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Foxwoods restructuring gambles on complexity

by contributor Lisa Allen  |  Published July 5, 2013 at 12:30 PM

The restructuring of Foxwoods Resort Casino's $2.3 billion in debt has concluded with an out-of-court agreement after four years of negotiations, eliminating $550 million in debt obligations and pushing back debt maturity dates.

The deal, announced on July 1 by the casino's owner, the Mashantucket Pequot Tribal Nation, was touted by sources familiar with the restructuring as the most complex restructuring involving a Native American tribe in history.

"This was the most complicated deal we have ever worked on," said Soren Reynertson, a managing general partner at New York-based GLC Advisors & Co. LLC, which advised about half of the casino's creditors. "The sovereignty of the issuer meant we lacked many of the traditional tools available in a corporate restructuring, including certain points of leverage, a framework for negotiations and typical sources of value."

Although the parties eventually reached a consensual solution that more than 99% of bondholders voted to approve, the restructuring raised the specter of an even more complex outcome: the first-ever bankruptcy filing by a Native American tribe.

The Mashantucket Pequot Tribal Nation initially considered attempting an unprecedented Chapter 11 bankruptcy filing for the Ledyard, Ct.-based casino, sources familiar with the restructuring process told The Deal Pipeline.

The tribe was interested in filing for bankruptcy because it believed it would have more leverage against junior creditors in court, one source said. The tribe, however, nixed the plan because the legality was questionable and the creditors were all against it, making a bankruptcy court less likely to support a filing.

From a legal perspective, it's doubtful that a Native American tribe would be eligible to file for Chapter 11, since the U.S. bankruptcy code allows filings by people and corporations but not governmental entities. A federally recognized Native American tribe such as the Mashantucket Pequot Tribal Nation is classified as a sovereign nation.

Still, the case can be made that corporations owned by Native American tribes could file, according to Blaine Green, the head of Pillsbury Winthrop Shaw Whitman LLP's Indian law practice.

The uncertainty, however, works in the tribes' favor. "The mere threat, possibility and potential that a tribe could file for bankruptcy could be more effective and useful than an actual bankruptcy filing," Green said.

He went on to explain that if one tribe filed, only to have its petition denied, the threat of bankruptcy would be unavailable to other tribes in the future.

Furthermore, if a tribe filed successfully, the bankruptcy process could call tribes' legal protections into question, potentially stripping them of rights that protect their sovereignty.

Protecting these rights makes a compelling case for finding an out-of-court solution, but also makes it more difficult to reach an agreement.

Businesses owned by Native American tribes have special legal protections that restrict creditors' avenues of recourse. Tribes are legally prohibited from selling tribal assets or issuing equity, and they are legally immune from attempts by outsiders to force a change of control at their businesses.

Without a court to push things along, the discussions at Foxwoods stretched on for four years -- one adviser who worked on the deal compared the process to a "game of Whac-A-Mole" in which, each time one tranche of creditors was satisfied with a provision, another tranche would rise up to dispute it.

Global Leveraged's Reynertson was thrilled that the parties reached a consensual resolution with more than 99% bondholder participation.

Foxwoods CEO Scott Butera was also happy with the resolution. "This was a one-of-a-kind deal, the first and biggest deal of its type done with Native American sovereignties -- it's a little bit revolutionary," Butera said.

Butera added that the restructuring solved Foxwoods' financial woes, explaining, "We're in very solid financial condition -- if need be, this could be a permanent financial structure."

Now Foxwoods is looking to expand, Butera said. The company is competing for a license to build a $1 billion casino in Milford, Mass., and is evaluating opportunities for a $300 million to $600 million casino in the Catskill Mountain region of New York.

The Milford proposal involves plans for a 660,000-square foot casino that would require a $20 million contribution from Foxwoods, according to Butera, who is working with Deutsche Bank to raise the necessary funds through debt and equity financings. Butera added that the new project would be nonrecourse to Foxwoods, so it won't put a huge burden on the casino's capital structure.

Under the Foxwoods restructuring agreement, the capital structure is divided into four secured tranches. A source familiar with the restructuring process said it's highly unusual to have even three tranches of debt that are subordinated but still secured. 

In many restructuring situations, bondholders that take losses will receive equity to give them a possibility of recovery if the business turns around. Foxwoods, however, couldn't provide that deal sweetener, since tribes aren't legally permitted to issue equity.

As a result, said one legal counsel who worked on the deal, "The bottom two classes of bonds received a haircut as part of the restructuring, so in place of that, they received contingent interest obligations."

The contingent interest obligations are structured so that, if the casino performs well in the future, junior creditors will receive a payout to help compensate for the losses they swallowed during the restructuring process, the lawyer said.

The legal counsel said the tribe got a letter of declination from the National Indian Gaming Commission -- an independent federal regulatory agency -- stating that documents relating to the new securities don't constitute management agreements. The letter of declination, which formally distinguishes these securities from equity, was a necessary closing condition for the deal.

Those securities were designed specifically for this unusual situation, sources said.

In addition, some of the bonds toggle between cash-pay and pay-in-kind depending on how the business is performing and not at the issuer's discretion. This structure provides the issuer with flexibility in case the business is in trouble, but also ensures payouts for creditors if it's thriving. Sources said this structure is also unusual, and is another accommodation for a situation in which the debtor cannot issue equity.

In the new capital structure, the first tranche of creditors includes the casino's senior lenders: family-owned Malaysian firm Kien Huat Realty, Bank of America NA and Wells Fargo & Co. Those lenders will split $542 million in existing term loans, at par, into two new term loans with longer maturities.

Kien Huat, the first investor who funded the casino's development, received a phenomenal return on its investment, sources said.

Prioritized slightly under the first tranche is the distribution to the tribe, which amounts to about $3 million per month, a source said. That distribution may increase if Foxwoods performs well.

Originally, the casino paid out dividends to individual tribe members, but under the restructuring plan, the payments will go directly to the tribal council to fund services such as the police force.

The next tranche of debt comprises the Special Revenue Obligation (SRO) bonds. Those bondholders, which include bond-insurer MBIA Inc. and Northwestern Mutual Financial Network, didn't take a haircut in the restructuring.

However, the holders of Subordinated Special Revenue Obligation (SSRO) bonds and 8.5% notes -- the two classes with the lowest priority -- did take losses, although the special debt instruments designed for the restructuring could help them perform well in the future. SSRO holders include distressed bond investor Fundamental Advisors LP, while 8.5% noteholders include Pioneer Asset Management and insurer Aegon Group.

Foxwoods is not the only tribe-owned casino to restructure its debt in recent memory. Mohegan Tribal Gaming Authority, which runs the Mohegan Sun resort in Uncasville, Conn., restructured debt through an exchange offer in January 2012. The Chukchansi Gold Resort & Casino in Coarsegold, Calif., restructured debt in 2011. The Lac du Flambeau Band of Lake Superior Chippewa Indians restructured debt related to their Lake of the Torches casino in 2011. The Mescalero Apache tribe restructured $200 million in 12% bonds related to its Inn of the Mountain Gods resort in Mescalero, N.M., in 2010. Also in 2010, the Pueblo of Pojaque's Buffalo Thunder Resort and Casino in Santa Fe restructured $245 million in senior notes.

Even more restructuring may be on the horizon for tribe-owned casinos. New York and Massachusetts have both authorized new casinos in order to bring in more tax revenues, for example, but such new facilities will take business away from the casinos that already operate in the Northeast.

One source suggested that Mohegan Sun's 2012 restructuring was just a "Band-Aid," adding that the casino's capital structure may not be sustainable in the future, while another source who is familiar with Mohegan Sun's restructuring said the casino is not currently working with the adviser who designed its 2012 restructuring plan, Blackstone Group LP.

Meanwhile, a source knowledgeable of Foxwoods' restructuring said other tribes have unsustainable capital structures relating to their gaming ventures. Tribe-owned casinos with ratings of B3 negative and lower from Moody's Investors Service include Mohegan Tribal Gaming Authority, Buena Vista Gaming Authority, Shingle Springs Tribal Gaming Authority, Snoqualmie Entertainment Authority and Tunica-Biloxi Gaming Authority.

The Mashantucket Pequot Tribal Nation was advised by restructuring firm Miller Buckfire & Co. LLC's James Doak. The tribe took legal advice from a Weil, Gotshal & Manges LLP team that included Andrew Yoon, Stephen Karotkin, Ronit Berkovich, Miranda Schiller, Todd Chandler, Ted Waksman, Larry Gelbfish, and Stuart Goldring.

Bank of America NA was advised by a team from Davis Polk & Wardwell LLP that included Waide Warner, Sartaj Gill, Marshall S. Huebner, Brian M. Resnick, James H.R. Windels, Frank J. Azzopardi, Po Sit, John Fouhey, Susan D. Kennedy, Betty Moy Huber, and Erin K. Cho.

Kien Huat Realty took advice from Cleary Gotlieb Steen & Hamilton LLP.

The SRO bondholders were advised by Blackstone Group's Michael Genereux and Ken Nguyen. Certain SRO bondholders took legal advice from Bingham McCutchen LLP; Akin Gump Strauss Hauer & Feld LLP advised their steering committee.

The steering committee for the holders of SSRO bonds took advice from Mintz Levin Cohn Ferris Glovsky and Popeo PC.

The 8.5% noteholders' steering committee was advised by Bracewell & Giuliani LLP.

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Tags: Bank of America NA | bankruptcy | Chapter 11 | Foxwoods Resort Casino | Kien Huat Realty | Mashantucket Pequot Tribal Nation | Moody's Investors Service | Scott Butera | Special Revenue Obligation | SRO | SSRO | Subordinated Special Revenue | Wells Fargo & Co.

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