Debt deal lifts veil on Foxwoods' finances

Mashantucket - In releasing details of its $2.2 billion debt-restructuring plan a couple of weeks ago, the Mashantucket Pequot Tribe made available a treasure trove of information that previously had been accessible only to investors.

Indeed, such public disclosure of information related to the tribe's Foxwoods Resort Casino could become a regular thing.

According to a presentation to bondholders that is among the materials the tribe posted Sept. 28 on the website of the Electronic Municipal Markets Access system, the restructuring plan "redefines and expands" the "information sharing and reporting requirements" the tribe and its gaming enterprise face.

If a sufficient number of the tribe's lenders approve the restructuring plan, Foxwoods - including MGM Grand at Foxwoods - will post annual and quarterly "SEC-like" financial reports on the EMMA website and will "host conference calls within 10 business days of reporting." The plan calls for the tribe to post annual and quarterly financial statements on a confidential, password-protected site.

Foxwoods' financials have been available only to investors and securities analysts with the necessary access to IntraLinks, a secure online service. By contrast, the Mohegan Tribal Gaming Authority, which operates Mohegan Sun, has "registered" its debt with the U.S. Securities and Exchange Commission, which requires the public filing of quarterly, annual and other reports.

"Posting results on a public website and hosting quarterly conference calls drastically increases the level of transparency," said Greg Roselli, a gaming analyst with UBS Securities.

"It's huge … a very big win for creditors," an investor who wished to remain anonymous said of the proposed change in Foxwoods' reporting requirements.

The tribe's Sept. 28 posting provides, for the first time, specifics of the Restructuring Support Agreement it signed with steering committees for each class of its creditors. The restructuring would reduce the tribe's outstanding debt from $2.24 billion to $1.72 billion, with junior lenders facing a $520 million "haircut" that could be offset by better-than-projected cash flows if Foxwoods' business improves.

Under the plan, the tribe's senior debt - $21 million owed to Kien Huat, the Malaysian investment company that bankrolled Foxwoods' construction, and $549 million owed to a syndicate of banks - would be restructured into two new term loans with five- and seven-year maturities. Banks would also arrange another $27 million in senior debt in the form of a $12 million line of credit and a $15 million term loan, both due in 30 months.

Kien Huat's annual claim to nearly 10 percent of Foxwoods' adjusted net income would be eliminated.

Special-revenue obligation bonds, so-called SROs, totaling $609 million would be converted to $619 million in new SROs maturing in 13 years, while subordinated special-revenue obligations, or SSROs, which total $415 million, would become $293 million in new SSROs maturing in 18 years.

A class of bonds known as the 8.5 percent notes, which total $643 million, would be converted to $208 million in 6.5 percent notes.

Funding for the tribe, which has cut the cost of its government by more than 70 percent since 2008 and phased out payments to tribal members, would continue to shrink for the next several years. The tribal government's budget for the 2012 fiscal year, including operations and maintenance capital, is about $50 million, according to the tribe's bondholder presentation.

Under the plan, fixed funding for the tribe would be reduced to $42.5 million in the first year of the agreement, $40 million in the second year and $35 million in the third year. The tribe's share of any excess cash flows would increase over time as the various levels of restructured debt are repaid.

"The tribe's willingness to take a deep haircut versus (its) historic distributions is a strong statement," Roselli, the gaming analyst, said. "It says they want to stay in good standing with the capital markets. It speaks well of them."

Soaring debt, declining revenue

The bondholder presentation discusses events that precipitated the tribe's 2009 default and the steps the tribe has taken and will take as it tries to climb out of the hole.

The tribe cites the recessionary trends that hit the gaming industry around 2007 and the high national unemployment rate that reduced casino-goers' disposable income. Competition from Mohegan Sun and racetrack casinos in Rhode Island and Yonkers, N.Y., also pinched Foxwoods' revenues just as MGM Grand opened in May 2008.

The tribe's total debt grew from a bit more than $1 billion in fiscal 2005 to nearly $2 billion in fiscal 2008. Meanwhile, the gaming enterprise's EBITDA - earnings before interest, taxes, depreciation and amortization - fell from $322 million in fiscal 2007 to $277 million in fiscal 2008. With maturities nearing, the tribe's debt approached $2.1 billion in 2009, as EBITDA dropped to $264 million.

For the gaming enterprise, the path to recovery has included an overhaul of Foxwoods' senior management, a process that began with Scott Butera's hiring as president and chief executive officer in late 2010. Butera, who arrived with a reputation as a "turnaround artist" after leading restructurings at Las Vegas-based Tropicana Entertainment and Donald Trump properties in Atlantic City, has been heavily involved in the Mashantuckets' restructuring talks.

Butera also has overseen efforts to lower Foxwoods' operating expenses, which were down about 16.5 percent for the nine months that ended June 30, 2012, according to the tribe's bondholder presentation. On that date, the number of full-time casino employees was 3.4 percent less than on the same date in 2011.

Looking ahead, Internet gambling may provide another new revenue source for the tribe. More competition looms, too, with expanded gambling expected to materialize in Massachusetts, New York and Rhode Island.

In the meantime, the casino will continue to pursue the "elimination of unprofitable lines of business," renovate its hotels and upgrade its restaurants and bars. The tribe, seeking to diversify by providing more and more nongaming amenities, plans next month to open its Pequot Outpost - a complex that includes a gas station, a convenience store and a Burger King restaurant opposite its Two Trees Inn - and to announce soon the start of construction of a 312,000-square-foot shopping mall linking the Grand Pequot Hotel and MGM Grand.

The mall, which is to be developed and owned by Tanger Factory Outlet Centers of Greensboro, N.C., and Greenwich-based Gordon Group Holdings, "will be constructed with $110 million of third-party capital and could be open as early as the fall of 2014," the tribe's bondholder presentation says.

Large, complex deal

By all accounts, the Restructuring Support Agreement, reached after nearly three years of talks, occasioned a huge sigh of relief among the parties involved and beyond.

"For Indian Country, it's a positive," Roselli said of the deal. "It was one of the last (tribal) restructurings hanging over the space. … It was good to see all parties reach a negotiated agreement."

In a report issued in March following the Mohegan Tribal Gaming Authority's refinancing of $1.6 billion in debt, Fitch Ratings noted that the Mohegans' much-anticipated debt exchange was then the fifth Native American gaming restructuring since the recession struck.

"Broadly, it is positive to see resolution nearly three years post default, even if the resulting capital structure remains highly leveraged," Michael Paladino, an analyst who heads Fitch's gaming, lodging and leisure sector, said of the Mashantuckets' restructuring plan. "… The Mashantucket Pequot case is the largest and most complex situation to date given the number of constituents with different priorities, claims, and bargaining positions, so a successful out-of-court resolution bodes well for the sector's future financing prospects."

The Restructuring Support Agreement must be approved by at least two-thirds of the lenders holding the 8.5 percent notes and by the lenders holding at least 50.1 percent of the outstanding combined principal amounts of each other class of bonds.

The deadline for signing the agreement was originally set for Sept. 16, then extended 30 days to Oct. 16 — Tuesday.

Asked whether the noteholders had any choice but to accept the agreement's terms, Roselli said, "Not much. … I would add that the process took almost three years to work out; and given that, the remaining holders' ability to negotiate different terms is very limited."


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