Bailout

Sovereign default of the day: Foxwoods

By Felix Salmon

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.

Full post as published by Macroprudential on January 11, 2010 (boomark / email).