Wednesday, August 26, 2009

Mashantuckets Buried By Debt

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This installment of The Tribes In The Media is an article in The Day newspaper concerning the Mashantucket Pequots inability to pay its casino debt. Both the Mashantucket and Mohegan gaming operations have debt loads that have only increased over the years with no apparent ability of being able to pay them down. Connecticut Governor Jodi Rell said, "They're working to try to address it with their lenders and hopefully they can, but obviously it's a concern to us." The governor's budget chief, Robert L. Genuario, said officials aren't concerned that the Indian casinos wouldn't default on their payments of slot machine revenue to the state because that money comes off the top.

Mashantuckets near default on Foxwoods' debt
Mashantuckets hope to restructure $2.3 billion in debt; plan sees 'no impact' on Foxwoods
By Brian Hallenbeck
The Day
August 26, 2009

On the brink of default, the Mashantucket Pequots are seeking to restructure $2.3 billion worth of debt, a senior adviser to the tribe said in interviews this week.

The debt is $1 billion more than the tribe's Foxwoods Resort Casino - North America's largest casino and once the world's most profitable - can sustain, the adviser said.

”We'll be asking creditors to take a big haircut,” he said.

While restructuring the debt with Malaysian investors, bondholders and banks, the Mashantuckets would continue to operate Foxwoods and MGM Grand at Foxwoods “as usual,” according to a plan drafted by Miller Buckfire, an independent New York investment bank.

”Restructuring will have no impact on operations,” reads the plan, a copy of which the senior adviser provided to The Day. The adviser discussed the tribe's fiscal crisis on the condition of anonymity, offering a rare look at the Mashantuckets' finances.

The tribe is at risk of defaulting Monday on the terms of a $700 million line of credit with a syndicate of banks, the adviser said.

”Our goal is to reduce debt,” he said. “My feeling is that further reductions (in the casinos' work force) would be counterproductive to the quality of the business.”

The tribe, grappling with the recession's devastating effect on the gaming industry, laid off hundreds of casino employees in 2008, and also trimmed the size of its government and cut benefits for tribal members, including their monthly “incentive” payments.

In a letter distributed by e-mail last week, Michael Thomas, chairman of the Mashantucket Pequot Tribal Council, updated tribal members on the seriousness of the situation.

”Earnings are down considerably and there are no signs of immediate improvement,” he wrote. “... These are dire financial times for our Tribe.”

Thomas, in the letter, said there would be no further reductions in the size of tribal government or in the incentive payments.

”Instead, Tribal Government and the Incentive will now be paid FIRST with any cuts or changes to our operation taking place after our members are paid,” Thomas wrote. “I will not waver from my pledge to protect the Tribal Government and the Incentive.”

Banks that are among the tribe's creditors have pushed for further cuts in tribal government, which already has sustained two rounds of downsizing, the senior adviser said. Over the last 36 months, he said, incentive payments have been cut in half.

While the amounts of individual payments are affected by such factors as age, level of education and employment, they now range, on average, from $90,000 to $120,000 a year, the adviser said.

Likening the tribe's finances to a waterfall, he said Foxwoods casino revenues are currently distributed on four levels, starting with Kien Huat, the Malaysian investment company that originally bankrolled Foxwoods, which opened in 1992. The tribe owes Kien Huat $21.2 million of the $160 million it originally loaned the tribe, the senior adviser said.

”They get first dibs,” he said.

Next in line is the banking syndicate headed by Bank of America/Merrill Lynch and Wells Fargo/Wachovia, followed by bondholders and finally the tribe.

”Our problem is we have no money for tribal government and the members,” the adviser said.

The tribe this month maxed out its line of credit, moving $91.9 million into cash accounts “to improve its negotiating leverage and better secure the interests of its members during the pendency of restructuring,” the Miller Buckfire plan says.

Thomas, who is up for re-election in November, referred to the money in his letter to tribal members last week. At the same time, he acknowledged differences among tribal leadership.

”Foxwoods is here to support our people not Wall Street,” he wrote. “Those who put the interests of bankers and bond holders ahead of our tribal community will have to answer to me. To make sure, I have introduced a resolution to take our last borrowed dollars and put them in a lock box only to be used for Government and Incentive.”

Thomas declined to answer questions about the tribe's finances.

Much of the tribe's debt is “legacy debt” incurred during Richard “Skip” Hayward's tenure as chairman from 1975 to 1998, a period of rapid expansion at Foxwoods, the senior adviser said. More recently, the effects of the recession and increasing competition have eroded the tribe's revenues.

The $1 billion MGM Grand at Foxwoods, approved during Thomas' tenure as chairman, opened in May 2008.

Although traffic at the casinos has remained constant over the past 18 months, spending per patron has fallen by 50 percent, the adviser said.

For the nine months ending June 30, the casinos' gaming revenues totaled $870 million, down from $926 million for the same period a year earlier. Expenses were reduced by $12 million. The amount spent on promotion remained constant.

In preparing the restructuring proposal, Miller Buckfire assumed the casinos could generate from $200 million to $225 million a year in EBITDA (earnings before interest, income taxes, depreciation and amortization), enough to support a debt of no more than $1.3 billion, the senior adviser said. The projections, however, might have to be re-evaluated in light of the economic outlook and future competition in Massachusetts, the plan says.

In fact, the prospect of a “destination” casino resort in the Bay State, where lawmakers could legalize casino gambling as soon as this fall, looms as the single greatest threat to Foxwoods, the senior adviser said.

The Mohegan Tribal Gaming Authority, which operates Mohegan Sun, Foxwoods' neighboring competition, has proposed building a resort in western Massachusetts.