commission disqualified Magna, which says it is considering all of its legal options with respect to the slots bid and has filed various legal actions to protect its interests.

At the end of 2007, Magna Entertainment announced plans to sell tracks like Remington Park, Portland Meadows, and Thistledown. Stronach blamed the poor economy and credit crunch for preventing the company from moving forward on those plans. Magna also has considered selling flagship tracks Santa Anita Park and Gulfstream Park, or interest in those operations, but has failed to carry out those plans.

Greenlight, which owns about a 10% share in MI Developments, has favored a plan to sell off Magna Entertainment’s debt to Internet entrepreneur and CNET founder Halsey Minor, a plan Minor proposed in October. Greenlight said that plan would result in a far better outcome for MI Developments shareholders than the plan for MI Developments to commit additional capital to Magna Entertainment.

MI Developments will conduct a conference call on its fourth-quarter earnings on February 24.

Frank Angst is a Thoroughbred Times senior writer