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Boom times for Indian casinos, says Merrill Lynch

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NEW YORK - American Indian casinos will take in $15 billion, 36 percent of national gaming revenue this year, a figure that will rise to 40 percent by 2006, according to a major report by Merrill Lynch.

With this increase and further expansion on the horizon, Indian gaming has penetrated the bond market, with four financings since December, the investment banking company reported.

With stagnant markets in Las Vegas and Atlantic City, the dynamic growth in gaming is all in Indian country, wrote Merrill analyst Kurt van Kuller. But he also warned "rapid growth can be a mixed blessing."

Casino bonds often come with "a gusher of revenues," according to van Kuller. But, "investors need to ponder market saturation and the impact of potential new competitors in a fast-changing environment."

The comprehensive overview of Indian gaming noted that California, with a dozen major casino proposals, and New York lead the Indian casino boom, and new compacts have come online this year in Arizona and Wisconsin.

Indian market share is growing, with Indian gaming the market leader in 19 of the 29 states that have it, said Merrill. (Eight of those states have only Class II gaming.) In nine states, Indian casinos capture at least 75 percent of gaming visits. A full 60 percent of tribes in the lower 48 have gaming, and the number will rise, according to the report.

California's 43 percent Indian visitation rate will probably increase when the new Indian casinos there come online, the report said.

"Indian casinos typically come on-stream in underserved gaming jurisdictions," the report noted. "Rapid growth is occurring during the initial rush to fill the void in new markets. Indian gaming is thus capturing much of the dynamic growth in the industry, while the older Nevada and Atlantic City markets struggle with the effects of saturation, post 9/11 air travel concerns, and the soft economy."

The largest individual Indian casinos by number of machines remain Foxwoods, owned by the Mashantucket Pequot tribe of Connecticut (6,400), Mohegan Sun, owned by the Mohegan Tribe of Connecticut (6,200), and the Pearl River Resort of the Choctaw Tribe of Mississippi, with 5,000 machines.

The Pequots plan a $100 million expansion, according to the report, which would increase Foxwoods to 7,200 slots, and the Mohegans completed a $1.1 billion renovation last year. The $750 million Pearl River is the only land-based casino in Mississippi, it noted.

In the lower 48, 201 tribes operate 321 gaming facilities. "The most is six for the Sault Ste. Marie Chippewa of Michigan, followed by five for the Florida Seminoles."

Some 20 new tribes may start gaming in California, according to Merrill, and the Navajo Nation, the country's biggest reservation, has signed a compact with Arizona.

The largest states in Indian gaming revenue are California, at $5 billion, Connecticut, with $2 billion, and Michigan at around $1 billion. New York may reach $2 billion when its new casinos start, the report estimated.

In California, van Kuller wrote, 37 of 59 recognized tribes without compacts with the state said they wanted them, and 54 groups are seeking federal recognition as tribes. He feels California "has the potential to become one of the world's leading gaming centers, with Foxwoods-style resorts." It already has 50 Indian casinos.

In New York, the Oneida Nation and St. Regis Mohawks, with gaming compacts since 1993, are now seeing a more crowded landscape. Last New Year's Eve, the 2,625 slots Seneca Niagara opened, and the Senecas have been given access to a total of three casinos. The Mohawks are expanding their Akwesasne Casino, and plan a Catskills casino.

Van Kuller noted that 11 New York state racetracks are also able to install video lottery terminals, turning them into so-called "racinos."

The Merrill report also noted a laundry list of other states with potential for Indian gaming growth, including Alabama, Arizona, Colorado, Connecticut, Idaho, Kansas, Florida, Illinois, Indiana, Louisiana, Massachusetts, Maine, Michigan, New Mexico, Ohio, Oregon, Rhode Island, South Dakota, Washington, Wisconsin, and Wyoming.

It cited a few land issues, such as tribes acquiring land and building off-reservation casinos. "Tribes generally must have acquired the land prior to the adoption of IGRA (Indian Gaming Regulatory Act) on Oct. 17, 1988 in order to use it for a casino."

However, van Kuller wrote, "This is a controversial issue, and can be a major barrier to success."

The analyst noted that many Indian casinos are not close to urban population centers, explaining why "a number of highly visible proposals involve efforts to build near major cities." These include San Francisco (Lytton Band of Pomos, Graton Rancheria Band), Minneapolis (Red Lake and White Earth bands of Chippewa), Chicago (Ho-Chunk) and Gary, Ind. (an unnamed Oklahoma tribe).

The report tallied a number of major gaming companies that have partnered with tribes. Harrah's is the largest, with four Indian casinos under management. But other big players include Stations, Trump, and Park Place Entertainment. The Hard Rock Hotels have deals with the Seminoles, and Foxwoods, with a caf? planned for the Choctaws.

As to financing, "debt secured by Indian gaming revenues is expected to appear more frequently in the tax-exempt bond market," the report notes. There are several obstacles to this, though, including the lack of tribes to issue private-activity bonds. Management contracts in place also are a barrier to issuing T-E debt.

Issuers, said Merrill, will be looking at the following possible credit issues, especially with rapid growth: potential overbuilding, management experience, financing future capital programs, "event risk," and possible backlashes in local relations.

Competitive concerns include the racinos, which "could ultimately involve into full-fledged casinos run by deep-pocket owners," said van Kuller.

Also of concern to investors are interruptions of service. These can be caused by financial distress, shutdowns by state and federal authorities, natural disasters, or the expiration of compacts.

Tribal management concerns are a problem as well. The report noted various problems with management at the Meskwaki Sac and Fox, the Kickapoo of Texas, the Nooksack of Washington state, the Poncas of Oklahoma, and the Kiowa of Oklahoma.

"On balance," the report concludes, "we believe there are excellent opportunities within the Indian gaming sector ? however, this outlook must be tempered by the leveraging of future revenues to perpetually finance growth in a very capital-intensive business."