Thursday, March 13, 2008

The Tribe In The Media: Former Mohegan Business Partner's R.I. Casino Credit Downgraded

In the Tribe In The Media series, we take a look at the Tribe's former management company and its casino operations in Rhode Island. The following article was in yesterday's Providence Journal, much of it based on S&P's credit rating cut of March 4:

Twin River misses payment on loan; credit rating is cut
Wednesday, March 12, 2008

The Twin River gambling and entertainment site in Lincoln has run into some problems with its lenders, but said it is confident it can work things out.

UTGR Inc., the company which owns Twin River, missed one of its loan payments to lenders, which was due last week, according to the leveraged commentary and data unit at Standard & Poor’s Corp. (S&P) of New York.

Separately, the S&P ratings organization last week downgraded the ratings it assigns to UTGR’s debt. Overall revenue at Twin River is up sharply, but S&P said it is concerned about UTGR’s ability, after paying expenses, to fully cover the interest and principal payments on its loans.

Twin River spokeswoman Patty Doyle said yesterday that the company is in the process of working out its financial problems with its lenders.

“We see this as a short-term cash-flow issue, and we are fully optimistic about the future here in Rhode Island and confident we will work through our short-term cash flow” issue, Doyle said. What happens at Twin River affects not only the company, its suppliers and employees, but also taxpayers, for it is a major source of tax revenue for Rhode Island, said state Rep. Steven M. Costantino, D-Providence, chairman of the House Finance Committee.

“Their success is our success,” he said. For every $100 netted by Twin River’s video slot machines (after paying out prizes), the state takes about $61, according to Costantino and House fiscal adviser Michael O’Keefe.

Altogether, the state expects to take in about $243 million from Twin River’s video slot machines for the year that will end June 30, and about $256 million for the year that will start July 1, O’Keefe said.

Costantino said he is aware of what happened last week with Twin River. “They defaulted on one payment. … I’ve been assured that they’re going to pay it within the grace period” that UTGR and lenders have agreed to establish, he said.

Governor Carcieri’s spokesman, Jeff Neal, said, “The Department of Revenue and the Lottery division were aware of the situation, have been in close contact with Twin River, and are monitoring the situation carefully.”

Neal added, “The good news for Rhode Island taxpayers … is that the state operates the video lottery terminals. As a result, the state gets its share first. We actually pay Twin River their share of the proceeds from the video lottery terminals. Consequently, the state’s revenue stream from that facility is not in any danger.”

According to the S&P leveraged commentary and data unit, UTGR on March 4 missed an interest payment on its loans and asked lenders to agree to a grace period to resolve the default.
In addition, S&P Ratings Services on March 4 lowered its corporate credit rating on UTGR, to B- from B+, and placed the ratings on its “CreditWatch” list with negative implications.

The downgrade and CreditWatch placement “reflect sustained weakness in the company’s credit metrics due to meaningful underperformance by Twin River relative to our expectations and heightened competitive conditions in the Connecticut, New York and Rhode Island gaming markets,” S&P said.

S&P also said it expects that operating results for casino operators across the country “to be somewhat soft over the near term, given the current status of the economy.”

UTGR took on a substantial amount of debt to acquire, expand and upgrade Twin River. It borrowed about $495 million from large, corporate banks in 2005, said Ben Bubeck, a director in S&P’s corporate ratings department. Its borrowings expanded to about $565 million in 2006, he said.

Because UTGR is a privately held issuer, Bubeck said he is restricted as to how much information he can divulge.

But he said “It’s not necessarily a revenue issue” which led to the ratings downgrade and related action by S&P. “Revenue has done decently, actually,” he said.

Instead, S&P’s chief concern has to do with the amount of cash flow Twin River generates. In other words, S&P is focused mainly on the amount of money that Twin River has left over, after paying ordinary and necessary business expenses, but before accounting for such items as interest, tax, depreciation and amortization.

“Clearly, it’s an issue with their ability to service their debt,” Bubeck said. The ratings downgrade and related action by S&P means that “there are some serious problems that need to be addressed” at Twin River, he said.

Doyle said that UTGR’s borrowings relate to its purchase and expansion in 2005 of what was then known as Lincoln Park.

UTGR’s owners, BLB Investors, pledged at the time to spend $125 million on upgrading, expanding and improving the facility, she said. In the end, they spent $225 million, nearly doubling Twin River’s size.

“They did spend more” than originally anticipated, because the owners wanted to create a “first-class” facility and “a real showcase for the state,” Doyle said.

Regarding the missed payment, she said that UTGR has entered into a pact with lenders, known as a forbearance agreement. The agreement, covering 10 business days, ends March 21, she said.

During that time, Twin River’s owners “are seeking some near-term funding and covenant relief on [UTGR’s] debt service, and they’re working with the lenders to develop a long-term solution to the current capital structure constraints,” Doyle said.

S&P’s Bubeck said that one area they may want to look at involves the portion of the Twin River take that UTGR turns over to the state, essentially the tax rate that Twin River pays to Rhode Island, which he said is one of the highest nationwide.

Doyle said, “That is not something we’re planning at all.” Twin River in calendar year 2007 turned over $229.5 million to the state and $4.75 million to the Town of Lincoln, and plans to continue its state and local payments under the agreed upon formulas, she said.

Twin River’s overall revenue, from its slot machines and other operations, for January was up 29 percent compared with the same period last year. Last month, revenue was up 42 percent from the same point a year ago, Doyle said.

According to a report from the Rhode Island Lottery, the amount of cash taken in by Twin River’s video lottery terminals totaled $1.19 billion for the eight months that ended Feb. 29, up from about $739 million for the same period a year ago.

In July 2005, the Rhode Island Lottery entered into a five-year “Master Video Lottery Terminal Contract” with UTGR to operate one of the state’s licensed gambling facilities.

Twin River operates a 500,000-square-foot facility in Lincoln, which includes restaurants, a food court, comedy club, bars, a greyhound racing course, and 4,752 video lottery terminals, Doyle said. Twin River has about 1,200 employees, she said.

Expansion of the facility began in 2006 and was completed last fall.

Twin River recently underwent a change in the hours of its food-and-beverage operations located throughout the facility. Some reduced hours, others maintained hours, others increased their hours, Doyle said.

Twin River also recently decided it will no longer pay overtime to employees who work Sundays.
Doyle said the changes are the result of adjustments in Twin River’s operations now that the expansion is complete and guest patterns are established.

“This is a well-run organization” which continues to seek efficiencies in its operations, meet customer needs, and preserve the revenue it supplies to the state each year.

Although the fourth quarter of last year “proved difficult for the industry as a whole,” she said, at Twin River, “BLB remains completely optimistic about the future and its operations in Rhode Island.”

BLB is owned by Kerzner International, Waterford Group and Starwood Capital Group. BLB owns UTGR, which, in turn, owns Twin River.