Fitch: Foxwoods and Mohegan may have to restructure again

NEW YORK -- (PRESS RELEASE) -- Mohegan Tribal Gaming Authority (MTGA) and Mashantucket Pequot Tribal Nation (MPTN) may have to restructure again, according to Fitch Ratings. Their original restructurings did not cut enough debt and a recovery in casino operations never materialized. Less than two years after restructuring its debt, MPTN is again in default on certain debt tranches. In the event both tribes default, we expect MTGA's recoveries to be materially better.

The Massachusetts casino openings by MGM Resorts International and Wynn Resorts, Ltd. will cannibalize revenues from the Connecticut-based Mohegan Sun (owned by MTGA) and Foxwoods (MPTN). Foxwoods should feel a greater impact, since about 32% of its customers come from MA versus 18% for Mohegan Sun. Assuming a loss of 50% of the MA business and a 50% flowthrough, the casinos could lose a combined $136 million of EBITDA. Increased competition from upstate New York and Philadelphia will also have an adverse effect, but to a lesser extent.

MTGA is better positioned to weather the current headwinds with lower leverage and having refinanced some of its debt in 2013, reducing its interest expense by an estimated $16 million. In addition, MTGA's $50 million per year in relinquishment payments to Trading Cove Associates expired in January. MTGA's debt to EBITDA is about 6x versus MPTN's about 12x, which may indicate that a larger haircut is needed in MPTN's case.

In the event of a default, recoveries will likely be in the form of a debt exchange, as is common in the Native American gaming sector. Given that the casinos are tribal enterprises, creditors cannot seize the assets (with the exception of Mohegan Sun at Pocono Downs) and US bankruptcy law does not apply to tribes. In MTGA's and MPTN's prior restructurings, weighted average recoveries excluding the senior-most bank debt were 86% and 23%, respectively. The difference largely reflects MPTN's greater leverage pre-restructuring.

Recoveries tend to be negatively correlated with debt/EBITDA metrics at the time of default. For the seven Native American gaming defaults Fitch studied, Fitch calculates a par-weighted average recovery of 54% while the par-weighted pre-restructuring debt/EBITDA for these issuers was 5.9x. This recovery rate is in line with corporates secured debt recovery rate of about 58%.

Fitch's Native American gaming recovery analysis, which is based on an NPV analysis, is detailed in a special report titled, "Native American Gaming Insights: Default and Recovery Study: Old Troubles in New England." In addition to the default case studies, Fitch discusses issues pertaining to Native American gaming recoveries including the applicability of bankruptcy law, sovereign immunity, unique tribal political risk and declination letters. Fitch also discusses its recovery rating framework for Native American gaming issuers.