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The Deal: Foxwoods Restructures $2.3 Billion Debt After Four Years of Negotiations

Stocks in this article: LVS WYNN MGM MPEL

Under the Foxwoods restructuring agreement, the capital structure is divided into four secured tranches. A source familiar with the restructuring process said it's highly unusual to have three tranches of debt that are subordinated but still secured.

In many restructuring situations, bondholders that take losses will receive equity to give them a possibility of recovery if the business turns around. Foxwoods, however, couldn't provide that deal sweetener, since tribes aren't legally permitted to issue equity.

As a result, said one legal counsel who worked on the deal, "The bottom two classes of bonds received a haircut as part of the restructuring, so in place of that, they received contingent interest obligations."

The contingent interest obligations are structured so that, if the casino performs well in the future, junior creditors will receive a payout to help compensate for the losses they swallowed during the restructuring process, the lawyer said.

The legal counsel said the tribe got a letter of declination from the National Indian Gaming Commission -- an independent federal regulatory agency -- stating that documents relating to the new securities don't constitute management agreements. The letter of declination, which formally distinguishes these securities from equity, was a necessary closing condition for the deal.

Those securities were designed specifically for this unusual situation, sources said.

In addition, some of the bonds toggle between cash-pay and pay-in-kind depending on how the business is performing and not at the issuer's discretion. This structure provides the issuer with flexibility in case the business is in trouble, but also ensures payouts for creditors if it's thriving. Sources said this structure is also unusual, and is another accommodation for a situation in which the debtor cannot issue equity.

In the new capital structure, the first tranche of creditors includes the casino's senior lenders: family owned Malaysian firm Kien Huat Realty, Bank of America NA, and Wells Fargo & Co. Those lenders will split $542 million in existing term loans, at par, into two new term loans with longer maturities.

Kien Huat, the first investor who funded the casino's development, received a phenomenal return on its investment, sources said.

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