Indian Casino Bonds — a House of Cards?

written by I. Nelson Rose

#160 © Copyright 2009, all rights reserved worldwide. Gambling and the Law® is a registered trademark of Professor I Nelson Rose,

The former Chair of the Mashantucket Piquots, Michael Thomas, sent a small shock wave through the financial community when he announced that Foxwoods, one of the world’s largest casinos, was in danger of defaulting on its multi-billion-dollar loans. Unease grew when word leaked out that Thomas promised tribal members that gaming revenues would first be used to make payments to the tribe and its members, before lenders.

Thomas lost his job, and tribes across the nation renounced his position. But missed payments and misstatements like this have created real fear among investors.

For good reason. If a tribal casino defaults on its loans, there is a very good chance that lenders could find out that they cannot enforce any of the rights they thought they had.

If tribal casino loans are declared worthless, the market for bonds and other debts from even thriving tribal casinos would crash. Billions of dollars in paper valuations would be lost.

A crash of this size would have an impact on the commercial casino side, which often partners with tribes to run operations, as well as on the financial institutions that would have to mark down their loans to zero. Given the shakiness of the present state of the economy, it is possible that we might see a revival of the Great Recession; the hoped for “V” shape of the markets would become the dreaded “W”.

Lawyers are trained to think of the worst, as well as the best, that can happen. But it is not just me. I have advised a number of very large investors who are afraid that others may begin to realize that the same laws that allow tribes to operate casinos may make them immune from bankruptcy laws.

If a commercial casino can’t make its loan payments, and can’t work out new deals with its lenders, it ends up in federal bankruptcy court. There is an automatic stay on all other court actions involving the casino, especially suits pending in state courts.

Lots of procedural steps follow. But in the end, the casino is either allowed to continue with new owners or all its assets are liquidated.

Nobody wants liquidation, because the physical assets aren’t worth much if no gaming is permitted. Selling at auction a former casino-hotel that can now only be run as a hotel would raise only a few cents on the dollar for the debt-holders and nothing for the present owners.

Priorities are set out in law and have been well established for centuries. Lenders are close to the top of list, behind the bankruptcy lawyers, of course, but well ahead of the present owners. It is common for equity owners to be completely wiped out, and for the bond and other debt-holders to become the new owners.

There are occasional new inventions, like junk bonds, which look like debt but don’t have the normal priority bonds have. But it is safe to say that a casino that has run into temporary problems will continue operating, with the lenders owning and running things, usually until they can sell it. A majority of the casinos in Atlantic City have been through Chapter 11, without patrons even noticing.

That basic system will probably not work with a tribal casino. Tribes are not corporations, and tribally owned casinos are not like privately owned operations.

First, there is tribal sovereign immunity. Whether based on the notion that tribes are domestic nations, or, as the U.S. Supreme Court stated, merely a misreading of an old federal statute, tribes cannot be sued without their consent.

Governmental immunity is actually written into the Bankruptcy Code: foreign and domestic governments are not “persons” and thus may not file for relief. Tribal corporations would probably be treated the same, since the Indian Gaming Regulatory Act is clear that a casino must be owned by a tribe.

Assuming debt-holders can at least get a hearing in a federal court, what can they ask for?

A judge would probably allow a tribe to continue owning and operating its casino as the debtor in possession while attempts are made to reorganize the debt. But the restructuring can’t be very drastic.

There is nothing in that law that would allow bondholders to become the owners following a tribal casino bankruptcy. They can’t even become casino managers without approval from the National Indian Gaming Commission. I greatly doubt that a bankruptcy judge, let alone a federal court of appeals or the U.S. Supreme Court, would rule that the bankruptcy statutes overrule the IGRA.

Since bondholders cannot own and operate a tribe’s bankrupt casino, there is not much chance that a court would appoint an outside executor to run the casino, and certainly not on an indefinite basis.

Well-written debt instruments might get around some of these problems. At least one bank added the following requirements to its multi-million dollar loans: the tribe waived its sovereign immunity and agreed that the casino would stay in business and that payments would first go to the bank. Of course, a court would have to rule that these provisions did not violate the IGRA, which mandates minimum guaranteed payments to tribes and plans for how the money is distributed.

And there are additional problems. A law enacted in 1871 requires that any agreement that encumbers Indian land for more than seven years is invalid, unless it has been approved by the Secretary of Interior.

I have looked over some of the loan documents behind the billions of dollars that have been lent to tribes for casinos. Only a handful have been approved by the Secretary. Which means that a court could rule that an indenture agreement listing all the protections in the world for lenders is literally not worth the paper it is written on.

The tribes’ lawyers might have an ethical duty to raise all these defenses and others, even if it would devastate the tribe’s own businesses in the long-run.

What should be done? The federal government should step in. When AIG was determined to be too big to fail, President Bush and Congress gave Treasury a blank check, which it used to protect not only lenders, but even AIG’s equity holders.

But legal gaming still is considered a morally suspect industry. Even if thousands of jobs might be lost through unnecessary closings, we won’t see any federal bailouts of casinos.

So it comes down to the parties directly involved with the current crises. The Mashantucket Pequot Tribe just announced that it had reached a “forbearance agreement” with its “senior lenders,” giving it more time to try to restructure its more than $2 billion in debt. The banks agreed not to force the Tribe into bankruptcy, even though it missed its payments, at least until Jan. 20, 2010.

Half a dozen other tribes, and dozens of big lenders, are in similar situations.

It is important that everyone continue to pretend that these are normal discussions revolving around conventional businesses that simply want to avoid the hassles and uncertainties of bankruptcy court.

It’s possible that courts might just side with the lenders, and treat Indian casinos exactly the same as commercial ones.

But no one can afford to take that chance.

© Copyright 2009. Professor I Nelson Rose is recognized as one of the world’s leading experts on gambling law, and is a consultant and expert witness for governments and industry. His latest books, Internet Gaming Law (2nd edition just published), Blackjack and the Law and Gaming Law: Cases and Materials, are available through his website,

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