The New London Day
Pequots' problems rock gaming world

Tribe's prominence only serves to magnify impact of financial crisis

By Brian Hallenbeck Published on 9/20/2009

Indian Country was already on edge last month when the Mashantucket Pequots' dire financial circumstances came to light.

In June, the Pojoaque Pueblo, owners of Buffalo Thunder Resort and Casino in Santa Fe, N.M., missed an $11.5 million payment on a $245 million bond. At about the same time, the Mescalero Apache Tribe, owners of the Inn of the Mountain Gods Resort and Casino in Mescalero, N.M., defaulted on a $200 million obligation.

In mid-August, the Little Traverse Bay Bands of Odawa Indians, owners of the Odawa Casino Resort in Petoskey, Mich., failed to make a scheduled $6.3 million interest payment on $122 million in loans.

And then the Mashantucket Pequots and their now-exiled tribal chairman, Michael Thomas, delivered a haymaker: The tribe, on the brink of default, was seeking to restructure $2.3 billion in debt, a senior adviser to the Mashantuckets told The Day.

Equally stunning was the chairman's response to the crisis.

Thomas, in an Aug. 19 e-mail, had updated tribal members “on the growing financial crisis facing our tribal community.” He pledged to preserve tribal government and per-capita “incentive” payments to tribal members, saying he'd introduced a resolution to put our “last borrowed dollars ... in a lock box” for that very purpose.

Thomas' pronouncement “sent shock waves through the financial community,” said Kent Richey, a Minneapolis, Minn.-based securities attorney who represents parties that do business in Indian Country. The recession's effect on gaming in general and the level of tribal gaming operators' indebtedness had been causing concern for some 18 months, Richey said, when word of the Mashantuckets' plight occasioned a new level of anxiety.

In an Aug. 31 announcement, Keith Foley, senior vice president of Moody's Investors Service's corporate finance group, described potential repercussions, saying, “A decision by the Tribe not to service its debt in a timely manner or honor its financial contracts - particularly if it has the capacity to service its debt - could cause lenders to retrench from this segment.”

He warned that the Indian gaming industry “has reached an important crossroads,” and that lending to the industry was fraught with a number of risks, “such as the 'sovereign immunity' of such organizations.”

”The Tribe owns the largest gaming facility in the U.S. (Foxwoods Resort Casino and MGM Grand at Foxwoods) and has a long history of gaming and debt issuance,” Foley said. “As a result, its actions could have a substantial influence on other Native American gaming issuers.”

Indeed, the magnitude of the fallout over the Mashantuckets' financial crisis has been largely due to the tribe's prominence in the gaming world.

”It was highlighted more because of the amount of the debt and because the Mashantuckets have been so highly respected in the business community,” Richey said.

The only tribal gaming operator with a debt load anywhere near that of the Mashantuckets' is the Mohegan Tribe, whose Mohegan Tribal Gaming Authority, operator of Mohegan Sun, reported early last month that its debt was $1.6 billion as of June 30. After the Mohegans, the most-leveraged gaming tribes are carrying debt in the $400 million to $500 million range, according to Richey.

Access to credit affected

For all the initial alarm over the Mashantuckets' situation, the tribe's prompt rebuke of its chairman has had a calming effect among investors, analysts say. On Aug. 31, five days after the story broke, the tribal council, citing Thomas' e-mail pledge to tribal members, relieved him of his duties and placed him on administrative leave pending a Sept. 10 vote to expel him from the council.

The next day, Sept. 1, the tribe averted default by making a scheduled $74.1 million bond interest payment.

Though Thomas appeared before the council on Sept. 10, no vote took place. At the meeting, however, he informed the council he would neither resign nor seek re-election Nov. 1. His term extends to the end of the year. While on administrative leave, he continues to draw his chairman's pay.

The council's response “has lessened concern” in the financial markets, Richey said. “If you look at the high-yield bonds, the markets did reflect a decline in the price. … Immediately following the (Mashantuckets' restructuring) announcement, there was a drop in the price and the yields went up as investment got riskier. But things have returned more or less to normal.”

Still, tribal gaming operators seeking to access credit have encountered some difficulty, sources have said.

”Certainly, the financial community has kind of taken a step back when looking at Native American financing,” Mitchell Etess, chief executive officer of the Mohegan Tribal Gaming Authority, said last week. “It's not like it's had any direct impact on us but that's because we're not in the middle of a transaction.”

How might the Mashantuckets' restructuring play out?

Since the tribe is a sovereign nation - a “governmental unit” that likely would be unable to pursue bankruptcy protection - it must rely on the “forbearance” of creditors, analysts say. Essentially, that means the tribe will have to ask for more time to meet its obligations.

While the tribe has not responded to requests for comment, sources have told The Day that tribal officials and their advisers met last week with bondholders' representatives and that the tribal council has begun to meet regularly with the tribal membership to provide “financial updates.”

But what lies ahead is uncharted territory.

”In a corporate setting, if there's insolvency and you're unable to pay your obligations, creditors can put you into involuntary bankruptcy and once in bankruptcy you can reorganize and the bankruptcy trustee can order changes in the debt,” Richey said. “But absent bankruptcy, nobody can tell you that you have to change your debt obligations - although you could be enticed to do so.

”If the debt's out there long enough, more than likely some kind of consensual agreement is reached … where some folks are not going to get everything their contract provides.”