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Bond analysts talk Indian gaming

NEW YORK - Over the past few years, the growth of Indian gaming has attracted ever greater attention from Wall Street equity analysts, whose research coverage of the growing number of publicly traded casino operating companies and equipment manufacturers doing business in Indian country necessitated knowledge of this emerging market.

Now, with tribes issuing bonds of various types to finance construction and expansion projects, some of Wall Street's bond analysts have also set their sights on Indian country. Such attention and scrutiny surely bodes well for the future and potential of Indian owned business ventures.

Kurt van Kuller, Kenneth R. Goldberg and Robert H. Jaeger, municipal credit research analysts from Merrill Lynch & Co.'s Global Securities Research and Economics Group in New York, recently issued a report with a very positive near and long-term outlook on the tribal gaming sector.

"We're seeing the emergence of a new sector of bond credits," co-author van Kuller told Indian Country Today, noting that analysts have long covered the participation of commercial casinos in the high-yield bond market. He said that Merrill Lynch is currently working on several financing projects, using both taxable and tax-exempt bonds, with a number of tribes throughout the country. "It's a budding new sector that now demands coverage because of its scope, size and potential. We see a critical mass emerging, which has great potential as a municipal sector."

Van Kuller explained that tribal governments can finance casino upgrades and expansion projects with tax-exempt bonds because casino profits are used for governmental purposes.

"It's akin to a state running a lottery," he said. "If a state wanted to open a casino and own it and run it, then that could also be funded from tax-exempt bonds." Bonds issued for commercial development projects by commercial casino operators, however, would not be tax-exempt, he added.

Indian gaming is "on the rise," the analysts said in the Oct. 16 report. "We expect more Native American operators to pursue both taxable and tax-exempt financing in the institutional markets to finance growth. Given the pace of new development, plus legislative and jurisdictional changes, careful credit analysis is imperative."

"As in most sectors, we expect to see a wide range of credit quality," the analysts said. "On the higher quality end of the spectrum, we would expect to see strong market positions (in some cases due to state mandated limits on gaming) with financing proceeds typically for expansions of facilities with some operating history. On the more risky end of the credit spectrum, we will likely see more financing for construction of new facilities with limited (or no) operating history."

As this is a new market, many bond investors have minimal first-hand experience with Indian-owned casinos; the analysts suggest that those looking to invest in casino-issued bonds "spend time 'rolling the dice' at some Native American gaming sites to get a sense of the range of facilities offered."

But the analysts invoke caution as well. "As many of the Native American markets develop at a rapid pace, competitive dynamics could be volatile. California is the most notable example where many properties are being developed and upgraded within a short time frame. 'The latest and greatest property' is subject to change many times, and there is also the possibility of overbuilding with a specific area. The New York market is subject to this uncertainty as well as it develops."

The analysts identified four major markets for bond investors to watch:


"With its large population centers and improving gaming facilities, California is becoming one of the largest gaming jurisdictions in the nation," the analysts observed. "We believe California Indian gaming poses the biggest threat to secondary Nevada markets [citing Laughlin and Reno in particular] that derive a greater percentage of their overall business from California residents than Las Vegas."

Due to its status as the country's premier gambling destination, Las Vegas will not be dramatically affected in regard to any loss of business to California's tribal casinos. But the analysts singled out Pechanga Casino and Resort as "well positioned to compete for traditional Las Vegas customers given its relatively strong product offering, and its location in a regional tourist area, with close proximity to a major highway."

"We expect gaming revenues to continue to grow, as customer acceptance grows among California residents," the analysts said, noting that tribes in the state currently operate some 40,000 slot machines, about 11,000 below the statewide compacted limit.

[For an account of recent attempts by California's Cabazon Band to secure tax-exempt bonds, see James May's article "Cabazons request tax-free bonds to fund resort project" in Indian Country Today, vol. 22, issue 19, Oct. 23, 2002, p. C-1.]

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While noting that combined revenue from Foxwoods and Mohegan Sun casinos represented 15 percent of the revenue from all other Indian casinos put together, the analysts asserted their belief that "gaming in Connecticut should continue to experience significant growth over the next several years."

The analysts noted the recent recognition of the Historic Eastern Pequot tribe, and well as the pending petitions of the Schaghticoke Tribe, the Golden Hill Paugussetts and the Hassanamisco Band of the Nipmuc Tribe, but concluded that any future Indian casino in the state is years away.

"In addition to the potential proliferation of Indian gaming within Connecticut, the state's existing casinos may face increased competition from Indian casino developments in neighboring states." After New York, the analysts cited Massachusetts, Maine and Rhode Island as the most likely nearby states to eventually open; the latter two states reportedly have the idea of "racinos", video slots at racetracks, under consideration.

"We believe New York's Catskills region will provide the Connecticut market with its only significant competition over the next few years," the analysts continued. "Casinos in other New England states do not yet appear to have the needed support to move forward, but could take some share from Connecticut longer-term as the Connecticut properties currently draw a significant level of volume from Massachusetts."

New York

"New York is likely to become a major gaming jurisdiction, which could rival the largest regional markets in a few years," the analysts predicted. "Given their close proximity to the New York metropolitan area, casinos in the Catskills should prove to be extremely lucrative for the tribes."

Regarding the October 2001 legislative action that expanded gambling in the state, the analysts see economic benefits not constrained by the boundaries of tribally owned lands.

"The expanded gambling bill is expected to be a boon for tribes, developers, local communities and the state," the analysts opined, noting market estimates as $3 billion to $4 billion once all six casinos are operational. The Catskills have 19 million people living within 100 miles ? it is estimated that when all the casinos are operational, state revenue could be as much as $300 million to $400 million per year."

The analysts figure that the establishment of Indian gaming in the Catskill region threatens to swipe market share from both Connecticut's Indian casinos and Atlantic City's commercial ones, while the Western New York casinos will compete for customers from Canadian gambling establishments. The western casinos should also draw visitors from Ohio and western Pennsylvania.

"We believe casinos in the Catskills will also expand the market, as a significant number of people that might not otherwise travel to Atlantic City or Connecticut would give the Catskills a try, given its more convenient location," the analysts said. "In spite of mitigating factors, we believe both markets will experience some loss of market share as a result of casinos opening in the Catskills."


Indian gaming in Florida is limited to Class II; the state has been unwilling to negotiate for a Class III compact. Nevertheless, the Seminole Tribe in particular has profited from a lack of competition.

"The Seminoles have demonstrated that Class II gaming can be highly profitable [which] is due in large part to the lack of competition from Las Vegas style casinos within the boundaries of the state of Florida," the analysts observed. "Moreover, it demonstrates the fast potential of the under-served gaming markets in Florida."

"The Seminoles have one of the strongest competitive positions of any gaming operation," the analysts continued. "Only one other federally recognized tribe exists in the state. No other tribal recognition cases are on the horizon ... Direct competition is limited to a single casino run by the Miccosukee tribe."

The Merrill team noted that last April, the Seminole Tribe participated in a $315-million tax-exempt bond sale, the largest ever for an Indian tribe, with another $95 million in tax-exempt financing planned in the near-term.

"The Seminole facilities are well positioned to benefit from a major upgrading of their outmoded facilities," the analysts concluded. "Over at least the intermediate term, increasingly strong profitability is foreseen. Longer-term growth may be substantially abetted by attainment of Class III gaming - although this is not necessary in the present environment."