Kinbasha Gaming International Inc. is trying to negotiate with lenders and obtain new financing to reduce debt and expand its chain of pachinko parlors in Japan.

The Hitachi City, Japan-based company operates 21 pachinko parlors in Japan through subsidiary Kinbasha Co. Ltd. The parlors, located in Ibaraki, Tokyo and Chiba, resemble Western-style casinos and offer the machine gambling games pachinko and pachislot. Besides the gaming operations, Kinbasha makes money from selling cigarettes, non-alcoholic beverages and other snack items in the parlors.

Kinbasha has been in default on a large portion of its debt since 2006, the company says in an Aug. 13 filing with the U.S. Securities and Exchange Commission. The company raised substantial doubt about its ability to continue as a going concern, or without the threat of liquidation, in the SEC filing, saying that there are not guarantees it will make enough money to meet working capital needs or repay debt.

The company has defaulted on $92 million of its $122.5 million in debt, which it incurred in the early 2000’s to expand its business.

The company started experiencing financial problems in 2006, causing it default on its debt. Kinbasha has obtained forbearance and loan modification agreements to extend the maturity of most of its debt, and reduce principal payments. It has been making reduced payments to lenders that have not agreed to forbearance agreements and has no assurance that those lenders will not foreclose on the collateral that secures the loans.

In Japanese culture, companies typically carry much larger debt loads than in the U.S., and the Japanese government has actually encouraged lenders to work with companies in this regard.  This was especially the case after the earthquake and tsunami hit Japan in 2011, according to Darren Minton, president of Trilogy Capital Partners, who handles some of Kinbasha’s investor relations, and Alan Fetzer, Kinbasha's strategic adviser.

Kinbasha had $18.7 million in revenue for the three months ended June 30, 2013, down almost 22 percent from revenues it had for the three months ended June 30, 2012. The revenue declined was partially caused by the yen/dollar exchange rate and because the company sold the business rights for its three restaurants in July 2012, so it had no revenue from the restaurants for the period ended June 30, 2013. Revenues from food and beverages operations decreased from $835,000 in the three months ended June 30, 2012, to $74,000 for the three months ended June 30, 2013, because of the restaurant sales.

For the three months ended June 30, Kinbasha had a net income of $761,000, compared with a net loss of $1.9 million for the three months ended June 30. The improvement in the income was because of improved market conditions, and because in 2012 the company was still recovering from the March 2011 earthquake. The earthquake and subsequent tsunami caused severe damage to one of the company’s parlors, which had to be closed for about a year, and limited the operating hours for other parlors. Kinbasha’s expenses that year included $634,000 in repair costs, according to Minton and Fetzer.

The company says in the SEC filing that it is not making enough money to substantially reduce its debt before the end of the next fiscal year.

Kinbasha says in the SEC filing that its future depends on the ability to restructure the debt it has defaulted on, obtain forgiveness on part of the principal and interest due on its loans, as well as extend the loans’ maturity dates. The company owes on loans and interest from Higashi-Nippon Bank, Morgan Stanley Credit Products Japan Co. Ltd, Jogashima LLC and Aozura Asset Co.

The company previously restructured $6.7 million loan from Tokyo Star Bank K.K. that resulted in a $5.2 million gain, says Minton.

In addition to continuing its negotiations with lenders, Kinbasha says in the SEC filing that it plans to expand to increase revenue.

Kinbasha plans to open parlors in the Tokyo metropolitan area and Ibaraki. The plan to expand requires global investors willing to finance the plan.

“The company plans to utilize the funds from its capital raise to build additional gaming locations in greater metropolitan areas such as Tokyo, where revenues run an average of three times greater than at other more rural gaming locations,” Minton says.

For the last edition of Turnaround Tuesday, see “Lone Pine Looks to Restructure Notes to Avoid Bankruptcy.” 

For more struggling companies, see Mergers & Acquisitions’ Distressed Company Watch List

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