Tuesday, August 26, 2008

Editorial: Time To Play Hardball

Feather News

On Friday, a major credit rating agency has placed Waterford Gaming and affiliates under review for a possible downgrade.

Waterford Gaming, owned by principles that control Trading Cove Associates which used to manage the Mohegan Sun until their 7-year management contract was bought out under a deal that pays TCA 5 percent of every dollar spent at Mohegan Sun for 15 years, also owns the competing Twin River racetrack-casino in Rhode Island.

The Mohegan Tribal Gaming Authority is experiencing financial difficulties. MTGA reported an 89 percent decline in profits for the period of April through May but since Trading Cove Associates is paid a portion of revenues (before expenses) and not based on profits (like it used to be in the earlier 7-year contract that was bought out), their payments from MTGA have not suffered much.

Until this week. Under the 15-year buyout agreement, TCA will not receive 5 percent of the revenues from future expansions, such as the Casino of the Wind expansion that is scheduled to open Friday. That doesn't mean that TCA won't try to get some of that money generated by the Casino of the Wind.

Under the 15-year buyout agreement, a clause says that if TCA's payments are "materially" affected by a (future) expansion, then TCA can bring MTGA to court. In accounting terms, "materiality" is generally defined as a 5 percent variance.

So, for instance, if the slot machine revenue at Mohegan Sun (excluding the Casino of the Wind) goes down by more than 5% after the Casino of the Wind opens this week, then TCA may bring MTGA to court to seek more money from MTGA.

What can MTGA do about it? That isn't clear. After all, the Tribe signed a contract knowing the "materiality" clause was in that contract.

Last fiscal year, MTGA paid TCA about $78 million - which is 5% of revenues generated at Mohegan Sun. TCA doesn't get paid anything related to the Tribe's Pocono Downs racetrack-casino in Pennsylvania. MTGA distributed about $80 million to the tribal government, roughly the same as it paid TCA last fiscal year. In other words, TCA is getting paid a lot of money and it is part of the reason MTGA has experienced financial problems.

Even if the economy hadn't gone sour, MTGA still would have been in financial difficulty. But the 15-year TCA contract was and is a disaster. MTGA is expected to pay TCA over $1 billion over the course of that 15-year contract.

MTGA simply cannot give in to any future TCA demand. Yes, we signed a contract. But TCA knew that payments to them under that contract would result in financial difficulties at MTGA.

MTGA should seek a workout agreement with TCA before it gets to court. At the least, we should find a way so that MTGA never pays TCA more than we did last year. There are ways that can be done without breaking the contract. This route would also involve working out agreements with other creditors as well. This route is no different than what the TCA principles are debating with their own Twin River racetrack-casino in order to save that racetrack-casino.

Instead of trying to save face, MTGA and the Tribal Council should be focusing on saving MTGA.