TLP: Tribal Leaders Fire Up Peace Pipe With Casino Lenders Owed $2 Billion
It's probably very un-PC to wonder about out loud, but if there's such a thing as an Indian giver, can we say that the Mashantucket Pequot tribe came very close to being Indian borrowers?
Michael Thomas, a Pequot Indian with a brash leadership style and a checkered past, was a driving force behind turning Foxwoods Resort Casino into one of the world's largest casinos, and for making tribal members rich in the process. These days, he's being cast as the man who triggered a financial crisis.Well, as a Wisconsin tribe showed earlier this year, sometimes nothing. The Lac du Flambeau Band of Lake Superior Chippewa Indians went to court, and won, seeking to stop the $782,000 monthly payments they were making on a $50 million bond. "Faulty" fine print in the deal gave the tribe an out, an option that may not have been available to the Pequots in Connecticut.
With gambling revenues sinking and a showdown with lenders looming, Mr. Thomas vowed last summer to protect dividend payments to tribal members—as high as $120,000 a year for some—before reimbursing creditors owed more than $2 billion.
That audacious move spooked banks and bondholders. Other Pequot leaders, fearing a backlash, disavowed Mr. Thomas's comments and ousted him as chairman of the tribal council. As the crisis worsened, the tribe stopped making debt payments. In July, tribal leaders did exactly what Mr. Thomas said he wouldn't: They said they will halt the payouts that have put two or more BMWs in the driveways of some tribal members, and have made the Mashantucket Pequots the envy of the Indian gambling world. Lenders are now trying to hammer out a debt-restructuring deal with the tribe.
The financial mess on this tiny reservation in rural eastern Connecticut has rattled the once-booming business of casinos run by American Indians, drawing attention to the ramifications of their unique legal status. Tribal-owned casinos can't be forced into bankruptcy, many experts say, because tribes are sovereign nations. And federal law allows no one but Indians themselves to operate casinos on reservations, which effectively prevents creditors from seizing them and selling them off.
The showdown between the Pequots and their lenders, which include Bank of America Corp. and Wells Fargo & Co., has raised what was once an unthinkable question: What happens if a sovereign tribe defaults?
More from the WSJ:
Mr. Thomas's vow has stoked fears among other Indian leaders that it will become more difficult for tribes nationwide to borrow money. His letter to fellow Pequots "was a statement that investments in tribes are not safe and that tribes will try to figure out some way to get out of them, and that is not the case," says Bob Garcia, chairman of the Confederated Tribes of the Coos, Lower Umpqua and Siuslaw Indians in Oregon.While the Chippewas in Wisconsin rolled the dice and came up lucky, the Pequots seem to be making the safer bet. And the smart money says they've got a better chance to come up winners in the end.
Wall Street used to shy away from lending to tribes. But in the late 1990s, after lawyers crafted language in loan documents waiving tribes' sovereign protections from being sued in state or federal courts, the Indian-gambling debt market took off. Loans were secured by cash flow from the casinos.
Over time, the Indian lending market grew to an estimated $20 billion in outstanding debt. The easy money encouraged the Pequots and other tribes to keep building.
Then the national economy hit the skids and gamblers pulled back, putting pressure on casinos nationwide. Now lenders are tightening credit for tribes, asking more questions and charging higher interest rates.