Tuesday, November 17, 2009

Mashantuckets Credit Rating Lowered, Interest Payment Missed

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The following appeared in today's The Day newspaper:

Mashantuckets likely to default on key payment
By Brian Hallenbeck
The Day
November 17, 2009

Two-thirds of $21.25M in interest paid, but tribe says balance won't be on time as credit rating plummets

The Mashantucket Pequot Tribal Nation expects to default next month on the balance of a bond interest payment that was due Monday.

In a statement, the tribe said it had paid about two-thirds of a $21.25 million payment, triggering a 30-day grace period in which it could pay the rest. It said, however, that it does not "currently anticipate" paying the balance within the grace period, meaning it will be in default as of Dec. 16.

While the tribe stressed that its ongoing efforts to restructure debt will have "no impact" on operations at its casinos - Foxwoods Resort Casino and MGM Grand at Foxwoods - it did not say whether tribal government or payments to tribal members could be affected.

Spokesmen for the tribe did not respond to a request for more information.

Hours after the tribe's announcement, Standard & Poor's, the credit-rating agency, lowered its "issuer credit rating" on the tribe from CCC to D, the lowest possible rating, which is assigned to debtors whose bonds are in default because of nonpayment of principal and/or interest. The agency also lowered to D its "issue-level rating" on the 8.5 percent notes in question.

"The rating actions stem from the Tribe's announcement that it did not make the full $21.25 million interest payment due today on the notes; it made a $14.2 million payment," Standard & Poor's said in a press release.

Although the tribe has a 30-day grace period in which to retire the balance of the interest payment, or "coupon," Standard & Poor's said it considers a default to have occurred, even if a grace period exists, "when the nonpayment is a function of the borrower being under financial distress - unless we are confident that the payment will be made in full during the grace period."

The $21.25 million payment represents half of the 8.5 percent annual interest on $500 million in notes, which are to mature in 2015.

Three weeks ago, the tribe announced it had reached a so-called forbearance agreement with its "senior lenders," a reference to the Bank of America-led syndicate of banks that has extended the tribe a $700 million revolving line of credit, which is due in its entirety in July 2010. It could not be determined whether terms of the forbearance agreement prevented the tribe from making the full $21.25 million payment on the 8.5 percent notes, as one financial analyst familiar with the situation speculated.

The tribe's agreements with bondholders give the bondholders the right to restrict payments to the tribe in the event of a default. According to one financial source who asked not to be named, a default on the 8.5 percent notes would not necessarily cause the tribe difficulty because the distribution of gaming revenue to the tribe would not be severely restricted.

A default on more senior bonds, however, could lead to severe restrictions on distributions to the tribe, the source said.

The Day first reported in late August that the tribe had drawn down the balance on its line of credit and would seek to restructure more than $2 billion in debt with the help of Miller Buckfire, an independent New York investment bank. Michael Thomas, then the chairman of the Mashantucket Pequot Tribal Council, had informed tribal members that he intended to put tribal government and "incentive" payments to members ahead of payments to creditors.

Thomas' pledge sent shock waves through the financial markets and Indian Country, and the tribal council moved swiftly to relieve him of his duties. He has since been expelled from the council. Rodney Butler, the council treasurer, was elected chairman Nov. 1 by the tribal membership and will take office Jan. 1.

The tribe met last week with a committee of bondholder representatives, which hired GLC Advisors & Co. to provide financial advice and the New York firm Bracewell & Giuliani as legal counsel. In addition to the $500 million in 8.5 percent notes, the tribe's bond debt includes $570 million of special revenue obligation bonds, or SROs; and $369 million in subordinated special revenue obligations, or SSROs.

The tribe also owes Kien Huat, the Malaysian investment company that originally bankrolled Foxwoods, some $21.2 million.

In its statement Monday, the tribe said once again that its debt-restructuring efforts "are separate and distinct from operations at Foxwoods" and would not affect "guests, employees, suppliers or business partners at Foxwoods or MGM Grand at Foxwoods."

"There's been no impact on our operation," said Robert Victoria, Foxwoods' senior vice president of consumer marketing. "The debt and the restructuring, that's all handled on the (tribal) nation side. People really don't talk much about it."

The Mashantuckets' impending default is expected to send more ripples through Indian Country, particularly among other gaming tribes that need to access credit to upgrade their operations.

Asked for her tribe's reaction to Monday's news, Lynn Malerba, chairwoman of the Mohegan Tribe, which owns Mohegan Sun, said, "Our thoughts are with our friends at the Mashantucket Pequot Tribal Nation, and we sincerely hope they can resolve their financial issues in a manner that is fair to everyone involved."