As Wilton Rancheria's Elk Grove Casino Works it Way Through Courts, Nearby New Indian Casino Financed With 'Junk Bonds'

March 13, 2018 |

As the case challenging Wilton Rancheria's proposed $500 million casino in Elk Grove, California works its way through Federal court in Washington DC, a competing Indian casino planned in nearby Amador County, California is preparing to break ground on what will be a competing, albeit, smaller gaming operation.

The proposed 71,000 sq. ft.  Buena Vista Rancheria casino, organized as the Buena Vista Gaming Authority (BVGA)  being built near Ione, California, is scheduled to break ground this year and open next year. As with other Indian gaming facilities in California, one of the large Las Vegas-based casino operators will manage the facility on behalf of the tribe.

What makes this new operation distinctive is, according to one report, is the ''highest interest rates ever seen on a junk bond since the financial crash" to finance the construction of the gaming facility. High-interest rates can hobble business operations and make repayment of debt difficult during downturns in the economy. 

According to the story posted on, the relatively small tribe will pay a yield of 14.425-percent on the secured $205 million five year bond to construct the casino. The bonds were sold on March 6 at a discount of 95-percent.

According to data from ICE Merrill Lynch Bank of America, the current average junk bond rate is 6.28-percent. Among the rating services, Moody's rated the bond "Caa1 Corporate Family Rating and Caa1-PD Probability of Default"  while Standard & Poors grade the debt as "B-." (View differing rating grades among three agencies here.)

In their analysis of the debt, S&P noted that the junk rating is attributed to several factors including the lack of lodging at the casino, and competition from 11 nearby gaming operations.

Additionally, along with Moody's report, S&P noted that the BVGA, like all tribal operations, "S&P Global Ratings does not assign [asset] recovery ratings to Native American debt issues, as there are significant uncertainties surrounding the exercise of creditor rights against a sovereign nation. These include whether the U.S. Bankruptcy Code would apply, whether a U.S. court would ultimately be the appropriate venue to settle such a matter, and to what extent a creditor would be able to enforce a judgment against a sovereign nation."   

While both agencies graded the BVGA bonds are junk, there were notes of optimism reflected in their reports. S&P noted its proximity to the Stockton, California and the marketing expertise of its management partner, Caesars Entertainment's Harrah's unit in drawing customers to the casino based on their customer loyalty programs.

BVGA is not alone in the Indian gaming operations segment nationwide who pay junk bond interest rates to secure financing. One such example is the Quapaw tribe in Oklahoma.

As the operator of what is acknowledged as a successful operation, on February 1 the Quapaw group was able to refinance its debt down to 10.5-percent. Current average yields on high quality, investment grade corporate bonds is about 4.1-percent with blue chip companies like defense contractor Lockheed Martin Inc. paying yields of 3.58-percent while entities like Frontier Communication pay 15.15-percent, which indicate substantially more risk of default. 

A bond underwriter and adviser contacted for this story said the issuance of junk bonds for construction tribal gaming facilities is not unusual given their unique legal status. The verified source asked that their name or firm be used for this story.

"The 14-percent interest rate is high but tribal issuers have to pay a premium over their commercial counterparts because normal bankruptcy remedies aren't available [and] lenders cant take the casino from the tribe," the source said. "Tribes can theoretically assert their sovereignty and walk away from the debt. The rate also reflects new construction risk."

The source noted there are currently 474 Indian gaming operating in the country. Typically, the exorbitant interest rates paid during construction can be refinanced after the casino have begun operation and have shown profits.

"Obviously new construction has higher risk than a 10-year old casino. To reduce the risk to investors, new construction loans typically escrow the interest payments covering the construction period and the first six months of operation, so if it’s an 18-month build there may be four semi-annual interest payments in the bank," the adviser noted. "The financing also includes a cushion to absorb construction cost overruns."  

Mentioned in the S&P report was the proposed Wilton Rancheria casino in Elk Grove, California. Although financing and construction plans for the $500 million project are on hold pending litigation, the prospect of the facility weighed heavily in the high-interest rate paid by BVGA.

The risk analysis of the BVGA states "BVGA's casino will have limited amenities beyond a few dining options to drive nongaming revenue, which puts the property at a disadvantage to competitors with broader amenities that can increase the length of customer stay and spending. There are also multiple proposed properties that could be built near BVGA's market. We believe a project in Elk Grove, Calif., about 30 miles from BVGA's planned casino, would be the closest material competition."

The Elk Grove project, as noted is tied up in litigation in federal court and could be several years before financing is secured, and construction starts. The danger for any large project is the uncertainty of changing economic conditions.

Interestingly the site of the proposed Elk Grove Wilton Rancheria casino, which is currently backed by Las Vegas-based Boyd Gaming, is on a portion of an unfinished shopping center purchased from the Howard Hughes Corporation currently known as the Outlet Collection at Elk Grove. Construction on that shopping center came to an abrupt halt ten years ago this July, when its then owner, General Growth Properties was unable to secure financing during the credit crisis resulting in the largest real estate bankruptcy in American business history. 

Also noted in the S&P report regarding the Wilton Rancheria operations was "we believe it is unlikely that a new facility could open before 2021 given ongoing legal challenges, the likely need to secure financing for construction, and the time it would take to build a facility."   

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D.J. Blutarsky said...

Pay no attention to those high junk bond interest rates. I'm sure those slots will be ringing in winners left and right, and those dice will be tumbling 7s and 11s 'till the sun rises over the cow pastures! And whatever they can pay out, Chuckie's got 'em beat!

Eye on Elk Grove said...

Boyd Gaming is now expanding into other States. As we should have learned with General Growth Properties, and all the promises made, I wonder what will happen, if and when, the casino is built, and if the Wilton Rancheria Casino is unable to fulfill its annual payments to the city of Elk Grove, citing increased building costs and decreased revenues as originally projected, what the reaction will be?

After all, 180 million over 20 years is nice on paper; however, we shall see how much the city of Elk Grove actually receives and how the Elk Grove City Council responds.

Eye on Elk Grove said...

Just a point of clarification. Under long-term deals with city of Elk Grove and county of Sacramento, Wilton Rancheria will invest more than $180 million in the first 20 years of the project, as stated, to improve public safety, traffic, schools and community programs. The city of Elk Grove is earmarked to receive 132 million in the first 20 years. We shall see!

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