Tribe’s Roll of Dice Rattles Lenders

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.

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?

“The usual route through which these problems are resolved is that equity disappears,” meaning that owners are wiped out, said Mr. Thomas, 42 years old, during an interview at his reservation home. “My people are not equity.”

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.

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.

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Another development that alarmed investors occurred in April, when a federal judge in Wisconsin ruled that a $50 million bond deal was invalid because it violated federal Indian casino law.

The decision, which is under appeal, could mean that the 3,500-member Lac du Flambeau Band of Lake Superior Chippewa Indians won’t have to pay back its lenders. That worried investors, even though the bond terms that the judge found problematic are unique to that deal, Indian-gambling lawyers say.

Many tribes haven’t amassed debt burdens as large as the Pequots did for Foxwoods. Only a handful have defaulted on debt.

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That, in turn, could hurt the tens of thousands of Indians across the country who rely on casino revenue to fund local governments and economies, says Mr. Garcia of Oregon’s Confederated Tribes of the Coos, Lower Umpqua and Siuslaw Indians.

“We use the money from casinos to fund scholarships for students and health-care benefits, pay for things for elders,” he says. {snip}

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At the end of last year, the Pequots failed to pay about $7 million of interest on $500 million in bonds, putting the tribe in default. They also missed a July 13 deadline to repay a $700 million credit line from banks. The banks have agreed to forbear to give the tribe time to cut a deal with bondholders, who rank below the banks in the pecking order of creditors.

In most debt restructurings, lenders agree to forgo some or all of the money they are owed, often getting new stock in return. But because federal Indian gambling law bars anyone but tribes from having ownership stakes in casinos, Foxwoods’ lenders can’t take equity. That removes a big enticement for them to forgive debt. Federal law also bars Foxwoods’ lenders from operating a casino on Indian land, making foreclosure an unattractive option.

Those restrictions have given the tribe leverage in negotiations. The Pequots have asked bondholders to slash the total they are owed.

Bondholders don’t want to do that, but some of them have offered to stop receiving interest for a time and to push back repayment deadlines. Last week, a committee of bank lenders proposed a middle ground, according to people familiar with the talks.

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