Indian gaming has come a long way from its inception when money was hard to come by and the bond markets couldn't be tapped to finance construction projects.

Tribes had little or no track record running casinos, and prospective lenders were wary of making loans to what amounted to sovereign nations with the legal immunity questions that entailed.

Thus, many tribes had to turn to individuals, often at a stiff price. Foxwoods, which was to become the world's biggest casino for a while, reached as far away as Malaysia where billionaire Lim Kok Thay lent money at high rates on a loan still being paid back.

Mohegan Sun turned to South African mogul Sol Kerzner, who still profits from his investment there.

But over time, track records were established and some of the early casinos, such as Foxwoods, became huge successes.

The result: investors became more comfortable and began lending to a segment of the industry that was growing faster than the commercial side.

Still, the question remained, what recourse would lenders have in a default?

On the flip side, the tribes are limited in their ability to raise cash to keep their credit in good standing. They can't sell their land any more than Maryland or California can. They can't sell shares of stock in the tribe.

But that question receded as time went by, profits piled up, and tribes set about building ever-larger casinos.

Not any more.

The issue took front and center dramatically when Mashantucket Pequot Chairman Michael Thomas said he would lock up cash for payments to tribal members before paying lenders as mighty Foxwoods Casino is not generating enough cash to service debt, much of it taken out to build the $1 billion MGM Grand tower

Foxwoods is generating just enough money to support $1.3 billion in debt while it owes $2.3 billion. If neighboring Massachusetts approves gambling, those numbers will worsen.

The Pequots will not be the only tribe negotiating with lenders. Inn of the Mountain Gods and Buffalo Thunder in New Mexico also defaulted recently.

But Foxwoods is the biggest and highest profile case, and it is still trying to build casinos in Philadelphia and Kansas.
    
The stakes are enormous. If Foxwoods and lenders can't reach a restructuring deal and force a lawsuit, all bets are off.

A court victory for the tribe would be pyrrhic because banks and investors might never lend again to tribes, or their terms might be so costly as to make only the highest quality loans possible, or the conditions might be unpalatable to tribes guarding their sovereignty.

In this environment, both sides will be highly motivated to negotiate a compromise.

But damage might already have been done. Even a negotiated settlement could freeze future financing if lenders feel they were backed into a corner with no good alternative.

And that could bring Indian gaming growth to a screeching halt faster than any Department of Interior policy, because it could constrain expansion of existing casinos as well as the financing of new ones.

The explosiveness of the situation was evident in the reaction to The Day's story.

S&P and Moody's immediately cut Foxwoods credit rating three notches to CCC.

The tribe then removed Thomas as chairman saying he had betrayed their trust. He was put on administrative leave.

However the matter is resolved, most of the legal issues are likely to remain, chilling investors and the casino ambitions of tribes that need to borrow money to fulfill them.

By Frank Fantini

Frank Fantini is the editor and publisher of Fantini’s Gaming Report. A free 30-day trial subscription is available by calling toll free: 1-866-683-4357 or online at www.gaminginvestments.com.

Please login to post your comments.

Comments(1):

1. Lenders also at fault

   I have seen provisions in these loan agreements that require debtors to prioritize repayments before most other distributions; however lenders in this case may have been over zealous in advancing funds to what appeared to be a sure-thing - and therefore acted (dare I say) rashly. By the way, in this usage, Pyrrhic should be capitalized.

   Monday, September 14, 2009 William

More Featured Articles