Sunday, November 29, 2009

A Perspective On The Mashantucket's Financial Situation

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The following installment of The Tribes In The Media is an article in today's Hartford Courant on the possible precedent setting situation of the Mashantucket Pequot's financial crisis.

Many Eyes Watching Foxwoods' Negotiations With Creditors
By Eric Gershon
The Hartford Courant
November 29, 2009

When the Mashantucket Pequot Tribal Nation disclosed that it failed to make a large scheduled debt payment Nov. 16, the owner of Foxwoods Resort Casino left no doubt that it faces the sort of financial stress that could drive a business into bankruptcy court.

Debt rating agencies pounced, branding the tribe a defaulter. Despite hundreds of millions of dollars in revenue from slot machines alone, the tribe fell $7 million short of a $21 million payment.

But as Foxwoods limps into the holiday season — traditionally a weak time for business at the casino — the Pequots' situation isn't as desperate as it would be for a regular private business.

As a sovereign nation, the tribe doesn't operate under all the same rules: It can't be forced into Chapter 11 bankruptcy, so its creditors have unusually limited ability to compel payment.

Some legal experts doubt whether the Mashantuckets could even qualify for a voluntary Chapter 11 filing, an option that might benefit the tribe as a way of easing the load of its more than $2 billion in debt.

For now, creditors have little choice but to negotiate with the tribe. The terms the Pequots offer — and the terms that creditors ultimately exact — will affect more than the parties involved, and Native American business interests nationwide are paying close attention.

The outcome could influence every tribal casino operator that might need to restructure debt — or borrow money in the future.

"Foxwoods is going to set the precedent," said Greg Guedel, chairman of the Native American Legal Services Group for the Seattle law firm Foster Pepper. "It's such a significant business enterprise that it is probably going to become a model, good or bad, for whatever happens subsequently."

Because the tribe does not issue public financial reports other than slot revenue (25 percent of which goes to the state of Connecticut) it's difficult for outsiders to gauge how deep Foxwoods' financial troubles are. The Pequots have said their debt restructuring is "separate and distinct from operations at Foxwoods" and "will not have any impact on guests, employees, suppliers or business partners at Foxwoods and MGM Grand at Foxwoods," which employ about 9,000 people — down from 11,000 in October 2008.

Still, it remains unclear whether the problems that led to the restructuring will force more cost-cutting.

Bankruptcy Possible
The Pequot tribe opened Foxwoods in 1992 and has since turned it into the nation's largest casino.

On Nov. 16, the tribe said it failed to deliver in full a scheduled payment on a $500 million debt and expects to enter default. The announcement followed the tribe's disclosure last August that it had hired an investment bank to help restructure its debt.

The tribe would not comment on its financial circumstances this week. But in an interview Tuesday, a source familiar with the tribe's thinking said a bankruptcy filing is not totally out of the question, even though the tribe prefers to continue negotiating directly with debt holders.

"On surface, that does appear to be potentially difficult," the source said of a bankruptcy filing. "But in no way are we ruling it out. It's not something that appears to be top of the list in terms of viability."

Guedel said a voluntary bankruptcy is effectively impossible for political reasons within the tribe, but he does not view it as impossible: "I think if you had a tribal business that decided, 'The best thing we can do here is file for Chapter 11,' I think they could do it."

Like casinos nationwide, revenues at Foxwoods have plunged. Between the 2004-05 fiscal year and the end of the 2008-09 fiscal year in June, slot revenue fell by 13.5 percent from an all-time high of $820 million to $709 million, the smallest total in a decade.

Slot revenue this past July through October was down further — 9 percent from the prior year.

At a time of cost-cutting, that doesn't fully explain how the tribe became unable to deliver a semiannual $21.25 million debt payment.

The broader explanation holds that the onset of recession in late 2007 coincided with Foxwoods' massive, highly leveraged expansion, namely the addition of MGM Grand at Foxwoods, which opened the following spring amid a hiring spree.

Pressure From Tribes
The Pequots' failure to make the Nov. 16 debt payment underscored the nature of the unusual risk borne by investors in tribal casinos.

"If it was a typical U.S. corporation, then the lenders would have more leverage at the negotiating table," said Craig Parmelee, a managing director at Standard & Poor's who follows the gambling industry. "They could accelerate their loans, demand full payment today. And if they were to do that, that would force the corporation to file for bankruptcy protection. And we have a well established process through our bankruptcy courts where the situation gets worked out thereafter.

"Often in those situations, the lenders take control of the company and can sell it and/or operate it. In case of a tribe, they can still accelerate and demand payment today. The problem is that doesn't take you down the same path."The Pequots may be insulated from a forced bankruptcy, but they nonetheless face pressure to deal with creditors fairly, for their own sake and that of other tribal casino operators.

"Whatever value the tribe places on maintaining relationships with the capital markets — that's the leverage that the lenders have," Parmelee said.

Other tribes, eager to keep the trust of lenders, will also be urging the Pequots to use their negotiating advantage responsibly, according to Guedel, the lawyer in Seattle.

"Every lender, when a tribe came calling, would say, 'Wait a minute, look what happened over here with Foxwoods,'" he said.

Creditors' inability to take control of Foxwoods or force a sale of its assets means that the casino must remain open for business for them to get paid at all. In its Nov. 16 announcement, the tribe said its restructuring efforts would not affect visitors' experience of the casino, and at least one gambling analyst said he saw "zero" chance that Foxwoods would close for business.

"The lenders are trying to attain the maximum value that they can for their loans," Parmelee said. "If the casino were to shut down, then there's no value."