Nearly every town, city, and State has a gambling franchise these days. Many are operating at or near bankruptcy. I thought only the people IN the casinos lost money! Turns out not to be the case.
The other day, while researching Bonds (a fascinating area, and one that is deceptively complex - never invest in something you don't understand!) I came across a bond listing for the Mohegan Sun Casino. It was showing a staggering 240% rate of return. I nearly fell out of my chair!
My neighbor goes there all the time, being a Nutmeg State resident (Google that!). He doesn't gamble, but his brother-in-law does, and the brother-in-law loses tens of thousands of dollars gambling, so the casino "comps" all the rooms and meals for the whole family. His wife comes back with buckets of "Mohegan Sun" napkins and room shampoos. I haven't bought paper napkins in months.
Gambling is a really, really bad idea, as I have noted before - on a personal level. And the idea that Casinos can "Create Wealth" is also specious. And perhaps the chickens are coming home to roost - big time, in the gambling business.
But I had presumed the Mohegan Sun was a thriving business, being so close to New York City. A little research online proved the opposite was the case. Apparently, they are having troubles with trying to expand and then abandoning their expansion efforts. They tried to build additional casinos and then ran into difficulties. They tried to expand the existing casino, and then abandoned the effort. Then they purchased a WNBA franchise. They grew too quickly and now people are nervous they can't pay back their bonds.
I have a rule of thumb about investments - I never invest in anything I don't understand, and I just don't get this bond situation. They mature in April at $1000 each, or a premium of 29.8% between now and then (they are selling for $770 right now). This gives an annual rate of 240%. It would be a short-term bet - you'd know in a month and a half if you go bust or not.
Since only Indians can own the casino, if the place does go bankrupt, the bond holders do not get stock. Now you see why the return is so high.... I am not sure I recommend this risky bet! It is like gambling at the slots there!
| Mohegan Tribal Gaming Aut | |
| Call 03/15/12@100 - Conditional Calls |
Maturity 04/01/2012
Price 77
Yield 240
Credit Rating Ca/Cc
240% Yield! Ouch! Since this article was written, things must have changed for the worse! This is a JUNK bond of the lowest rating.
According to a more recent local news article, apparently they are teetering on the brink at the moment! They have nearly 1.6 Billion in debt and maybe $50 million in profits last quarter (up from a loss of $25 million same time last year). Ouch. If they can't get debt restructuring, well, ouch.
If we assume they can increase revenues (and proposed Casinos nearby do not siphon off more and more of their revenues) to, say, $250 million a year, then they could pay off this debt in ten years or so. It might be do-able.
The key is whether the banks will loan them more money and restructure their debts. And they need the money - quickly. Why? Well, these bonds are coming due!
So that's the deal with these 240% annualized yield bonds. If you are willing to gamble that the Mohegan Sun will be able to restructure its debts by March 9 and pay back these bonds, you can make $230 on every $770 you invest, in a little over a month's time. If they can't restructure their debts and declare bankruptcy, well you lose $770.
This is not investing - it is gambling - like playing the slots, and gambling is never a smart thing to do with your retirement money. And note that the disincentives to declare bankruptcy and stiff the creditors are few. The same people will end up in control of the Casino, no doubt, but relieved of a ton of debt. There are more "Why not declare bankruptcy?" arguments than there are "Don't do it, because" arguments.
Now, if you are astute, you will realize that the "interest rate" on these bonds is 8%. How do they end up yielding 240%? Again, bonds are traded like stocks. Think of them as non-voting shares. And when the price drops down, the effective yield goes up. So far from being a safe investment, Corporate Bonds can swing all over the place.
And what this situation illustrates, is that a lot of players are nervous about their Mohegan Sun bonds, and would like to get $770 out of them now, rather than risk waiting a month and getting nothing. Maybe they know something we don't. Maybe they have insider information. But if you Google "Casino bankrupt" on line, you will find some interesting hits.
Frankly, I think we have gone overboard with Casinos. Every legislator in the country thinks they are a panacea to their economic woes - when in fact they may be creating more.
The problem is, there are too many casinos and not enough gamblers. Everywhere you look, there is an Indian Reservation casino opening up (often based on a "tribe" of a half-dozen Indians of dubious ancestry). You can gamble on river boats or boats offshore. One leaves twice a day from a dock near my house - operating in bankruptcy, of course - which may be a telling trend.
(Actually if you Google "bankrupt casino cruise" you find a lot of these, including some of the ill-fated Sun Cruz ships. There are a lot listed as "suspended operations indefinitely" or "Operations Ceased, 2009." Gambling, as it turns out, isn't a recession-proof business!)
In 1962, all gambling was illegal. Running numbers, betting on sports, betting on horses (off-track), selling Irish Sweepstakes tickets - you-name-it - it was all illegal except in Nevada. And Vegas was a sleepy little town. 50 years later, not only can you gamble everywhere, the government runs the lotteries and promotes gambling as a solution to our tax problems.
Problem is, gambling attracts a lot of odious people. In a recent incident, two "Businessmen" from an Indian Casino in New York assaulted a State Senator and his Wife, putting them both in the hospital. The names of the "tribal Businessmen" were not released, but when I was in New York, it always amazed me how many of the operators of the casinos had distinctively non-Indian names Act shocked.
Vegas keeps trying to reinvent itself to keep its business thriving. It took a stab at being "Family Friendly" - but that backfired badly, when families came to visit and saw all the hookers on the strip.
When we were in Vegas in the 1990's, the hookers would put their business cards everywhere - stuffed in the seams of a phone booth or a newspaper box. These were very glossy cards with photos, much like baseball player cards, with stats and everything. We were pretty tipsy and started collecting these and before long had a dozen or so, and were saying to each other, "I'll trade you a Tiffany for two Ambers!" and laughing uproariously. "No way, man! Tiffany was rookie of the year!"
A family saw this and their 8-year-old daughter said, "Daddy, can I collect the cards with the pictures of the pretty ladies on them, too?" Needless to say, that is one family that never came back to "Family Friendly" Vegas.
And if you went off the strip a block or two, you would see the underage teenage hookers, of both genders, plying their trade. If you want to have sex with teen runaways, Vegas has your back. And what goes on in Vegas, stays in Vegas, right? That slogan is working out so much better for them than the "family friendly" marketing program.
Gambling seems to attract a lot of odious sorts. It is an excellent venue for money laundering. And prostitution and drugs seems to shadow it wherever it goes. Where are we going with this? And why do State Legislators buy into this? Or more succinctly, how much does it cost to buy a State Legislator?
And now these Casinos, which promised their tribesmen so much money - and the States a share of the revenue - are conveniently showing losses and huge debts. Is Mitt Romney involved? Because it sounds like the same old deal - load up a company with debt, show an operating loss, declare bankruptcy, and then start over again, debt-free. Where did the debt all go to? Construction companies, for these abortive expansion efforts. And we all know that construction companies are NEVER Mob-connected, right?
So we stiff the Indians (except the few tribal elders who are on salary and go along with this) and we stiff the "save the schools because I want low property taxes" fund, and we stiff the bondholders as well. Repeat ad infinitium, as a number of casinos are going through this right now.
I am not saying this IS what is happening at Mohegan, but it COULD BE what is happening at a lot of these Casinos. And you and I have no way of telling, do we? No way at all. Buying these bonds is just gambling at this point - and gambling in a game that might be fixed from the get-go, and you have no way of knowing.
One problem with our free-market system is that it is a free-market system - namely that people can run rogue all over the rules, if they want to, if indeed there are even rules. Yes, there are some good investments out there still. But others? Who knows what you are buying into?
And who needs to go to a Connecticut casino, when they have one running in New York, every business day, on Wall Street?
But remember, it isn't Gambling - it's Gaming, right? Talk about poor normative cues!
Note: The debt situation this Casino is a moving target. Here are some more recent articles on the subject:
http://dealbook.nytimes.com/2012/01/24/owners-of-mohegan-sun-seek-to-restructure-debt/
http://www.theday.com/article/20120106/BIZ02/301069950/1064/rss12
http://www.boston.com/Boston/businessupdates/2012/01/mohegan-sun-owners-outline-debt-refinancing-plan/yPP0qkRMFw0oPraVNcw2HK/index.html
This part of their restructuring plan is troubling:
I'd rather cruise on the Coastal Concordia, I think.
This link describes their proposed debt refinancing in more detail:
http://www.marketwatch.com/story/mohegan-tribal-gaming-authority-commences-debt-refinancing-transactions-2012-01-24
If I read this right, this short-term investment could end up being a long-term one. And when those notes come due, in 2016, do they pay you back (at 11%) or do they roll those over yet again? Or what?
If you are bullish on the gaming industry, you might want to gamble. But it is a gamble, plain and simple - and a long-term one at that.
If we assume they can increase revenues (and proposed Casinos nearby do not siphon off more and more of their revenues) to, say, $250 million a year, then they could pay off this debt in ten years or so. It might be do-able.
The key is whether the banks will loan them more money and restructure their debts. And they need the money - quickly. Why? Well, these bonds are coming due!
Mohegan’s total debt as of Sept. 30 was $1.6 billion, the authority reported. Of that, $811.1 million comes due within the next 12 months, including $535 million that needs to be paid by March 9 and $250 million in 8 percent notes that mature on April 1. This debt will need to be refinanced before the due dates, the authority said Thursday.
So that's the deal with these 240% annualized yield bonds. If you are willing to gamble that the Mohegan Sun will be able to restructure its debts by March 9 and pay back these bonds, you can make $230 on every $770 you invest, in a little over a month's time. If they can't restructure their debts and declare bankruptcy, well you lose $770.
This is not investing - it is gambling - like playing the slots, and gambling is never a smart thing to do with your retirement money. And note that the disincentives to declare bankruptcy and stiff the creditors are few. The same people will end up in control of the Casino, no doubt, but relieved of a ton of debt. There are more "Why not declare bankruptcy?" arguments than there are "Don't do it, because" arguments.
Now, if you are astute, you will realize that the "interest rate" on these bonds is 8%. How do they end up yielding 240%? Again, bonds are traded like stocks. Think of them as non-voting shares. And when the price drops down, the effective yield goes up. So far from being a safe investment, Corporate Bonds can swing all over the place.
And what this situation illustrates, is that a lot of players are nervous about their Mohegan Sun bonds, and would like to get $770 out of them now, rather than risk waiting a month and getting nothing. Maybe they know something we don't. Maybe they have insider information. But if you Google "Casino bankrupt" on line, you will find some interesting hits.
Frankly, I think we have gone overboard with Casinos. Every legislator in the country thinks they are a panacea to their economic woes - when in fact they may be creating more.
The problem is, there are too many casinos and not enough gamblers. Everywhere you look, there is an Indian Reservation casino opening up (often based on a "tribe" of a half-dozen Indians of dubious ancestry). You can gamble on river boats or boats offshore. One leaves twice a day from a dock near my house - operating in bankruptcy, of course - which may be a telling trend.
(Actually if you Google "bankrupt casino cruise" you find a lot of these, including some of the ill-fated Sun Cruz ships. There are a lot listed as "suspended operations indefinitely" or "Operations Ceased, 2009." Gambling, as it turns out, isn't a recession-proof business!)
In 1962, all gambling was illegal. Running numbers, betting on sports, betting on horses (off-track), selling Irish Sweepstakes tickets - you-name-it - it was all illegal except in Nevada. And Vegas was a sleepy little town. 50 years later, not only can you gamble everywhere, the government runs the lotteries and promotes gambling as a solution to our tax problems.
Problem is, gambling attracts a lot of odious people. In a recent incident, two "Businessmen" from an Indian Casino in New York assaulted a State Senator and his Wife, putting them both in the hospital. The names of the "tribal Businessmen" were not released, but when I was in New York, it always amazed me how many of the operators of the casinos had distinctively non-Indian names Act shocked.
Vegas keeps trying to reinvent itself to keep its business thriving. It took a stab at being "Family Friendly" - but that backfired badly, when families came to visit and saw all the hookers on the strip.
When we were in Vegas in the 1990's, the hookers would put their business cards everywhere - stuffed in the seams of a phone booth or a newspaper box. These were very glossy cards with photos, much like baseball player cards, with stats and everything. We were pretty tipsy and started collecting these and before long had a dozen or so, and were saying to each other, "I'll trade you a Tiffany for two Ambers!" and laughing uproariously. "No way, man! Tiffany was rookie of the year!"
A family saw this and their 8-year-old daughter said, "Daddy, can I collect the cards with the pictures of the pretty ladies on them, too?" Needless to say, that is one family that never came back to "Family Friendly" Vegas.
And if you went off the strip a block or two, you would see the underage teenage hookers, of both genders, plying their trade. If you want to have sex with teen runaways, Vegas has your back. And what goes on in Vegas, stays in Vegas, right? That slogan is working out so much better for them than the "family friendly" marketing program.
Gambling seems to attract a lot of odious sorts. It is an excellent venue for money laundering. And prostitution and drugs seems to shadow it wherever it goes. Where are we going with this? And why do State Legislators buy into this? Or more succinctly, how much does it cost to buy a State Legislator?
And now these Casinos, which promised their tribesmen so much money - and the States a share of the revenue - are conveniently showing losses and huge debts. Is Mitt Romney involved? Because it sounds like the same old deal - load up a company with debt, show an operating loss, declare bankruptcy, and then start over again, debt-free. Where did the debt all go to? Construction companies, for these abortive expansion efforts. And we all know that construction companies are NEVER Mob-connected, right?
So we stiff the Indians (except the few tribal elders who are on salary and go along with this) and we stiff the "save the schools because I want low property taxes" fund, and we stiff the bondholders as well. Repeat ad infinitium, as a number of casinos are going through this right now.
I am not saying this IS what is happening at Mohegan, but it COULD BE what is happening at a lot of these Casinos. And you and I have no way of telling, do we? No way at all. Buying these bonds is just gambling at this point - and gambling in a game that might be fixed from the get-go, and you have no way of knowing.
One problem with our free-market system is that it is a free-market system - namely that people can run rogue all over the rules, if they want to, if indeed there are even rules. Yes, there are some good investments out there still. But others? Who knows what you are buying into?
And who needs to go to a Connecticut casino, when they have one running in New York, every business day, on Wall Street?
But remember, it isn't Gambling - it's Gaming, right? Talk about poor normative cues!
Note: The debt situation this Casino is a moving target. Here are some more recent articles on the subject:
http://dealbook.nytimes.com/2012/01/24/owners-of-mohegan-sun-seek-to-restructure-debt/
http://www.theday.com/article/20120106/BIZ02/301069950/1064/rss12
http://www.boston.com/Boston/businessupdates/2012/01/mohegan-sun-owners-outline-debt-refinancing-plan/yPP0qkRMFw0oPraVNcw2HK/index.html
This part of their restructuring plan is troubling:
The operator of the Indian-run casinos in Uncasville and Wilkes-Barre, Pa., also said it will offer to exchange $598 million in bonds for new notes with the same principal balance but with fewer restrictions. The gaming authority is asking holders of the old notes to accept amendments that would eliminate or waive restrictive covenants and eliminate certain default terms and modify or eliminate other provisions.So if you buy this bond now, you may end up with just more bonds, which may be worth face value, but on the open market may be worth even less than you paid for the old bonds.
I'd rather cruise on the Coastal Concordia, I think.
This link describes their proposed debt refinancing in more detail:
http://www.marketwatch.com/story/mohegan-tribal-gaming-authority-commences-debt-refinancing-transactions-2012-01-24
If I read this right, this short-term investment could end up being a long-term one. And when those notes come due, in 2016, do they pay you back (at 11%) or do they roll those over yet again? Or what?
If you are bullish on the gaming industry, you might want to gamble. But it is a gamble, plain and simple - and a long-term one at that.
4 comments:
The day after I posted this, the Mohegan Sun 8% bonds sold out. So someone bought these - hopefully not any of my readers.
Others are still available.
Frankly, I walked away (I was tempted, but thought again, this is gambling, not investing).
If I invested $770 to buy one bond (all I would gamble on this long-shot) the best case scenario would be me making $230 after a month. Big deal.
More likely, I would end up with the new bonds (in the proposed bond swap) and then be locked into a bond deal for another four years. I could sell the new bond, of course, but there is no guarantee it would be worth more.
And when the new bond matures? Well, I would probably be offered a new bond again - so I would never get paid back.
Worst case scenario? They declare a strategic bankruptcy and walk away from all their debts. I am out $770.
From my perspective, not worth it!
Another 'steal the bait' from Steve....
On a day off I would take a 30 minute ride through woods and past lakes and see the Woodstock Monument near Monticello, NY. We would think about all of the amazing acts that played there that day and we would meet some very cool people. On the way home we would eat at the Monticello Casino which has a very heavily subsidized restaurant that is quite good.
Then we walk past the gambling to the bar and dance floor, cut the rug a little and have a nice $4.00 drink, walk around a little, and go home.
It is great to have a wife on the same page as you. We are very well aware that those silly gamblers are totally subsidizing that night.
At the very least these casinos bring some nightlife to towns that would never have any.
But it is a true feat of self control to not plop yourself by a slot machine and lose money.
Many people do it because they are insecure and want to show their friends / partners that they are rich and can afford to throw away money even if they know that they will lose. Fortunately I do not have to do this. Accomplishing this is simple. From the very start of my marriage I was very up front with my wife about what I make, what I have, my savings goals, and my life goals. I have no reason to show off to anyone. I believe that people are not stupid. They have the low down on a casino. But, they do not want to appear 'cheap' in front of their peers and partners. Many men actually lie about their income / wealth and get into trouble that way. The casinos primarily play upon that insecurity and need to show off to make money. Secondarily they play upon the myth that people can regularly profit from gambling.
Please keep these columns coming.
My friend does the same thing as he appears to be immune to the lures of the slots or the tables. His brother-in-law, on the other hand.
While I appreciate that "stealing the bait" CAN be done, there is a risk you might get snared. After all, these folks, who are very very smart (and rich) have designed these traps to snare the unwary and play to your compulsions.
Years ago, in Vegas, we were WALKING on the strip and saw this convener belt and it said, "This Way to Ceasar's Palace". We stepped on it, and it was like the conveyor belt in the opening sequence of the Jetson's.
In a matter of seconds we were whisked high up over the strip and into the heart of the Casino. The very heart of it. Like cattle swept up down a conveyor belt into a slaughter house.
We tried to get out. No exits were clearly marked. No wonder so many get killed in Casino fires! We went from room to room, all lit up with shiny lights and chrome and those weird noises that slot machines make. Even the blackjack tables were noisy.
And no one was wearing dinner jackets like James Bond, either.
We kept asking security guards where the exits were and finally one said, "Go through that room, and then the next room, and then after that, turn right through the roulette area, and then beyond that is another room, and on the far side you will see the exit, clearly marked with a sign behind a palm plant."
A half-hour later we got out, and were in the parking lot. It took 45 minutes to walk back to the strip.
A very cleverly designed machine!
If you ever visit Japan, be sure to check out the Pachinko Parlors. They are like a slot machine scaled up to the size of a building. And the same sad people are in there, pulling the levers, compulsively, to get a free box of soap, if they win (this is how they get around gambling laws there).
Gamblers are not really showing off - they have a compulsive addiction, which most Humans have, of one sort or another. Odds are, if you go to a Casino, you will play. If you play you will lose. And then you will go to the ATM and get more money and play more, and before you know it, well, you've spent the children's college fund. Yes, it happens.
Casinos, baited credit cards, fast food, new car dealers, shopping malls, whatever. Our society panders to the obsessive-compulsive needs of humans - to their detriment.
While "stealing the bait" might be a good strategy (and I note you did spend $4 on a cocktail, and I presume did pay something for the food, so they at least broke even) you can't really get rich this way. And the risk is, that once, just once, one of you will say, "Oh, heck, let's play a roll of quarters in the slots and see what the fuss is all about!"
That is the risk, like with miles credit cards.
The best and 100% foolproof way to avoid the trap is to not step in it. Relying on your "willpower" to not bet in a casino or to "pay off the balance every month" might work most of the time, but they are counting on you faltering once (and that is all they need) - just once in your life, and then they have you in the trap.
Just avoiding traps is a better, safer strategy, particularly when you consider the potential outcomes involved.
UPDATE: March 2012
It appears the Mohegan Sun worked out a deal with the bondholders:
http://www.hartfordbusiness.com/news22957.html
Which was smart on the part of the bondholders.
The Mohegans got debtholders to tender their old notes in exchange for $10.8 million cash, plus new notes due in 2016, 2017 and 2018 that carry interest rates ranging from 10.5 percent to 11.5 percent.
If the turn around the casino, make the interest payments (now, at a much higher rate) and don't default on the new notes, whoever bought those old ones at 90 or 95 will find they made a pretty good bargain.
I was THIS CLOSE to buying one, but I ran out of courage at the last minute. The next day, they were all snapped up!
240% annualized rate of return, for some lucky fellow, plus 11% going forward - provided the Casino remains solvent.
Interesting business, these bonds!
Post a Comment