A Restructuring Success: The Inn of the Mountain Gods

Author’s Note: Earlier this year, President Mark Chino of the Mescalero Apache Tribe and I appeared on a panel discussion at the National Indian Gaming Association (NIGA) conference. The panel focused on financial success stories and gave an overview of the Mescalero bond restructuring transaction. Afterward, several tribal leaders approached me to express their gratitude, indicating that the session had been extremely helpful for them. A few also mentioned their disappointment that some colleagues had to miss the session due to scheduling conflicts and were wondering if we had a written version of the discussion. Therefore, I thought it might be helpful to review some of the key points of the restructuring here in CEM.

I recently had the pleasure of serving as the financial advisor for the Mescalero Apache Tribe with regard to the exchange offer restructure of its $200 million 12 percent bonds for the Inn of the Mountain Gods, the tribe’s casino resort property. It was a long, much awaited, publicly visible process, as well as one of the first successful win-win restructurings of bond debt in Indian country, with both the bondholders and the tribe coming away extremely satisfied with the results. The tribe and its financial team hope that the transaction can possibly set an example for other tribes facing similar financial complexities, such as looming maturities and over-leveraged debt loads.

Like many tribes, the Mescalero Apache issued its bonds at a time when the markets were much more robust and investors allowed higher ratios of leverage based on projections for new construction projects. The Inn of the Mountain Gods is located in a pristine area of southern New Mexico, and with its additional amenities such as a ski resort and hunting facilities, it had been able to establish itself as an exclusive resort for the western Texas market. At the time of the bond issuance (2003), a new hotel and resort expansion was inarguably needed. There were a few risk factors attributed to the inn’s credit profile, such as an unsettled compact (which was consummated not long after the issuance of the bonds), so the Inn of the Mountain Gods was assessed certain premiums and stricter covenants than might be otherwise typical. There were no fall-away provisions within the original bond indenture, allowing for automatic updates or changes, so the tribe and the inn were stuck with a rather onerous indenture. Added to the scenario, then came the challenges of the recession, management turnover and market instability, which placed the tribe in a very challenging position with regard to refinancing its debt.

Tribal President Mark Chino of the Mescalero, who I believe was one of the key components of the success of the eventual restructuring transaction, made a very salient point for tribal leaders. Although obvious, his recommendation is for tribes to do everything possible to avoid unmanageable debt in the first place. He made it very clear that he was, in no way, being critical of the past tribal administrations, but was simply recommending that they all think very, very thoughtfully and carefully before entering into a debt agreement, as it will affect a tribe for many years to come.

When I was first retained by the tribe, everybody had a refinancing in mind, so we approached the market with that perspective. With management instability and declining revenues, along with market dislocation caused primarily by the sub-prime crisis and its resulting ramifications, it became very clear that based on current revenue and leverage ratios, a simple refinance of the existing debt would not be possible. Additionally, the current bondholders communicated very candidly to me that even though discounted transactions were being negotiated throughout the capital markets and the bond industry, they would not accept anything less than par (full) value.

These facts, combined with a default of the Inn of the Mountain Gods’ June 2009 interest payment, sealed the direction of the transaction as a negotiated restructuring between the tribe and the existing bondholders.

A major asset during this negotiation was that one of the first exercises I had undertaken with the tribe and its team was to understand and clearly delineate their own priorities early on in the process. Not only did we create a list, but we also prioritized the items into the order of their importance. This created a road map for us throughout the negotiating process—a road map we did not waver from. Chino and I agreed that, for a tribe, one of the most important aspects of the process is to be united in purpose. Obviously not all tribal council members working through the steps of complex process will agree on all of the various issues, but if a tribal council can at least be unified on a main set of goals, it goes a long way toward achieving success.

Another area where the Mescalero tribe was extremely diligent and wise was regarding the gaming and resort operations management. The financial advisory team, including myself, other advisors and lawyers, had all agreed that at the time of the proposed restructuring, the management situation had reached a critical juncture. We recommended that third-party outside help would be the prudent solution. This was entirely up to the tribe, however, and the council made the decision to search for the best possible management team for the Inn of the Mountain Gods.

A very wide net was cast and many management teams were interviewed. The process was extremely thorough and diligent, and in the end, the council’s selection turned out to be a positive game changer. The principal owner of the selected management company had recently left a large commercial gaming company, where he had overseen 17 casino properties and had an immense amount of knowledge and expertise. He had launched a new management company, and his staff members all had the right mix of Las Vegas and Indian country experience. [Note: Many tribes worry that by hiring outside management, they in some way give up control. However, in this case, I feel that the tribe exercised its absolute sovereignty—its right as the casino’s owners—and in doing so realized a true home run.] Within a very short time frame, the outside management company, working with the tribe, the management board and the existing staff, had increased revenue and reduced costs. This upward trend gave the bondholders the confidence to move forward with a meaningful transaction. Remember, cash is king, so when there is evidence of increased revenue, then a decent deal can be achieved.

We began the process of structuring the new transaction with several goals in mind. We wanted to preserve tribal distributions, the bondholders wanted to remain whole, and unlike traditional bond structures, we needed a mechanism that would allow for principal reduction. We created a two-tranche structure whereby the first-out notes carried a lower-than-market interest rate, which was designed to sweep more cash flow to principal reduction in the early years of the new debt. Once the first-out notes are paid off, the second-out notes will carry a higher rate that is closer to market standard but with a much more manageable payment schedule, due to the now lower principal amount.

We actually came to an agreement on the broad terms of a deal in less than a year. However, the “smaller” points seemed to take quite a long time to document and work through. In any restructuring, once the parties, working with their financial advisors, agree on the business points and basic terms of the deal, then the attorneys must document the transaction. Inevitably, new issues arise that need to be discussed and vetted along the way. Typically, these are not deal-killing issues but rather logistical items that can delay the transaction until they are fully worked through.

Another key factor that Chino and I both agreed upon was the manner of the negotiations. It is inevitable that with a restructuring, especially if a default has occurred, many advisors and lawyers are retained—and logically so, as each party needs to feel that its interests are properly represented. However, when negotiating the key terms of the deal, we found that too many bodies in the room were counterproductive. The most effective sessions occurred between Chino and the lead representative of the bondholder ad hoc committee. These one-on-one sessions were productive and civil, and the two were able to truly analyze and explore the issues, having time to completely voice their own perspectives and rationales. Each man represented many people and serious concerns. Chino bore the responsibility for the needs of an entire tribal nation and its financial future for generations to come; the lead bondholder represented firefighters’ and teachers’ pensions invested within the bonds and held the responsibility to preserve their value. Together in a closed room they were able to focus and communicate to the point of agreement much better than in a large group environment.

Main credit for helping finalize this transaction also goes to the Inn of the Mountain Gods’ and the Mescalero Apache Tribe’s finance staff teams. In a restructuring, volumes of spread sheets and projections are generated. They typically start with the actuals and historicals. However, not all the requests are standard accounting reports. Some of the requests are for very unique and specific items that have to be data mined. These finance teams would spend many sleepless nights if need be, compiling the data for the restructuring teams’ requests as quickly as possible. Many of the finance employees at the Inn of the Mountain Gods are tribal members who understood the seriousness and urgency of the deal, but regardless of their heritage, they all deserve credit for stepping up and providing the transaction documents quickly and efficiently.

I believe that most tribes desire to be good corporate citizens and intend to pay their debts. However, when faced with a difficult and challenging situation, in most cases, a mutually agreeable solution can be reached if approached properly and logically. Fortunately, the Mescalero Apache Tribe did not have to test bankruptcy insolvency laws or enter into forbearance agreements. The tribe, the bondholders and their teams of advisors were able to negotiate a transaction that preserved their futures and did not compromise either side. As we see the capital markets seemingly entering recovery mode, it is our hope that this structure might be duplicated with other tribes so that the tribal finance lending sector is not compromised or distressed by failed deals and instead can be empowered by successful transactions like this one achieved by the Inn of the Mountain Gods Resort Casino.

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