Tuesday, August 26, 2008

Mohegan Gaming Authority Credit Rating Under Review For Another Possible Downgrade

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Updated with Moody's statement at end of article

A major credit rating company, Moody's Investor's Service, announced last week that it will be reviewing the Mohegan Tribal Gaming Authority's financial situation once again and the result of its review may yet be another downgrade of its credit rating.

A company's credit rating affects the interest rate it pays when it borrows money. For the last three months, MTGA recorded $23 million in interest expense alone on its debt. Once the fiscal year ends on September 30, MTGA is expected to record between $90 million and $100 million in interest expense for the entire fiscal year on its $1.46 billion debt (both long and short-term debt as of June 30, 2008).

This amount does not include the interest expense on the $1.2 billion that MTGA is expected to borrow to complete for the expansions in Pennsylvania and Connecticut. Although a downgraded credit rating will not affect the $1.2 billion in expansion borrowings, future borrowings would be affected.

Next summer, MTGA must pay off a $330 million bond offering and other borrowings related to the proposed casino in Washington (with the Cowlitz Tribe) and Wisconsin (with the Menominee Tribe). MTGA does not have the cash to pay the debt off so it will be forced to refinance these borrowings and it is then that a lower credit rating will come into play.

MTGA has benefitted from lower interest rates over the past year. The $1.2 billion line of credit that MTGA secured for its expansions is structured in such a way that it will fluctuate depending upon market conditions. If the prime rate goes down, as it has in the past year, then the interest rate MTGA pays on the line of credit will also go down. But if the prime rate goes up, which is expected to happen in the near future, then the interest MTGA pays on the $1.2 billion (expansion) line of credit will also increase.

In addition to MTGA, the tribal government also has borrowed money. The tribal government currently pays close to $7 million annually in interest expenses. Annual interest expenses the tribal government pays will come close to doubling over the coming year due to anticipated future borrowings for the government building-community center. The government building-community center, which one high official estimates will cost $100 million, is expected to add another $5 to $6 million in interest expenses each year.

Financing for the government building-community center has not yet been secured but the current plan is to borrow the money through a bond offering. Since the project is related to the tribal government, it is believed that the Tribe can do a tax-free bond offering. In other words, those who buy the bonds won't have to pay taxes on the interest the tribal government will pay them. Since the tribal government is almost totally reliant on MTGA as its source of revenues, a lower MTGA credit rating may mean that tribal government borrowings will be more expensive.

On July 31, MTGA reported an 89 percent decline in overall profits for the three months of April through June. MTGA figures include Mohegan Sun and Pocono Downs in Pennsylvania. Two weeks ago, it was announced that July slot revenues at Mohegan Sun fell by close to 15 percent (14.6%)compared to July 2007.

In addition to MTGA, Moody's also announced that the Mashantucket Pequot Tribal Nation's credit rating was also placed under review. Moody's said it will look into how MTGA and Mashantucket manage expenses.

Another credit rating service, Standard and Poor's, downgraded MTGA's credit outlook to "negative" in May and lowered the Mashantucket Pequot Tribal Nation's credit rating. Under the Standard and Poor's rating system, MTGA has a grade of BB- while Mashantucket has a rating of BB+, which means that Mashantucket's credit rating is little better than MTGA's credit rating.

Moody's also placed companies controlled by a principle of MTGA's former casino management company under review. MTGA pays its former management company 5 percent of the revenues generated at the Mohegan Sun complex so if MTGA's credit rating suffers, so will the credit ratings of the former management company and subsidiaries of the former management company that rely on MTGA's revenues, including Waterford Gaming LLC and Waterford Gaming Finance. Waterford Gaming's major investment is in the Twin River racetrack-casino in Rhode Island.

Moody's said of the review of Waterford Gaming and its subsidiary, "During its review, Moody’s will assess the potential implications of MTGA’s deteriorating operating performance and financial profile on the amount of cash distributions to Waterford and the company’s continuous ability to meet its coupon payments and de-lever its balance sheet."