Monday, July 7, 2008

Twin River's Dilemma

By Ken Davison
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The financial problems of the Twin River greyhound track-slot parlor in Lincoln, R.I., caught the business community by surprise.

Twin River's parent company, UTGR Inc., first missed a loan payment in March, had its bond rating downgraded in March and had liens totaling $6 million placed against it by a contractor.

The owners of Twin River also built and managed the Mohegan Sun casino and one of the principles, Sol Kerzner, is an internationally renowned gambling magnate that created the Sun City casino in Africa, bought Atlantis in the Bahamas and bought and sold the Resorts casino in Atlantic City, N.J.

Twin River's owners will also build and manage the Mashpee Wampanoag Tribe's $1 billion casino that is slated for the town of Middleboro, Massachusetts. Twin River's owners no longer manage Mohegan Sun but will continue to receive 5% of Mohegan Sun's revenues until December 2014. The Mohegan Tribal Gaming Authority paid the group, known as Trading Cove Associates, $77.5 million in fiscal year 2007 alone. MTGA is expected to pay TCA over $1 billion over the course of their 15-year payment stream in a contract that ended TCA's services halfway through their seven-year casino management contract that began in 1996.

UTGR is owned by BLB Investors, which is comprised of Kerzner International Ltd., the Waterford Group and Starwood Capital Group.

Standard & Poor's (S&P) downgraded UTGR's credit rating in March, citing its risk of bankruptcy.

Standard & Poor's Ratings Services lowered its credit rating to CCC-. The ratings remain on Credit Watch, where they were placed March 4 with negative implications.

According to S&P, "The downgrade reflects our ongoing concerns about a potential bankruptcy filing as the company reportedly continues to negotiate a forbearance agreement with its lenders. While we believe that incentives exist for the company and its lenders to reach an extended agreement, the new ratings better reflect the near-term risk factors for a potential bankruptcy filing if the parties are not able to come to an agreement."

Rhode Island was the first of 11 states to approve racetrack-casinos, also called racinos, in 1992. According to a spokesperson for Twin River, the company's financial problems stem from the state's hefty 62% tax rate on its VLT slot machine revenue. The company has offered the state of Rhode Island a one-time payment of $560 million in exchange for reducing the tax rate to 25% but the state is not likely to accept that offer.

Twin River's now has 4,750 VLT slot machines and generated $342 million last fiscal year in slot revenue. By contrast, the Mohegan Tribe's Pocono Downs generated $156 million last fiscal year. The Mohegan's Pocono Downs was open for 11 months during fiscal year 2007. Similar to Twin River, Pocono Downs pays an effective rate of about 62 percent to the state of Pennsylvania now but that rate may fall by a few percentage points once the expanded facility's slot machines begin to generate more revenue.

Clyde Barrow, director of the Center for Policy Analysis at the University of Massachusetts-Dartmouth, said he believes Twin River's owners paid too much for the slot parlor and greyhound race track in 2005 and spent too much on trying to turn it into an upscale gambling destination. The investors spent $445 million for the Rhode Island property and four Colorado racetracks in 2005 and its Rhode Island renovations cost $225 million, for a total outlay of $670 million.

"(They) paid casino money for a ‘racino,’" said Barrow, who noted that an Atlantic City casino - the Trump Marina Hotel Casino - was sold in May for only $316 million.

It is possible that they expected to turn Twin River into a full-fledged casino, with table games, but that hasn't happened. Twin River received permission in April to remain open 24 hours per day on weekends and holidays but wasn't permitted to add table games to the slot parlor.

Any legal action by Twin River's creditors, chiefly Merrill Lynch Capital Corp., to collect on $577 million in outstanding loans have been delayed until July 31st.