Foxwoods Debt Talks Test Tribal Bets

Foxwoods Debt Talks Test Tribal Bets
Pequot Casino Seeks Big Lender Haircut; Sovereign Default?

With a mid-July deadline looming for a big payment to its lenders, the Indian tribe that runs the nation's largest casino is in talks with banks and bondholders about how best to restructure more than $2 billion in debt that it can no longer afford.

The Mashantucket Pequot Tribal Nation, which owns and operates Foxwoods Resort Casino in Ledyard, Conn., wants bondholders to wipe out a significant portion of its roughly $1.3 billion in bond debt, in some cases paring the tribe's obligations by at least half, people familiar with the matter said.


The bondholders are working on a counteroffer that could include small cuts in the debt and would ease the repayment terms, the people said. The bondholders haven't yet coalesced around one approach, these people said.

The talks have raised issues unique to Native American gambling that investors once dismissed, such as tribes' rights as sovereign nations. The talks also have broached questions about the way the Pequot tribe spends the income from its casino, which is the largest in the U.S. by space and gambling positions like slot machines.

The deadline involves a $700 million revolving credit facility the tribe tapped from banks led by Bank of America Corp.'s Merrill Lynch. The facility matures on July 13 and the tribe would need to pay off the entire credit line on that day, though it is likely to seek an extension because of the slow progress of the talks. The Pequots breached a covenant on that debt in the fall and have received several waivers on that breach since.

Negotiations between the tribe and its bondholders have been going on since December, when the Pequots made their offer, and have taken on a new urgency with the credit line coming due. The Pequots also have proposed a "reset" in which they would pay back more of the debt should business improve, said one of the people familiar with the matter.

The tribe and Bank of America declined to comment.

The result of the Pequot restructuring "is going to really send a message—either way—to the lending community," said Keith Foley, a senior vice president at Moody's Investors Service. "If the creditors take a haircut and it appears [the tribe] got the upper hand and came out much better than the creditors did, that could be a real problem."

Moody's recently stopped rating the Pequots amid a dearth of information about the tribe's finances. The Pequots have gone "radio silent," Mr. Foley said.

Over the years, investors paid little attention to the federal protections for tribes that can complicate relations with creditors. Tribes are sovereign nations and because they are the only ones that can operate casinos on tribal land, lenders can't foreclose on the assets and sell them off as they would do with other defaulting borrowers. Nor can the tribe file for bankruptcy, according to most analysts.

In addition, the Pequots, like some other tribes, use proceeds from the casino to fund a fully functioning government and society, including a post office, police force and community center. The tribe also pays out dividend-like checks—known as "distribution" or "incentive" payments—to its members from the casino's revenue.

Those individual payments have totaled as much as $120,000 for some members, according to some estimates, and became something of a lightning rod in restructuring negotiations. The tribal council forced out its chairman, Michael Thomas, last fall after he suggested payments to tribal members would come before those to creditors, a move that unnerved lenders.

Distributions to tribal members have been pared, though by how much remains unclear. The tribe declined to comment on its distributions.

Foxwoods set the standard for Indian casinos after opening in 1992, with total revenue reaching $1.58 billion in 2006, according to the Center for Policy Analysis at the University of Massachusetts at Dartmouth. Investors, at first wary, soon lined up to lend to tribes, enticed by the prospect of booming cash flows. Indian gambling revenue overall soared to $26.5 billion in 2009 from $5.4 billion in 1995, according to the National Indian Gaming Commission.

But Foxwoods got squeezed by the same economic forces that pushed the likes of Tropicana Entertainment in Las Vegas and Trump Entertainment Resorts in Atlantic City into bankruptcy protection.

Foxwoods' revenue last year tumbled 14% from 2006 to $1.36 billion and the tribe defaulted on some bond payments. In addition to fewer casino visitors, Foxwoods faces increased competition from Pennsylvania, Rhode Island, New York, and Massachusetts, where gambling soon could be legalized.

Last August, the Pequot's tribal council wrote to members that "the current levels of debt being carried by the tribe—which were put in place during a different time with very different assumptions about competition and the economy—are not sustainable."

The Pequot's restructuring comes amid financial distress at a host of other smaller tribes, raising concerns among creditors and the broader investment community. The Inn of the Mountain Gods Resort Casino in New Mexico and the Little Traverse Bay Band of Odawa Indians in Michigan also have struggled with debt.

A federal judge in Wisconsin earlier this year ruled that a $50 million bond deal with the Lac du Flambeau Band of Lake Superior Chippewa Indians violated federal casino law, allowing the tribe to continue withholding payments due its lender. The ruling raised the specter that the lender, Saybrook Capital LLC, might never recoup its investment.