Casino Capitalists Swallow $500 Million in Foxwoods Deal

In the heady Go-Go Days of Casino Capitalism, no one questioned "Sovereignty" - the ability of Tribal Slot Barns around the country to simply stop paying their debts with no legal recourse available to lenders.

The 2 Connecticut Slot Barns, at one time, rolling in cash, are among numerous Tribes to default or be unable to fulfill future debt obligations.

Bankruptcy is not an option.

Mashantuckets may pay price for debt deal
By Lee Howard
Publication: The Day


Analysts say tribe could be forced to waive immunity

The Mashantucket Pequots have staved off potential bankruptcy but will likely have to waive claims to sovereign immunity in their attempts to restructure $2 billion in debt obligations related to Foxwoods Resort Casino, analysts said Monday.

The Wall Street Journal reported Sunday that the Mashantuckets were expected to close a deal by year's end that would reduce the tribe's debt load by half a billion dollars while refinancing $1.5 billion in obligations at favorable terms of 6 percent and 8 percent interest.

The Mashantuckets own Foxwoods, the largest casino in North America, which, like many gaming enterprises across the country, has been struggling in the midst of a prolonged economic slump.

Heather Rupp, a certified financial analyst for Peritus Asset Management in Santa Barbara, Calif., said Monday that the interest rates worked out for Foxwoods obligations are much lower than what might be expected for yields on D-rated junk bonds - a rating that the Mashantuckets obtained after defaulting on some of their debt.

Rupp said these rates would be expected for companies with a higher-quality bond rating than the tribe currently enjoys and are surprising for an entity just about to emerge from restructuring.

"It looks like even if they eliminate $500 million in debt, they're still running at a fairly high leverage (debt) rate," she said.

Other analysts said the only way creditors would be expected to agree to terms so favorable to the tribe would be if the Mashantuckets, granted sovereign-nation status in 1983, agreed to waive sovereign immunity.

Sovereign immunity gives the tribe a right to avoid civil suits that makes it difficult to collect on debts in the event of a default.

"Creditors are not going to do deals these days unless they can guarantee that they can go after the money," said Roger Gros, publisher of Las Vegas-based Global Gaming Business magazine.

Gros said other Indian casinos also have had to waive sovereign immunity to get their debts restructured. When the Mashantuckets initially sought money to finance expansion of their gaming empire, he added, no one thought to question sovereign immunity because Foxwoods had been such an enormous success story and no one envisioned a time when the tribe wouldn't be able to pay back its debt obligations.

Steven Lanza, a University of Connecticut economist, said the alternative to waiving sovereign immunity would have required the Mashantuckets to pay a much higher interest rate on their debt - which would have increased their costs and may have made any restructuring prohibitive.

Lanza said the Mashantuckets were able to negotiate lower rates on their debt partly because they had creditors up against the wall. Lenders were not sure they could collect on any of their debt because of the sovereign-immunity question, he said.

Even if they could take the tribe's casino operations in a bankruptcy proceeding, the property might prove to be worthless because in Connecticut, only Indian tribes can run a gaming business, he said.

"There's a sort of hostage situation going on here," Lanza said.

Gros gave credit to newly appointed Foxwoods' chief executive Scott Butera for his role in the expected debt restructuring. Butera had helped turn around other casino operations swimming in debt, including Tropicana Entertainment and Trump Entertainment Resorts, while similarly making large wads of financial obligations quietly go away.

"He's a magician when it comes to refinancing," Gros said. "I don't see them going into bankruptcy now."

Gros added that he expects that Butera, as has been his pattern, will give up his position at Foxwoods once the restructuring is finalized.

Hud Englehart, a spokesman for Butera, had no further comment Monday on the debt restructuring.

Lanza said the debt deal will likely have a snowball effect on casino operations around New England.

For the Mashantuckets, the effect will be higher rates for any further borrowings, he said, probably crimping Foxwoods' ability to expand anytime in the near future.

"We probably won't see them in our lifetimes return to the status where they'd be considered any kind of prime asset," Lanza said.

For Mohegan Sun, which also has been looking to refinance some of its $1.6 billion in debt, there may be an opposite effect, he said, as the Mohegans point to the low rates given to the Mashantuckets in an attempt to gain favorable financing terms.

And for the proposed expansion of casino gambling in other states, the effect of the restructuring may be to scare investors away, he said, thereby eliminating some of the potential competition that both Mohegan Sun and Foxwoods might otherwise have expected.

"The pots are getting smaller in the poker game, and it's costing more for a seat at the table," Lanza said.

Analysts agreed that the overall effect of a debt restructuring would be good for Foxwoods and good for the Connecticut economy. The casinos have been a drag on the economy over the past few years, they said, but debt restructurings could help ensure that the gambling meccas won't be reducing jobs in large quantities over the next year or so.

"The casinos are in better shape because now they have a new deal and debt they can more easily manage," Lanza said.

"And for the creditor, they get a good deal, too, because they get a certainty of getting some of their money back without the uncertainty of possibly getting none of their money back," he said.

It remains to be seen, though, when the casinos will regain their foothold. Both Foxwoods and Mohegan Sun have seen encouraging signs of recovery in the most recent quarters, but the gains often have been difficult to sustain.

Mitchell Etess, chief executive officer of the Mohegan Tribal Gaming Authority, operator of the Mohegan Sun, said casinos won't bounce back entirely until the U.S. economy shows more vitality, including job and home-price stability.

"There are times when I feel that things are turning the corner. Then the stock market goes down by 2,000 points," Etess said in a phone interview.

Etess wouldn't comment on Mohegan Sun's negotiations to refinance its debt but said he has been following closely news about the Mashantuckets' attempts to restructure its obligations. He said Indian tribes are in uncharted waters when their casino operations go awry because of questions over how the issue of sovereign immunity plays out in debt negotiations.

"There's no doubt that all of the North American gaming sector is watching what happens in the Foxwoods situation," Etess said.