Recession would hit tribal gaming harder

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PORTLAND, Ore. - A recession would hit American Indian gaming disproportionately hard, said a market analyst here who specializes in Native finance.

Scott Clements, managing member of Clements Partners LLC, notes that in general, recessions tend to be more devastating to companies that finance operations through large cash flows. Particularly hit hard would be the hospitality industry - and the specialty niche called tribal gaming.

A recession would put pressure on credit quality, Clements pointed out in a recent analysis of how tribal credit will be affected if a recession hits.

He noted that "a relatively small number of institutions is financing Native America" with a significant number of these involved in lending for tribal gaming.

"Historically, lenders have reduced their activity in the hospitality sector when there have been pressures on credit quality."

The implication for tribal gaming? "Cash-flow supported lending (especially intermediate and longer-term lending) is less popular because the collateral (cash) is intangible and transitory."

Lenders also would be likely to raise credit standards and decrease investments in general in "new and emerging markets" if there is a sharp downturn, which would affect all of American Indian commerce.

Clements noted that the last five or six years have seen "a growing number" of lenders and investors in Indian country.

What responses should tribes take to these potentially negative economic factors to protect initiatives they have planned or already under way?

"Near-term, rely on internally generated cash flow to a greater extent and reduce reliance on the external credit market," he advised.

Other steps could include deferring additional debt until the economy recovers, and being cautious on new projects, planning "manageable, incremental phases. This strategy ensures that each phase is succeeding before proceeding to the next."

In addition, Clements projects that economic "contrarians" may be able to achieve in hard times. "Applied to tribal economic development, this philosophy suggests that when everyone else is ducking for cover it may be time to prudently build, expand and increase market share to fully capitalize on the next recovery."

Clements has been involved in financing for the Confederated Tribes of Warm Springs in Oregon, the Redding Rancheria in California, and 15 or more other tribes since he started his consulting business in 1979. He arranged about a half dozen public tribal bond issues, with the largest being about $5 million, and conducted 35 to 40 private placements of debt, which tend to raise much higher amounts.

Clements said there is "general agreement" the domestic economy is either in or at the brink of a recession. Others would point to the standard definition of a recession: two straight quarters of negative growth in the economy. By that standard, there is no recession yet.

Stock markets have taken a severe beating in recent months on bad economic news. Even factoring in the recent spike in stock prices after the Federal Reserve Board announced an unexpected interest rate cut, the technology-driven NASDAQ index is off more than 50 percent from its high of last year, while the "blue chip" Dow Jones Industrial Average dipped 20 percent from its most recent high before bouncing back.