Sovereign default of the day: Foxwoods

By Felix Salmon
January 11, 2010
Peter Applebome notes that dire financial situation at Foxwoods casino looks much more like a sovereign default than a run-of-the-mill commercial real-estate deal gone sour:

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Peter Applebome notes that dire financial situation at Foxwoods casino looks much more like a sovereign default than a run-of-the-mill commercial real-estate deal gone sour:

The Pequots, like all Indian gambling operators, are no mere business enterprise but a sovereign nation, exempt from most commercial regulations and almost certainly unable to use the bankruptcy laws or sell off gambling assets that could be operated by others. So lenders have no choice but to restructure debts, work with the tribe and hope that the economy picks up.

Essentially, the lenders can’t foreclose on the casino, because the current owners — the Pequots — are the only people who can own it. If it’s not an Indian casino, it’s can’t be a casino at all. That, in turn, gives the debtors enormous leverage over their creditors: they can pretty much name their terms, and the lenders have little choice but to agree to them.

How did the lenders find themselves in such a dire situation? I think you know the answer to that one: they just weren’t thinking.

“It’s kind of uncharted territory,” said Tom Foley, a lawyer who specializes in Indian gambling issues and is a past chairman of the National Indian Gaming Commission. “Many of the banks and bondholders should have been aware of these kind of risk factors, but when everything is good, nobody is really looking at the downsides.”

You can be sure they’re looking at the downside right now.

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4 comments so far

I imagine the lenders figured that a duopoly casino in Connecticut is pretty much a license to print money – which it is. The fact that everyone got greedy and built too much hotel capacity doesn’t impair the fundamental business. This isn’t Vegas where anyone can build and anyone does. They have a great market to split with Mohegan Sun – all the gamblers in New England, pretty much, plus a fair number of tourists.

I once went to Mohegan Sun with a crew from work around the Chinese New Year and was amazed at how many amateur gamblers were thrilled to play $100 tables. It’s not like it’s that expensive to maintain property and hire unskilled labor in Nowhere, CT. If I were working in loan restructuring this would be the commercial loan I’d be most happy to extend for a longer term – as long as they keep the interest coming I don’t care if it takes 100 years to repay the principal. There’s enough lingering Puritanism in New England that there will never be omnipresent casinos.

Posted by najdorf | Report as abusive

this one is awesome, felix. thanks for bringing it to our attention. pure,unadulterated ignorance of risk.

Posted by KidDynamite | Report as abusive

Casino capitalism, meet casino capitalism.

Posted by HBC | Report as abusive

I think HBC wins the thread.

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