The economic downturn is opening some previously-uncharted legal territory – the question of applicability of federal bankruptcy laws and procedures for troubled Tribal enterprises.
The Mashantucket Western Pequot Tribal Nation, owner of the massive Foxwoods Resort Casino, is seeking to restructure at least $1.45 billion in debt. With gaming revenues in steep decline due to a lack of players, Foxwoods is at risk of becoming the biggest Tribal casino company to default on its debt.
The looming cash crunch highlights the different economic and legal landscape in which Tribal enterprises operate. “They can’t do the types of things other debtors can in a restructure,” says Megan Neuburger, an analyst at Fitch Ratings in New York. “Tribal casinos can’t do a debt-for-equity swap. They can’t raise cash by selling off assets on Tribal land to repay creditors.” Standard & Poor’s has cut its Mashantucket rating four steps to CCC and placed the debt on credit watch. Creditors probably can’t take over assets or operations of casinos on Tribal land, which are sovereign nations, as they may with commercial bankruptcies, Neuburger said. That leaves them little choice other than to restructure debts and work with the Tribe.
No Tribal casino has yet tested federal bankruptcy laws. “Bankruptcy law does not apply to Tribal situations in the same way it does to a commercial situation,” Neuburger said. Michael Thomas, chairman of the Mashantucket Pequot Tribal Council, told members that the Tribal government would be paid first, before bankers or bondholders. “It might be posturing, but the Tribe is indicating that it might put itself, the equity holder, ahead of the debt, ignoring corporate law,” said Lawrence Klatzkin of municipal bond broker Chapdelaine Credit Partners. “It probably won’t happen, but if it does, who’s to say other Tribes don’t say, ‘If Foxwoods doesn’t need to meet its U.S. legal obligations, maybe I don’t either.’”