Sunday, February 12, 2012

Losing Money Gambling

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 Authority
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!
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:

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:

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.