Mashantucket Pequot Reaches Deal To Extend Foxwoods Casino Debt Forbearance

The Mashantucket Pequot Tribal Nation, owner of Foxwoods Resort Casino, has reached a new agreement in principle with its senior lenders to extend a debt forbearance agreement. The agreement is designed to provide more time to improve the casino’s cash flow and repayment ability as it works to restructure $2.3 billion of debt. The existing forbearance agreement would have expired January 20th; the new agreement extends the timeline to April 30, 2010.

The agreement in principle has been made with a majority of the Tribal nation’s lenders and will be finalized and executed shortly, according to the Tribe’s spokesperson.  The statement emphasized that the Nation's debt restructuring efforts are separate and distinct from operations at Foxwoods and will not have any impact on guests, employees, suppliers or business partners at Foxwoods or MGM Grand at Foxwoods.

“Foxwoods remains committed to providing its guests with its signature guest service, unparalleled gaming options, the very best in entertainment, and world-class services, dining and amenities,” according to the statement.
 

Ruling In Lac du Flambeau Casino Bond Case Highlights Tribal Sovereignty Power Against Creditors

When the Lac du Flambeau Tribe fell behind on repaying $50 million in bonds that financed its casino in northern Wisconsin, bond issuer Wells Fargo asked a federal judge to appoint a receiver to run the casino and increase payments on the debt service. As reported on Turtletalk, the judge refused based on principles of Tribal sovereignty, leaving the bank and bondholders with few legal options other than negotiating with the Tribe.

In 2008, the Lac du Flambeau issued bonds to provide capital for the construction and operation of its casino. The bonds carried interest at 12% and required a monthly payment from the Tribe of approximately $800,000. With the economy plunging and over $46 million still to be repaid on the bonds, the Tribe stopped setting aside money to service the debt. Wells Fargo then filed suit in federal court to appoint a receiver to run the casino, in accordance with the terms of the bond agreement the Tribe executed with the bank.

The Tribe argued that the receivership clause in the bond agreement was so broad that it was actually a management agreement that would require approval by the National Indian Gaming Commission. The Commission had not been involved in negotiating the deal and did not provide any approval, therefore the Tribe argued that the agreement was void. The judge’s refusal to appoint a receiver essentially validated that position, leaving Wells Fargo with no direct ability to take control over the casino’s operations. “The entire agreement is a void issue,” said Tribal administrator William Beson.

The judge’s decision means the Tribe is not legally responsible to pay back the money, said Monica Riederer, the Tribe’s attorney. However, she said that does not mean the Tribe will completely renege on the debt. “They will do whatever they’re legally required to do,” Riederer said. Meanwhile, investors and Tribes across the country will no doubt closely monitor the impact this situation has on the ability of Tribal entities to obtain future bond financing. Having no ability to enforce collection of a bond debt is “a nightmare for investors,” said Megan Neuburger, an analyst who follows the Indian gaming industry for Fitch Ratings. “It’s sort of an investor’s worst-case fear.”

 

Tribal Casino Defaults Raise Big Questions On Bankruptcy Laws

The economic downturn is opening some previously-uncharted legal territory - the question of applicability of federal bankruptcy laws and procedures for troubled Tribal enterprises. 

The Mashantucket Western Pequot Tribal Nation, owner of the massive Foxwoods Resort Casino, is seeking to restructure at least $1.45 billion in debt.  With gaming revenues in steep decline due to a lack of players, Foxwoods is at risk of becoming the biggest Tribal casino company to default on its debt. 

The looming cash crunch highlights the different economic and legal landscape in which Tribal enterprises operate. “They can’t do the types of things other debtors can in a restructure,” says Megan Neuburger, an analyst at Fitch Ratings in New York. “Tribal casinos can’t do a debt-for-equity swap. They can’t raise cash by selling off assets on Tribal land to repay creditors."  Standard & Poor’s has cut its Mashantucket rating four steps to CCC and placed the debt on credit watch.  Creditors probably can’t take over assets or operations of casinos on Tribal land, which are sovereign nations, as they may with commercial bankruptcies, Neuburger said. That leaves them little choice other than to restructure debts and work with the Tribe.

No Tribal casino has yet tested federal bankruptcy laws.  “Bankruptcy law does not apply to Tribal situations in the same way it does to a commercial situation,” Neuburger said.  Michael Thomas, chairman of the Mashantucket Pequot Tribal Council, told members that the Tribal government would be paid first, before bankers or bondholders.  “It might be posturing, but the Tribe is indicating that it might put itself, the equity holder, ahead of the debt, ignoring corporate law,” said Lawrence Klatzkin of municipal bond broker Chapdelaine Credit Partners. “It probably won’t happen, but if it does, who’s to say other Tribes don’t say, ‘If Foxwoods doesn’t need to meet its U.S. legal obligations, maybe I don’t either.’”