Las Vegas Sun

March 28, 2024

S&P analyst reviews Indian casino bonds

Limited geographic diversity and increasing competition have resulted in below-investment grade ratings for all but one of the six tribal casino bond deals now rated by a major credit rating agency, a new report says. Still, the ratings rank in the highest 50 percent of all rated gaming companies, the Standard & Poor's rating agency said Wednesday.

Tribal casinos benefit from limited competition in the areas they operate, good market demographics and high margins relative to the rest of the gaming industry, S&P analyst Michael Scerbo said. Margins are boosted by exemptions from federal corporate taxes and often "significantly reduced" state taxes as agreed upon within state compacts, Scerbo said.

Compacts are agreements between state governments and tribes that outline the standards for operating a casino.

Indian casino deals have a number of favorable risk factors, Scerbo said.

Once the casinos are built, discretionary cash flow -- after distributions to tribal members -- is primarily used to reduce debt, he said. Tribes' sovereign status and the highly regulated nature of the gaming industry "is likely to restrict acquisition activity," helping the ability to reduce debt on existing casinos, he added.

The Mashantucket Western Pequot Tribe's Foxwoods Casino in Connecticut is the only bond deal of the six rated by S&P that bears an investment-grade rating. The Foxwoods deal has a "solid balance sheet" and it's located in a "densely populated and capacity-constrained" market, Scerbo said.

It has a similar business position to its nearby competitor, the Mohegan Tribal Gaming Authority's Mohegan Sun Casino. The Mohegan deal -- rated BB+ -- is more highly leveraged due to a recently completed $1 billion expansion, he said.

The other four tribal deals have similar ratings.

The Choctaw Resort Development Enterprise, a business of the Mississippi Band of Choctaw Indians and operator of the the Pearl River Resort in central Mississippi, has a BB rating.

The Chumash Casino & Resort Enterprise, Turning Stone Casino Resort Enterprise and the United Auburn Indian Community all carry BB- ratings. The Santa Ynez Band of Chumash Indians operates the Chumash Casino Resort near California's Central Coast, the Oneida Indian Nation operates the Turning Stone Casino Resort in upstate New York and the United Auburn Indian Community operates the Thunder Valley Casino near Sacramento.

Locals' casino operator Station Casinos Inc. manages Thunder Valley for the Auburn tribe.

All told, tribal casinos nationwide generated an estimated $13 billion in gaming revenue in 2002, S&P said. The estimate is based on data from individual tribes as well as projections from 2001 government figures. By comparison, Nevada casinos won an estimated $9.6 billion for the fiscal year ended June 30.

Much of that growth has been concentrated in California. Many California casinos hold a "monopolistic market position" within their respective markets, Scerbo said. Still, the casinos are scattered throughout the state and are sometimes located in remote areas where access is "challenging," he said.

"These properties tend to be spread out and do not create the cluster benefit evident in many markets, particularly in Las Vegas," he added.

S&P examines a number of factors when determining ratings for Indian casinos, including the quality of the casino, population density in the market and the competitive landscape. Population demographics and casino management -- such as the involvement of a management company or other third party -- also play a role.

Tribes with public debt still have sovereign status, which presents complex jurisdiction issues for investors, Scerbo said.

"The inability of secured creditors to have redress in the form of execution and foreclosure on collateral effectively renders the transaction as unsecured," he said. "This fact, along with the 'single asset' nature of the enterprise being financed and the likelihood that any realized collateral may not have much value, may be a strong force keeping these transactions from achieving investment-grade ratings."

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