Monday, November 23, 2009

Connecticut Tribes Under Financial Stress

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The following installment of The Tribe In The Media is one of at least four articles written by Bill Cummings in the past few days on the plight of the Mohegan and Mashantucket Pequot's financial situation.

Tribes teeter on financial brink
Stamford Advocate
By Bill Cummings
Stamford Advocate
November 23, 2009

At the top of a steep hill, high above the Thames River and the glimmering glass towers of the Mohegan Sun casino, a huge white building sits half-finished.

A newly paved road winds its way to the plastic-shrouded shell of the Mohegans' new tribal office and community center. Construction equipment is scattered about, but work on the facility stopped months ago.

It's a stark and unmistakable symbol of the financial crisis within Connecticut's multibillion-dollar Indian gaming empire.

After making and spending billions over the last decade, the Mohegans and their nearby neighbors, the Mashantucket Pequot Indians, are teetering on the brink of a financial meltdown.

Expansion plans have been canceled, employees have been laid off, credit ratings are in free fall, and bankers and bond holders are knocking on the door. In a sign of just how bad it has become, the Pequots last week defaulted on a Wall Street bond, signaling to creditors the tribe cannot meet its obligations.

All of this adds up to a toxic mix of problems that only a few years ago would have been unthinkable for two tribes with economic engines that once seemed geared for never-ending growth.

The immediate cause is a national recession that has cash-strapped gamblers staying away or spending less when they do visit. The trend is similar across the country. Casinos in Atlantic City are reporting slot losses of 20 percent or more, and gaming revenue in Las Vegas is in a downward spiral. Three smaller Indian tribes have already defaulted on loans.

But the revenue drop at the Mohegan Sun and Foxwoods, the casino built by the Pequots, is being magnified by billions of dollars in debt the two tribes accumulated during a nearly decade-long building binge and dubious business deals that have crippled cash flow for both operations.

All this comes as competition grows around the casinos. Slot parlors at race tracks in Rhode Island and Yonkers, N.Y., are already cutting into the take, and both tribes face the possibility that Massachusetts will soon allow casino gambling in the Bay State.

"The Connecticut tribes got in the same situation as commercial operators," said Megan Neuburger, a senior analyst with Fitch Ratings Services, which tracks gaming trends nationally.

"Revenue was up, and a lot of investor money was available. Now revenue is down. Did they overbuild? To some extent, I think so. There was easy access to capital for a half a decade. There was also a belief that this was a recession-proof industry." Neuburger said.

Bradley Beecher, a former head of the Connecticut State Police gaming unit who later worked for the Mohegan Gaming Commission, said he watched the tribe overpay for goods and services during its accelerated building campaigns.

"It was crazy what they were paying. They imported wool carpet from London, glass beads from India. And it was all fast-track construction," Beecher said.

"Ask yourself why they are in a bind when they pay no tax on 75 percent of their revenue," Beecher said, referring to the fact that while the state takes 25 percent of slot revenue, the tribes pay no taxes because of their status as sovereign nations.

TOUGH TIMES

Over the last two years, the Pequots watched their slot revenue drop by more than $100 million while debt grew to $2.1 billion.

The Pequots' credit rating fell to CCC, but the news got far worse last week when the tribe defaulted on a $500 million bond package. Standard and Poor's dropped the Pequots rating to D, the lowest possible.

Pequot tribal leaders had already laid off 800 of its more than 7,500 workers and offered buyouts to top tribal employees.

The Pequots are also struggling to meet payments to a Malaysian family that bankrolled Foxwoods and to MGM Mirage, the Las Vegas casino developer that helped build the MGM Grand at Foxwoods. The Malaysian investors will earn money until 2018, when they are expected to walk away $1 billion richer.

The Mohegans are not much better off. The tribe is carrying $1.6 billion in debt, its net income dropped 23 percent in 2009, and it must send five cents out of every dollar spent at the Sun to South African investors who built the first casino.

The tribe recently avoided default on a $200 million loan when it refinanced at 12 percent interest. Earlier, the tribe refinanced a $330 million note.

A new hotel planned at the Sun is on hold, along with other projects.

THE RISE OF THE SUN AND FOX

For Connecticut's two federally recognized Indian tribes, the foray into gambling began with hundreds of millions of dollars in borrowed money. The source was dubious at best, but few believed casinos in a rural part of Connecticut would be successful.

The Pequots in 1992 turned to Kien Huat Realty, a family-owned construction and development firm that made its fortune in Malaysian government projects. The deal provided $235 million to build the first version of Foxwoods.

The Mohegan Sun came on line a few years later under an arrangement with South African casino mogul Solomon Kerzner and his partner Len Wolman, a Mystic hotel chain owner and fellow South African.

The Pequot and Mohegan casinos quickly surpassed expectations. Foxwoods grew into the world's largest casino, featuring thousands of hotel rooms, dozens of restaurants and seven gambling areas. The Sun grew to 3.1 million square feet, offering three casinos, assorted hotels and other features.

Public records show in 1993, the year Foxwoods opened its doors, the casino earned $81 million from slot machines. By 2005, the slot take had swelled to $818 million.

The Sun earned $227 million in slot revenue in 1997, its first year of operation. Slot revenue ballooned to $916 million by 2007.

The Pequots bought the Lake of Isles Golf Course in North Stonington and the Spa at Norwich Inn, built a $200 million museum dedicated to Eastern Indians and invested in a Philadelphia casino plan.

The Mohegans purchased the Pocono Downs race track in Pennsylvania and added a casino. They proposed a $1 billion casino in Palmer, Mass., bought a golf course in Connecticut and a WNBA basketball team, and struck several deals with other tribes to build casinos outside Connecticut.

The building and buying mirrored what was happening nationally. The Native American gaming industry took off like wildfire, moving from a handful of bingo parlors and card rooms in the early 1990s to a $27 billion industry in 2008.

THOSE EXPANSION BLUES

By the end of 2008, however, the national recession had taken a serious toll on casino income, in Connecticut and nationally.

Foxwoods earned $708 million from its slot machines in 2009, a $111 million decrease since 2005. The Sun earned $802 million from its thousands of slot machines, a $114 million drop from 2007.

The first three months of the 2010 fiscal year, which began in July, showed no improvement. Foxwoods slot revenue dropped 13 percent from the previous year, and slot revenue at the Sun was down 10 percent.

Reports filed by the Mohegans with the federal Securities and Exchange Commission show the tribe's net income dropped 11 percent in 2009; gaming revenue fell 8 percent; gross slot revenue was down 5 percent; and non-gaming revenue dropped 16 percent.

The Mohegan's interest expenses rose 19 percent compared with 2008, according to financial statements.

The Pequots do not file reports with the SEC, claiming their status as a sovereign nation makes disclosure voluntary. The Mohegans agree, but file anyway.

At the Sun, the revenue drop had a very visible impact. The Mohegans launched an $800 million expansion, but it was cut short. Although a third casino opened in mid-2008, at a cost of $113 million, the rest of the project, another hotel, parking garage and other features, was suspended because of lack of money.

TROUBLE IN MASHANTUCKET

The first public sign the Pequots were in trouble came in September when former Pequot Tribal Chairman Michael Thomas told tribal members in an e-mail that he would rather keep casino profits than make payments to bond holders and banks.

"These are dire financial times for the tribe," Thomas wrote. "The situation is serious and threatens our tribe. Regardless of what may happen, I have made it clear that we will not accept Wall Street mandates for cuts to tribal government or the incentive." The incentive is a stipend every adult member of the tribe receives. According to a variety of published reports and sources, the payments can be as much as $100,000 a year for each of the 450 or so adult members of the tribe.

The tribe also uses casino revenue to provide health insurance, day care and higher education for members, and operate tribal government.

Pequot spokesmen and other tribal members declined to comment on the stipend or the cost of other services. Some said reports of a $100,000 stipend are false, but they refused to say how much each member receives.

Meanwhile, Thomas worried possible casinos in Massachusetts would drain profits. At least three casino ventures are on the table, and the state Legislature this fall decided to put off a vote allowing casino gambling until next year.

According to a study by the Center of Policy Analysis at the University of Massachusetts at Dartmouth, more than 7 million Bay Staters in 2008 visited casinos in Connecticut and slot parlors in Rhode Island and Maine.

SHOCK WAVES AND PANIC

Thomas' e-mail sent panic through the financial institutions that set the cost of bonds and lending. He was quickly removed from office and opted not to seek re-election during balloting this fall.

Attempts to reach Thomas for comment were unsuccessful.

"The tone affected investors," said Neuburger, the Fitch analyst, referring to Thomas' remarks. "The tribe's response (suspending Thomas) helped." Neuburger said the issue facing the Pequots and Mohegans is what Thomas feared: how revenue from the casino will be distributed and how much will have to go toward debt.

"The lenders may want to change how it's distributed," she said, explaining the tribe may receive less as more revenue is diverted to pay debt.

Pequot tribal leaders this fall hired Miller Buckfire, a high-powered New York City financial firm that specializes in reorganizing companies, to restructure the tribe's debt and finances.

The biggest immediate challenge is a $700 million revolving loan due next July that the tribe cannot pay, according to a source with direct knowledge of tribal finances. The Pequots recently entered into a forbearance agreement in which certain creditors agreed to take no action until the end of January.

That agreement, however, did not include the $500 million loan now in default, or a $250 million note due in 2021.

The tribe last week announced it paid $14.2 million of a $21.3 million interest payment on the $500 million bond. Tribal leaders said they did not anticipate paying the balance, resulting in default.

"NOT SURPRISING"

Neuburger, the Fitch analyst, said the default is "not good news," but added it was "not entirely surprising" given the forbearance agreement.

"There have been other defaults at smaller tribes, but this is an outstanding situation," Neuburger said. "Everyone is watching to see if they default more." The problem facing lenders, industry analysts explained, is creditors cannot attach property owned by tribal nations, which means they cannot foreclose. Instead, lenders accept payments based on cash flow. If the tribe does not meet its payments, there is little a lender can do except cut off credit.

The source close to the tribe said hiring Miller Buckfire is an acknowledgement of trouble. The source described Foxwoods as "a highly leveraged business," and admitted the reorganization under way is akin to what a company would do in Chapter 11 bankruptcy.

Chapter 11 allows companies to reorganize their business and pay off debts while also keeping the doors open and avoiding foreclosure.

Kelly Sullivan, a Pequot spokeswoman, cautioned against reading too much into last week's the default.

"This is not an unusual step when you enter into restructuring. Now that they are in default nothing really happens. There are discussions with all lenders, but this won't impact operations."