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Saturday, 23 June 2018

California tribe pays sky-high yield on casino bond

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A Native American tribe in California has agreed to pay one of the highest interest rates ever seen on a junk bond since the financial crash to finance a long-delayed casino development.

The Buena Vista Rancheria of Me-Wuk Indians of California, which has been planning to build a casino in Amador County for over a decade, finally sold a US$205m five-year bond to finance the project on Tuesday.

The cash for the controversial project, which has been marred by delays and a lawsuit, did not come cheap.

The tribe paid a yield of 14.425% on the secured bond - more than double the 6.28% offered on average by US junk bonds, according to ICE Bank of America Merrill Lynch data.

Even the riskiest borrowers in the asset class - those rated Triple C or below - currently pay an average yield of 10.39%, the ICE BAML data show. The Buena Vista deal is rated Caa1/B-.

The bond was issued at a steep discount of 95 cents on the dollar, allowing the tribe to keep the coupon at 13%. The capital structure also includes US$161m of subordinated payment-in-kind debt, according to S&P.

The deal comes over a year after the tribe first attempted to tap the US junk bond market to finance the development. Back then, it had offered a yield of around 12%. 

Bond investors have often demanded extra compensation on debt issues from Native American tribes, due to uncertainties over whether they would be able to enforce creditor rights against a sovereign entity in the event of a bankruptcy.

The Downstream Development Authority, which owns and operates a casino of the Quapaw Tribe of Oklahoma, paid a yield of 10.759% earlier this year to sell a US$265m five-year bond to refinance existing debt. 

It also faced investor pushback when it first attempted to sell the bond in late 2016. 

The Buena Vista development also faces risks of its own, including the existence or planned opening of other casinos with better amenities within a 100-mile radius, analysts at Moody’s and S&P have said.

But branding and marketing agreements with casino giant Caesars Entertainment, which will operate the casino as Harrah’s NorCal, should help attract customers, the analysts said.

The 71,000 square-foot casino is expected to open in the second quarter of 2019 following 13 months of construction, according to a note sent to investors and seen by IFR.

As in last year’s bond sale, which is formally issued by the Buena Vista Gaming Authority, Jefferies was the sole bookrunner on the offering.

 

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