Casino Enterprise Management

I recently had the pleasure of participating on a financing panel during a Tribal Gaming Economic Development Summit and was extremely impressed by the notable and accomplished resumes of my fellow panelists and our moderator. As the discussion began, the speakers launched into an interesting and complex repartee with regard to tribal financing of both gaming and other diverse projects. The buzzword of the conference seemed to be “diversification,” and the financing panel initially focused on tribal retention of equity ownership in new ventures. It was pointed out that unlike tribal gaming facilities—which by regulation can only carry debt—other non-gaming tribal ventures can have diverse equity ownership, resulting in creative capital structures. Although the discussion was immensely interesting and encouraging, from my seat on the dais, I glanced out at the well-attended event and realized that most of the audience members had glazed-over looks in their eyes. At first, I thought this might be due to the sugar content in the heavenly cookies that had been served after lunch, but then I realized we had completely lost our audience due to some financial terms we were using that were foreign to them. This would be the equivalent of me walking into an automotive parts conference discussion—even if I was very interested and desirous of learning about the topics at hand, I would need some assistance with the terminology first.

Many elected tribal leaders and commercial board members alike, upon commencement of their terms, find themselves thrust into facing serious financial decisions with regard to the capital structures of their respective gaming facilities, including capital raisings, refinancings, restructurings and reorganizations. They often have to quickly understand very complex issues and their related terminology. Some finance “lingo” sounds foreign with all of its acronyms and strange terms, and yes, some financial terms are in fact foreign language-based (pari passu and Sarbanes-Oxley, for example). Although every gaming operation has a unique capital structure and must utilize a distinctive financial strategy that is appropriate for that asset, a lesson in Finance Terminology 101, which is common and applicable to most transactions, might be worthwhile.

Amortization
The gradual elimination of a liability, such as a mortgage loan, in regular payments over a specified period of time. Such payments must be sufficient to cover both the amortization of the principal and the interest.

Balloon Payment
A large, lump-sum payment scheduled at the end of a series of considerably smaller periodic payments. A balloon payment may be included in the payment schedule for a loan, lease or other stream of payments.

Bond
A debt instrument issued for a period of more than one year with the purpose of raising capital by borrowing. The federal government, states, cities, corporations and many other types of institutions sell bonds. Generally, a bond is a promise to repay the principal along with interest (coupons) on a specified date (maturity). Some bonds do not pay interest, but all bonds require a repayment of principal. When an investor buys a bond, he or she becomes a creditor of the issuer.

Call
The right of the issuer to redeem (pay back) a bond before its scheduled maturity.

Capital Expenditure
Money spent to acquire or upgrade physical assets such as buildings and machinery. Also called “cap-x.”

Covenant
A clause in a contract that requires one party to do, or refrain from doing, certain things. Often, it is a restriction on a borrower imposed by a lender. A covenant may also require that a party maintain financial performance as a condition to a loan.

Depreciation
A decline in the value of a property due to general wear and tear or obsolescence; the opposite of appreciation. On the income statement, depreciation is shown as a non-cash charge that reduces income.

EBITDA
The technical definition is taken straight from the acronym; Earnings Before Interest, Taxes, Depreciation and Amortization. It is a calculation of net revenue and will be utilized in the marketplace to assess the health of a facility, the debt leverage and coverage ratios. For example, if a gaming facility has EBITDA of $25 million and it plans to raise $100 million, that would be at four times leverage. If one divides EBITDA by interest for any specified period of time, that will usually compute as coverage (depending on how it is defined within lending agreements). The significance of EBITDA in financing due diligence is great. EBITDA (both the actual figure a facility is realizing currently and the projected figure expected in the future) determines quite a bit in the financing process.

Equity
The monetary value of a property or business beyond any amounts owed on it in mortgages, claims, liens, etc. It is also defined as the interest of the owner of common stock in a corporation.

Fixed-Charge Coverage Ratio
Typically for corporations, this would be defined as profits before income taxes and interest payments, divided by long-term interest, for a given period of time. For most tribal casino facilities, it is defined as casino EBITDA less maintenance capital expenditures of the casino, less any distributions/advances made to the tribe, divided by the sum of cash interest expense (including capitalized interest) plus the required principal reductions.

Floating Rate
Any interest rate that changes on a periodic basis. The change is usually tied to movement of an outside indicator, such as the prime or LIBOR interest rate. Movement above or below certain levels is often prevented by a predetermined floor and ceiling for a given rate. For example, you might see a rate set at “LIBOR plus 3%.” This means that the rate on the loan will always be 3 percent higher than the LIBOR rate, which changes regularly to take into account changes in the market. Also called adjustable rate.

Funded Debt
Loans and obligations typically with a maturity of longer than one year, usually accompanied by interest payments. Also called long-term debt.

Interest
The fee charged by a lender to a borrower for the use of borrowed money, usually expressed as an annual percentage of the principal. The rate is dependent upon the time value of money, the credit risk of the borrower, and the inflation rate. Also called interest rate or coupon.

Leverage
The degree to which a business is utilizing borrowed money (expressed typically as a multiple of EBITDA).

LIBOR
London Inter-Bank Offer Rate. The interest rate that the banks charge each other for loans. Often used as a benchmark for institutional lending.

Loan
An arrangement in which a lender gives money to a borrower and the borrower agrees to repay the money, usually along with interest, at some future point(s) in time. Usually, there is a predetermined time for repaying a loan, and generally the lender has to bear the risk that the borrower may not repay a loan.

Maturity
The date on which a debt becomes due for payment. Also called maturity date.

Pari Passu
A Latin phrase with the literal translation meaning “of equal step.” Its use and significance is simply that one series of debt will have the same rights and privileges as another. Where this can affect a tribal issuance is how senior, secured and subordinated series of debt get positioned and how inter-creditor relationships are handled. Typically commercial bank debt will be senior and secured by physical assets within the casino. Bonds usually will be subordinated and unsecured behind existing bank debt, but this is fairly common and with bonds typically receiving a higher coupon than commercial bank debt, it is an accepted positioning. Where the lines get fuzzy, though, are the positions in the event of a bankruptcy and/or default. The banks and the bondholders want an equal chance at recourse and recovery, and yet there are still issues to be worked through in the tribal gaming sector. Depending on the varying size of the bank or bond portions, the credit of the facility, the stability of the market at the time of issuance, etc., the tribe should have their bankers, advisors and attorneys all look very carefully at these interlinking issues and how they might affect long-term planning.

Premium
An additional cost above the normal cost.

Private Placement
The sale of securities directly to institutional investors, such as banks, mutual funds, insurance companies, pension funds and foundations. Does not require SEC registration.

Pro Forma Projections
The definition of “pro forma” is a financial statement that has one or more assumptions or hypothetical conditions built into the data. Projections are forward-looking statements—quantitative estimates of future economic or financial performance often assuming certain conditions (expansions, improvements, new demographics, etc.). Tribal gaming operations most often utilize feasibility consultants to provide pro forma projections in combination with their own management’s estimates and those of their financial consultants.

Right of Recourse
The right to recover a bad debt through pursuing security or a guarantee from the borrower.

ROI (Return on Investment)
A tribal council (together with their management) must always assess the significance of return on investment when borrowing money. In gaming, one would typically expect an expansion, for example, to bring in an expected ROI that far exceeds the cost of capital. Conversely, sometimes the opportunity lost, or the negative cost (potential downturn), of not improving the property in a competitive environment can result in a loss of earnings or flat lining of revenue. So market indicators and feasibility studies play into an assessment of potential return on investment.

Sarbanes-Oxley
The Sarbanes-Oxley Act of 2002 requires specific reporting requirements for public companies, and these requirements are strict and exact. The cost of reporting within these guidelines can be very high (additional auditors, frequency of reports, etc.). However, if a tribal gaming issuer voluntarily agrees to report via this mechanism, usually the interest rate on its debt will be lower, as the risk is perceived to be somewhat less due to the transparency of the reporting.

Security
Property that is pledged as collateral for a loan.

Subordinated Debt
Junior debt in priority of claim. Subordinated or junior debt will be more expensive due to the higher risk the lender is taking on in relation to other senior lenders. However, junior debt is often necessary to attract senior lenders.

Trailing
In the case of time periods, the most recently completed time period. For example, TTM or “trailing 12 months,” would be the 12-month period that ended on the final day of last month.

This financial terminology list above is certainly not complete, but is a good reference starting place for tribal gaming personnel when contemplating a financing.


Valerie Red-Horse is an investment banker and financial advisor in her role as President/Owner of Red-Horse Financial Group Inc., offering securities through Western International Securities Inc., a FINRA and SIPC member firm. Red-Horse Financial Group and Western International Securities Inc. are separate and unrelated companies. She can be reached at valerie[at]wisdirect.com or (818) 389-4714.