Foxwoods Resort Casino, one of the world's largest, has failed to make a full payment on its debt, leading to a default and another credit-rating downgrade as casinos around the country struggle amid the severe recession.
The Mashantucket Pequot Tribal Nation, which owns Foxwoods, said it has paid $14.2 million of the $21.25 million semi-annual interest payment that was due Monday on $500 million in debt notes. The tribe said it does not anticipate paying the balance within a 30-day period, resulting in a default.
The tribe, which has been seeking to restructure billions of dollars in debt, said its efforts are "separate and distinct" from operations at Foxwoods and will not affect customers, employees, suppliers or business partners.
Foxwoods, which has about 10,000 employees, more than 7,000 slot and video poker machines and made more than $700 million in profits last year, is the most high-profile example of a tribe defaulting on its debt, said Megan Neuburger, director at Fitch Ratings. She said investors have long wondered what would happen if a tribe, which has national sovereignty, defaulted on its debt.
"This is definitely a precedent-setting situation," Neuburger said. "Certainly everyone in the investing community will be watching this to see what the outcome is."
Standard & Poors lowered its credit rating to D, its lowest rating. Lenders will be more hesitant to make loans to Foxwoods, said Craig Parmelee, S&P's managing director.
"The availability and cost of financing for Foxwoods in the future is in question," Parmelee said.
Foxwoods is one of several casinos across the country defaulting on its debt as consumers cut back on discretionary spending, Parmelee said. Among those, he said, are Buffalo Thunder and Inn of the Mountain Gods, both in New Mexico; and a Michigan casino owned by the Little Traverse Bay Band of Odawa.
Some commercial casinos not owned by American Indian tribes have gone into bankruptcy, he said.
Parmelee said he did not expect Foxwoods to close, however. Lenders can take possession of commercial casinos that default and sell them to third parties, but that option likely is not available when dealing with Native American tribes who operate as sovereign nations, he said.
The most likely scenario is a renegotiation of the debt, Parmelee said. That could mean some loan forgiveness, but lenders might question payments to tribal members and review the tribe's business plan, he said.
"I don't think shutting down the casino is the best route to meeting the goals of either party," Parmelee said.
Tribal officials said last month they had entered into a forbearance agreement with senior lenders that extends through Jan. 20. Such deals occur when a creditor gives up the right to immediate repayment of a loan by a debtor under certain conditions.
Foxwoods, along with Mohegan Sun in Connecticut, underwent expansions just before the economic downturn. But Mohegan Sun, operated by the Mohegan Tribe, has said that the casino is financially healthy.
"For those entities that took on additional debt to fund expansions, that certainly was a factor that contributed to many of the defaults across the gaming industry in the last two years," Parmelee said.
Foxwoods and Mohegan Sun said this week that slot machine revenue dropped about 4 percent in October compared with the same month last year.
Parmelee said he expects the level of declines in slot revenue at casinos to lessen, but he does not expect any meaningful growth next year.