Over the last three months, three tribal gaming authorities have worked out consensual debt restructurings with lenders in situations that seemed destined for protracted legal battles, bringing investor attention back to the oft-maligned sector.

Indeed, although some of the ugliest conflicts have yet to be resolved – most notably, the Lake of Torches court fight – over the past two years six of the 11 major restructuring agreements between tribal gaming authorities and bondholders tracked by LCD have come to fruition, involving more than $5 billion in debt. And while some lenders who have held onto the tribal gaming credits longer than they expected have vowed to never touch the asset class again, more investors, hungry for high-yield paper in an industry that pulled in $26.5 billion in 2010 and where the risks are now more transparent, have taken their place.

But the tribal gaming industry could become a victim of its own success. Various constituencies – even existing tribal casinos themselves – are flexing their political muscle to block new developments, while competition for new markets will be fierce as states like Massachusetts expand legalized gambling.

Recent deals
In its watershed billion-dollar private bond exchange finalized March 5, the Mohegan Tribal Gaming Authority gave bondholders a higher coupon and a par exchange for bonds trading at deep discounts, in return for pushing all maturities to 2016 and beyond. It was the latest in a string of tough compromises that industry professionals say is preferable to testing out the still-forming case law in distressed tribal gaming debt disputes.

“The most efficient and viable outcomes for the issuer tribe and the market as a whole are those that center around consensus,” says Scott Greenberg, a partner in Cadwalader, Wickersham & Taft’s financial restructuring practice. “These voluntary exchanges and amendments involve both parties facing the realities of the marketplace.”

With each successive compromise, the bondholders appear to fare better than the time before. The Mohegan exchange built upon the preceding restructuring by the Chukchansi Tribal Gaming Commission, where holders of $200 million in notes finalized an agreement in December for a discounted paydown and new notes with a higher coupon. Chukchansi’s agreement involved a Dutch-tender offer with cash for a portion of the notes and an exchange into new secured notes due 2020; and a 95% excess-cash-flow sweep. And that was even higher than the 90% cash-flow sweep negotiated in the successful River Rock Entertainment Authority bond amendment, which went into effect just before the Chukchansi agreement. The River Rock deal included a decrease in distributions for the tribe as well.

Looking ahead, cutting distributions could be key to concluding the long-awaited debt reworking for the Mashantucket Pequot Gaming Enterprise, which runs the Foxwoods Casino & Resort in Connecticut, whose $550 million in 8.5% notes have been in default since 2009. Per-capita distributions of up to $1,500 per month to roughly 450 members of the Mashantucket Pequot Tribe finally ended last week, according to news reports. Sources say this will bring the net distribution to the Tribe itself, which still receives payments from casino profits, down to less than $40 million, paving the way to a restructuring of the entity’s nearly $2 billion in debt.

Restructuring roulette
While Wall Street has been encouraged by the drumbeat of consensus, for some holders the process has been traumatizing. “I’ve canvassed some investors and often get an answer of ‘No more tribal gaming’,” says one banker who’s worked on some of the debt restructurings. “But new ones will still get done.”

One of the subordinated bondholders in Mohegan was so intent on getting out of the name that the holder refused to tender for a new bond that would delay the maturity, according to sources. This prolonged the process for several days and required additional extensions of the early tender deadline until other Mohegan bondholders and dealer manager Credit Suisse took matters into their own hands and simply lowered the consent threshold, sources have told LCD.

To make matters worse, a district court’s decision in the case of Lake of the Torches was partly upheld by an appeals court this past September. The decision held that the lender – Saybrook Capital, advised by Wells Fargo – couldn’t exercise bondholder rights for its $50 million bond because it was deemed to be an unapproved management contract, making it void under the federal Indian Gaming Regulatory Act. Since the indenture was deemed void, the tribe’s waiver of sovereign immunity in the document was deemed void as well, blocking the lawsuit.

The appeals court at least gave lenders a glimmer of hope by saying they could file an amended complaint basing their claims for relief on the bond transaction documents themselves, rather on the indenture, but this still remains an uncertain legal path.

As a result, experts say, lenders would be wise to avoid such pitfalls going forward. Specifically, in order to avoid an indenture being classified as an unapproved management contract, parties should avoid the types of provisions that the court focused on in Lake of the Torches, Greenberg says. These include lenders’ rights in an indenture to appoint a management consultant, hire new management if debt service ratios are not met, seek a receiver if there is an event of default, or require lender approval to replace managers, he said.

Unfortunately, hindsight won’t help the holders of the $450 million bond issued by Shingle Springs, which had provisions similar to those for Lake of the Torches. Shingle Springs is not technically in default, but has stopped making interest payments to Lake Management, the company hired to operate its casino that also provided it with financing.

The Shingle Springs Authority will need to pay $30 million to one of its early business partners, a California Court decided recently. If this creates problems in meeting coupon payments, Shingle Springs would have to restructure, and legal advisers close to the situation say the tribe, which has already made threats to shut down if it has to put too much money in escrow to appeal the $30 million ruling, might follow the same legal route as Lake of the Torches in avoiding its payment obligation.

Upcoming syndicated opportunities 
Given the widespread credit problems in tribal gaming names, investors have become more skeptical about new projects, according to professionals arranging and investing in new deals.

“Wall Street’s been a little tougher; they’re asking for a realistic view,” says Indian gaming analyst Victor Rocha. “So you’re looking at a new discipline in the industry. It’s no longer, ‘Build it and they will come.’ You have to do the analysis.”

Rocha, a member of the Luiseno Indians, which own the Pechanga Resort & Casino in Temecula, Calif., adds, “The new austerity has been great for the tribes, because they realize they have to be businessmen.”

There are also several greenfield tribal gaming projects that will soon need financing. One is a $350 million project for the Buena Vista Rancheria, with financing run by Credit Suisse, according to sources. The project is having trouble going forward, however, because it is too aggressive. According to sources familiar with the situation, it is precisely the kind of project investors would have financed before the downturn, but won’t now.

Credit Suisse declined to comment.

Then there’s the Shinnecock Nation on Long Island, N.Y. While New York Governor Andrew Cuomo recently proposed the possibility of full-scale casinos, political opinion has shifted away from having them in the state, according to recent news reports.

Massachusetts, meanwhile, passed a bill in November that would permit three new casinos in the state and one slots-only casino. The bill has specific provisions pertaining to tribal governments in the expectation of their participation. The Mashpee Wampanoag Tribe in southeast Massachusetts, for one, is looking to build a $1 billion casino in partnership with the Malaysian casino titan Genting Group. Experts expect projects to get underway in three to five years, as various lawsuits – par for the course in such projects – wind their way through the system.

Moving back to the left coast, there is also potential for projects by the The Cowlitz Tribe near Portland, Ore., and the Enterprise Rancheria band of Maidu Indians in Northern California to move forward over the next year, according to Fitch Ratings.

Finally, there is still the $250 million plan by the North Fork Rancheria of the Mono Indians for a casino near Fresno, Calif. That project has been stalled with what has been a widespread problem for tribal upstarts looking to get in on the casino business: land-into-trust issues, or the practice of applying for state land to be put in a trust for a tribe under the same sovereign control that can then be used to build a casino. The problem is this land can be far – critics say as many as thousands of miles – from where tribe members actually live today.

This land is my land
In California and elsewhere, active lobbies that include large tribes with their own gaming establishments often try to block other tribes’ new land-into-trust applications. Sen. Diane Feinstein is one of the most ardent critics of the spread of tribal gaming. Coining the term “reservation shopping,” she has put forward a bill that would prevent tribes from opening up lands far from their reservation unless they can show some ancestral or modern connection to the land.

The 2009 U.S. Supreme Court decision in Carcieri v. Salazar has brought into question which tribes can use the land-into-trust method and the decision is being used as a tool to stop new casino developments. A pending lawsuit citing the Carcieri decision was filed last January to stop an application filed by the Cowlitz Tribe of Washington.

The White House has supported land-into-trust, however. During the Bush administration, less than 15,000 acres were placed in trust in 2007 and 2008, but under President Obama, 158,000 acres have been placed in trust since January 2009, according to statistics presented at the 2012 winter council session of the National Congress of American Indians, which took place this week in Washington, D.C.

All told, the industry has come a long way since investors piled into new facilities without knowing what could happen if things went wrong. The proper way to write a bond indenture is clearer, standards are higher on the lender side, and sophistication and willingness to compromise are increasing on the tribal side.

The next thing to look out for as a critical mass of casinos sprout up, observers say, will be online gaming. –Max Frumes