MOHEGAN SUN CREDIT RATINGS DOWN GRADED AGAIN

Mohegan Sun credit ratings lowered over financial woes
By Brian Hallenbeck

Publication: The Day

Published 12/01/2010

Moody's Investors Service downgraded its bond ratings Tuesday on the Mohegan Tribal Gaming Authority and raised doubt about whether the authority can avoid a financial restructuring.

The agency lowered its corporate and probability-of-default ratings on the authority from "B3" to "Caa2," a designation reserved for high-risk debt.

The Moody's downgrade followed similar action last week by Standard & Poor's, another credit-rating agency, which lowered its rating on the authority from "B" to "CCC."

The gaming authority operates the Mohegan Sun casino in Uncasville and Mohegan Sun at Pocono Downs in Wilkes-Barre, Pa.

Leo Chupaska, the authority's chief financial officer, said the downgrades were not unexpected.

"We thought it would happen," he said. "Since we announced we're working with Blackstone (a major corporate advisory firm), there's been a lot of speculation about how we're going to deal with our (debt) maturities. Right now, we're in a refinancing mode. We haven't talked about restructuring. We really haven't said anything. We're still talking about refinancing."

In a refinancing, a debtor typically negotiates better loan terms, including extending maturity dates, while a restructuring often involves a creditor receiving less money than it is owed.

In a Nov. 12 filing with the U.S. Securities and Exchange Commission, the authority announced that Blackstone Advisory Partners LP was providing help with "strategic planning and analysis in connection with its business and financial goals, including operational improvements, contemplated hotel projects and … bank and bond maturities."

Authority executives declined to elaborate on Blackstone's involvement during a Nov. 23 conference call with investors and gaming industry analysts.

During the call, Mitchell Etess, chief executive officer of the authority and of Mohegan Sun, announced that as of Jan. 1 he will turn over responsibility for the day-to-day operation of the casino to Jeffrey Hartmann, executive vice president and chief operating officer, who will succeed him as CEO of the casino. Etess said he will concentrate on developing new business opportunities as CEO of the authority.

MTGA executives also discussed the authority's financial results for the quarter and fiscal year that ended Sept. 30, reporting a net loss of $26.3 million for the quarter and a profit of $9.7 million for the fiscal year.

Standard & Poor's, which announced its ratings downgrade the day after the call, noted that the gaming authority also reported a 6.5 percent decline in adjusted EBITDA - earnings before interest, income taxes, depreciation and amortization - for the fiscal year.

"We had previously cited our expectation that EBITDA would be relatively flat in fiscal 2010," Standard & Poor's said. The agency also placed the gaming authority on "CreditWatch" with negative implications.

"The ratings downgrade and CreditWatch listing reflect weaker-than-expected operating performance in the fiscal year ended Sept. 30, 2010, in addition to substantial refinancing needs beginning in 2012, when MTGA's $675 million bank credit facility and $250 million senior subordinated notes mature," Melissa Long, a Standard & Poor's credit analyst, said in a statement.

Moody's lowered its rating on each of six layers of the authority's outstanding bonds. In announcing the downgrades late Tuesday afternoon, it said the authority could have trouble refinancing upcoming maturities "without some impairment to bondholders given its high leverage … limited near-term growth prospects for Mohegan Sun Casino, the likely continuation of weak consumer gaming demand trends in the Northeastern U.S., and the strong possibility of gaming in Massachusetts."

Moody's said its "negative ratings outlook" for the authority reflects the short time frame in which MTGA has to address "a significant capital structure issue." If the authority is unable to refinance by March 2011, its $675 million revolving bank loan will become due, Moody's said. The same holds true for the authority's $250 million senior subordinated notes if they are not refinanced by April 2011.

Moody's had placed the authority on review for a possible downgrade in September, after layoffs of hundreds of Mohegan Sun employees. Both rating agencies warned that they could lower their ratings further if the authority proceeds with a restructuring plan that results in bondholders being offered less than they are owed.

Mohegan Sun's neighboring competitor, Foxwoods Resort Casino, has been seeking to restructure more than $2 billion in debt for more than a year. It has defaulted on a $700 million revolving bank loan and a series of bond interest payments.

Casinos across the country have faced financial difficulties brought on by the recession, which has curtailed gamblers' spending and, consequently, casino revenues