Indian Casino Projects May Be Smaller Than In the Past

The era of the big American Indian casino project may be over, Indian finance officers and investors heard at a recent tribal/bond investors summit in New York City. But not all the news from the sector is gloomy.

Jon Stern, director of Fundamental Advisors, LP, told the July 17 meeting, sponsored by the Native American Finance Officers Association, that casino finance hasn’t completely dried up, but “projects will be smaller than in the past.”

He said the cost of casino financing is “challenging,” but said that with a good borrower, good management, and good deal structure, “deals will get done.”

In a development that has made the casino finance market tighter, Michael Paladino, gaming, lodging and leisure sector head, Fitch Ratings, noted that there have been 8 or 9 Indian casino bond defaults to date involving “$4 billion or so.”t

James Kayler, managing director, Bank of America Merrill Lynch, told the NAFOA meeting that a majority of those defaults were “worked out relatively fairly” with consensual agreements between tribes and bond investors.

He said there is a bifurcation developing in the Indian casino market, pitting high quality deals against high risk ones, with delineation between the two “becoming ever more extreme.”

John Maxwell, managing director of Jefferies and Company, Inc., said at the analyst roundtable session that “investors are going to want to see a de-levering [paying down debt] type transaction.”

“Going forward, higher quality stuff will get financed,” he said, but it will be harder to convince investors to fund higher risk projects, which “may not get financed at all.”

Stern said casino supply growth “continues to be a concern” over the next five years but that there is some prospect for an increase in demand in the Northeast where some markets, like Boston, have yet to be tapped.

However, he said the result of expansion might be “to capture share from existing gaming.”

Kayler told the NAFOA panel that it has been harder for casinos to earn high returns in the past five years.

He said new properties in states like Pennsylvania and Ohio have been earning 10-15 percent returns, “less than the 20-30 percent returns before the financial meltdown.”

Not all the news at the panel session was bearish, however. Online gaming, specifically poker, continues to progress, attendees heard.

Kayler said there is “a very high probability” that Internet poker will be legal for Indian gaming in the next five to ten years, and Maxwell was even more optimistic, estimating one to three years.

“The technology is in place to put in all the controls,” Maxwell said. However, “operators want to wait for federal approval.”

Giving a macro analysis of gaming, Paladino said headwinds against it remain. The beginning of this year saw some positive trends, he said, but in the second quarter, investors have become “more cautious.” He expects this trend to remain in place for the rest of the year.

“The consumer is feeling a little more cautious” on spending for discretionary items like gaming. Operators, too, are cautious about new development.

In an earlier session at the show on investor relations, Brian Parrish, chief executive of Arizona’s Quechan Casaino Resort, also talked about gaming challenges.

“When the economy started to turn, it exposed a lot of weakness on the operations side,” he said. Pre-2008 financial projections, for instance, “led to unrealistic expectations,” making it “a challenge to manage expectations.”

David Sheridan, chief financial officer of the Seneca Gaming Corp. in New York state, added “the promise of performance in the future isn’t enough to carry your credit.”

Attendees at the show spoke favorably amongst themselves about Monday’s announcement by the Treasury Department that it is bringing back TED (tribal economic development) bonds, authorizing $1.8 billion in bonding authority.

The government originally brought out the program a few years ago as part of the American Recovery and Reinvestment Act (ARRA) federal stimulus package. But most of the $2 billion in bonding authority authorized under ARRA went unused.

Bill Lomax, a member of the Gitxsan Nation and president of the Washington, DC-based NAFOA, started the conference by saying that now “is one of the most critical times in Indian finance.”