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Mashantucket financial meltdown resonates through Indian country

MASHANTUCKET, Conn. – The news sent shockwaves through Indian country and the financial organizations that lend it money: The Mashantucket Pequot Tribal Council forced its chairman into an administrative leave in September in the midst of an unprecedented financial crisis at Foxwoods Resort & Casino, the biggest and most successful Indian casino in the country.

Chairman Michael Thomas was relieved of his duties Aug. 31, just days after an announcement that the Mashantucket Pequot Tribal Nation was restructuring a $2.3 billion debt and was at risk of defaulting on a $700 million loan.

The news that Foxwoods was on the financial brink, and a subsequent default three months later, have had a strong impact in Indian country, making it harder for nations to borrow and increasing financial costs when money is available.

The tribal council issued a statement saying it had placed Thomas on administrative leave “pending the outcome of an internal review,” and declined to comment further.

Six council members sent Thomas an e-mail saying he had “betrayed” their trust in a letter he sent to tribal members, describing his plan to deal with the tribe’s financial crisis and giving his opinion of the situation, The Day reported, citing a source within the tribe.

“Earnings are down considerably and there are no signs of immediate improvement. These are dire financial times for our tribe,” Thomas wrote to members Aug. 19.

What most alarmed the MPTN leaders – and its lenders and other lending markets in general – was Thomas’ remarks concerning “incentive” payments to tribal members. The payment had been halved over the past 36 months, ranging now from $90,000 to $120,000 a year, but Thomas said there would be no further reductions in incentive payments.

“Instead, tribal government and the incentive will now be paid FIRST with any cuts or changes to our operation taking place after our members are paid. I will not waver from my pledge to protect the tribal government and the incentive. Regardless of what may happen I have made it clear that we will not accept Wall Street mandates for cuts to tribal government or the incentive. Anyone who puts the interests of consultants, bankers and bond holders ahead of our tribal community will have to answer to me,” Thomas wrote.

The council issued another statement outlining the steps it had taken to make the nation’s economy “more efficient in light of global recessionary trends and increased competition.”

The council initiated discussions with its bank group about potential debt structure options, including a range of refinancing and recapitalization alternatives, the statement said. The council had hired Miller Buckfire & Co., LLC and Weil, Gotshal & Manges LLP as a financial and restructuring advisor and as legal counsel, respectively, to see it through the process.

“MPTN is currently in compliance with all debt agreements and is also current with all its debt payments,” the statement said.

In mid-October, the tribal council issued a statement announcing it has reached a temporary agreement with its creditors to deal with the debt. The council said it had entered into a forbearance agreement with its senior lenders that extends through Jan. 20, 2010.

But by mid-November, the council reported it would likely default on a $21.25 million bond-interest payment that was due Nov. 16. The nation had made a partial payment of around $14.2 million.

A 30-day grace period expired Dec. 16 when the nation officially defaulted on the remaining $7 million debt interest payment.

Lenders and other tribes are closely monitoring the Mashantucket’s financial circumstance and how it will be resolved as it will set a precedent for Indian casinos and other businesses everywhere.

Creditors can’t take over an Indian casino or force the sale of its assets, because of a tribe’s status as a sovereign nation. For the same reason, it is generally assumed that tribes cannot protect themselves under U.S. bankruptcy laws, although that assumption has never been tested in a U.S. court.

Foxwoods and other casinos facing harsh financial times have to remain open under whatever loan restructuring agreement is settled upon in order for their creditors to be repaid. So it’s business as usual at Foxwoods. Although slot revenues continue to slump, the casino continues to introduce new games, such as Video SCRABBLE, the hotels are booked solid, and non-gaming revenues are up.

Whatever the outcome at Mashantucket, financial experts agree the current economy and the prospect of more tribes defaulting on loans have contributed to a scarcity of funds, higher financial costs, more conservative loan structures and reduced deal size.