Saturday, September 22, 2007

The $330 Million Debt Question

By Ken Davison

In less than two years, the first and largest piece of financing for the Mohegan Sun’s $1.2 billion Sunburst expansion will come due for payment. For the second time since the expansion first opened in 2001, some might say.

Representing about a quarter of the Tribe’s total casino debt, $300 million was first borrowed in 1999 and was later paid off in 2003, when the Tribe’s business arm, Mohegan Tribal Gaming Authority (MTGA) borrowed $330 million at a lower interest rate (6 3/8% annual interest rate vs. 8 ¾% on the 1999 debt). This $330 million borrowing must be repaid on or before July 15, 2009. MTGA pays $21 million each year in interest expense on this debt alone and isn’t required to pay any of the $330 million amount borrowed until 2009, when the full amount that was borrowed must be repaid.

Due in part to refinancing, the rest of the Sunburst expansion debt won’t come due until the years 2012-2013 when $500 million will need to be repaid, and then the balance of the debt in later years.

Upon reaching the due date for the $330 million borrowing in the summer of 2009, MTGA will have paid over $200 million in just interest expense on that one piece of debt since it was first taken out in 1999. To put this amount in perspective, the $200 million in interest expense is about the equivalent to five per-capita distributions to tribal members.

The expansion will have been open for almost eight years by the summer of 2009 but it is unlikely that MTGA can generate the additional profits that would be needed to pay the $330 million debt. MTGA would then need to borrow money to pay for at least part of the debt. Nobody knows what interest rate would apply two summers from now but if MTGA refinances that debt using the same interest rate that applied in 1999 (8 3/4%) then that $21 million interest expense each year would spike to about $29 million annually.

Despite early announcements after the expansion by MTGA that it would pay down the Sunburst expansion debt aggressively, only about 18% of that debt has been paid off since the expansion first opened in 2001. The MTGA’s profits, as adjusted, suffered badly in the first three years after the expansion first opened, averaging $57 million in total profits for each of those three years (fiscal years 2002, 20003 and 2004) compared to the $140 million average profit for each of the last two pre-expansion years (fiscal year 2000 and fiscal year 2001). Since 2004, profits generated by the Mohegan Sun have doubled and are roughly equivalent to the profit levels of the pre-expansion years. Based on the most recent audit report, it is only when one includes the losses attributed to the diversification program that overall profits fall to slightly below the profit levels of those pre-expansion years.

MTGA first put a dent in the expansion debt in fiscal year 2003 - the same year of the $330 million borrowing - when the expansion debt was reduced by $50 million in that year. In the following three years, the expansion debt was further reduced by $81 million (FY 04), $65 million (FY 05) and $14 million in fiscal year 2006. Those payments total $210 million (not including expansion debt that has been refinanced), or 18% of the $1.2 billion expansion debt.

Although some of the expansion debt has been paid down, total MTGA debt has since increased due to the borrowings for the purchase and construction of Pocono Downs and the second expansion of the Mohegan Sun. As of June 30th, MTGA's total debt was approximately $1.3 billion compared to $1.25 billion a year earlier.

Note: This article focuses on one component of the debt and is not designed to give the reader a complete picture of the Tribe’s financial situation. It is our hope that through more articles covering the Tribe’s finances, the reader will gain a clearer understanding of the financial situation. In this article, the Mohegan Tribal Gaming Authority is referred to as “the Tribe” or “the casino.” The Tribe’s debt of $1.2 billion discussed in this article does not include tribal government debt or the approximately $1 billion the Tribe will pay to the former casino management partners, Trading Cove Associates, over a fifteen-year period. All profit figures have been adjusted to reflect actual payments to Trading Cove and do not take into account the $24.5 million reimbursed by Penn National to the Tribe in fiscal year 2006 This report is largely based on last year’s audit report (FY 06). The audit report for the current fiscal year (which ends on September 30, 2007) is expected to be released by the Tribe in December 2007.