September 24, 2008

Extortion Is a Heavy Burden

Justin Katz

Personally, I dislike government reliance on gambling for revenue, but this is emblematic of a mindset:

OUT OF EVERY DOLLAR lost at Twin River, the state gets approximately 61 cents. If expectations panned out, the state would get $254 million from Twin River this year. In June, the owners offered the state $500 million upfront if lawmakers would slice the rate by more than half. Legislative leaders refused.

Holloway, of Moody's, said "the state has — and I think it is pretty well known — a pretty onerous tax rate, and this property has produced a far lower level of revenues and earnings than was anticipated at the time the project was started."

And now Standard & Poor's credit rating agency is forecasting bankruptcy of the gambling hall. Who could be surprised that losing 61% of every "sale" — before accounting for expenses — would leave a company vulnerable?

Confirming, once again, what we already know: Our state government is a destructive force.

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Twin Rivers voluntarily accepted the deal and operates under an almost monopolistic arrangement with the state.

I have no problem with RI getting 61% of every dollar. I am more concerned that RI relies on what amounts to discretionary personal spending to pay for basic state services.

In hard economic times, discretionary spending drops.

Posted by: Anthony at September 24, 2008 9:16 AM

Twin River knew the State's financial interests prior to spending a dime on their facility. They then proceeded to spend too much money on a facility that attracted a different clientele than 'classic' gambling facilities like Foxwoods, Mohegan Sun, etc.

You might have a point if the State changed the stakes mid-way through the contract, but that is not the case here.

Might it be possible that Twin River knew they were overspending, but were counting on a buyout or prop-up at taxpayer expense (too big or too important to fail)??

All that being said, it is not good that RI is financially dependent on revenues from Twin River that could be seriously reduced if a destination casino were built pretty much anywhere in Mass (might this be the reason that Twin River is angling for default or a State bailout???).

Posted by: connected at September 24, 2008 9:23 AM

Not being so reliant upon discretionary income to fund government services would require a level of foresight and aptitude far beyond that capable by the little people that inhabit the Democrat General Assembly.

After all, that is the same type of foresight and aptitude that would recognize that maintaining a political, tax and regulatory structure - for decades - that ranks one's state as one of the worst for business in the entire country (and so one of the worst for employers, and thus one of the worst for job opportunities), would mean (among other things) that the state would not build up any "economic fat" to live off of during national recessions. Hence our current unemployment rate 40% above the national average.

The little people were too preoccupied with their real priorities, not the best interest of those that they purportedly represent, but going along to get along, being good obedient little sheep for the corrupt Democrat leadership (and unions that provide campaign support / don't back primary challenges to keep them in office) so that someday they too could cash in and become part of the leadership, and be in line for those state contracts for their own "business", state jobs for themselves and their relatives, and perhaps even the big prize, a magistrate of judgeship appointment.

The Brits have a slang saying: "I'm Alright Jack." It essentially means "screw you, I got mine!" That big white building on Smith Hill should have a billboard on the dome that declares with big, bold letters: "Screw You Rhode Island, In Here WE'RE Alright Jack!"

Posted by: Tom W at September 24, 2008 10:11 AM

I'm not defending Twin Rivers by any mean, and nothing that I'd argue negates the possibility that the company is orchestrating its own demise for strategic reasons. I'm merely looking at the arrangement from a well-duh perspective. Giving up 61% of all net income puts a major damper on flexibility.

Posted by: Justin Katz at September 24, 2008 10:12 AM

Tom W: Maybe that's why a study reported in yesterday's WSJ found RI ranked #2 in neuroticism and #48 in conscientiousness. Love the symmetry.

As for Twin Rivers, the core of the problem is that they overspent their CAPX budget. The revenues are reasonably close to what was projected -- as forecast, an upgraded facility is pulling gamblers from CT. And a successful TR is also causing prospective investors to think twice about VLTs at Raynham or Plainfield, forcing most of the MA gaming action closer to Boston (the SE Mass casino being a wild card, given tribal involvement).

So the key question is why the people that own TR -- no dummies, by a longshot -- overspent the CAPX budget. Part of the answer was undoubtedly that, as in similar rehabs of old facilities, they found some surprises in the walls. And another has to be that they thought they could either refinance their construction debt at a rate that would still make the project work. We now know that this assumption was incorrect; however, TR's owners were far from the only ones who got this forecast wrong. If you look at the track record of the ownership group, it leads me to conclude that this was a far more likely explanation of how they got to where they are today than some grand plan to pull a fast one on RI.

Granted, once the situation grew dire, they started exploring options that included some givebacks by the state -- but that doesn't seem to be the original intent. So now RI has to make some decisions that will enable TR to service its debt. The options would seem to include: (a) provide the long term debt refinancing the facility needs (calling Treasurer Caprio); (b) agree to a reduction in the retention rate (from 61% downward), perhaps in exchange for some equity in the company; (c) try to boost revenue by allowing table games -- i.e., conversion to full casino license, that might also further strengthen RI's competitive position ahead of gaming law changes in Massachusetts; or (d) let TR go into chapter 11, and see how the state would fare in federal bankruptcy court (it would certainly make for some interesting new case law, although it strikes me as a very risky path to go down, given the uncertainties involved).

Time will tell which option the state will choose -- most likely the wrong one, given the General Assembly's track record.

Posted by: John at September 24, 2008 10:57 AM

Actually, Twin River's 26% take of the net is a pretty good deal, given that Twin River does not lay out any money to acquire or service the slot machines (each machine costs between $10,000 and $20,000). Most of the money dropped into the machines stays at Twin River. Those patrons lucky enough or wise enough to not lose all of their money mostly get their cash back now from an ATM-like machine, choosing not to interact with a cashier at a window.

Twin River's expenses for running a gambling hall include cleaning, security, collecting and counting the money, customer service and other similar tasks, as well as debt service.

Wanna bet where most of Twin River's money is going?

Slot machines are the most profitable part of any casino operation, because the machines require very little in terms of personnel interaction to keep them going.

Twin River will gross almost $100 million from slot revenues alone this year.

I find it impossible to shed any tears for Twin River and their self-imposed woes.

Posted by: connected at September 24, 2008 11:07 AM

John, in reply to your above post, I don't see any real danger to the state from a TR bankruptcy, in fact it is probably desirable. The present management team have shown themself incompetent. It's really hard to lose money running a casino, you have to make some very poor financing choices, which they evidently did.Go ahead and put them in Chapter 11. Wipe out the equity and debt holders and then recapitalize, there will be plenty of willing lenders when their balance sheet is pristine (zero debt).Your assumption that a bankruptcy court would invalidate the state's deal with TR is very unlikely, IMO. No problem with allowing casino table games, as far as I'm concerned.

Posted by: observer at September 24, 2008 12:08 PM

The gamblers don't interact as much with cashiers because those people expect tips for cashing tickets.

Posted by: joe bernstein at September 24, 2008 3:18 PM
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