Conversations with the River Rock Entertainment Authority

September 11, 2011

Update: There is a new article pertaining to the default and proposed exchange offer here.

As I’m sure most of you know, the River Rock Entertainment Authority has $200 million in bonds coming due at the beginning of November of this year, and although the company has expressed confidence that a refinancing will occur, time is growing short and a definitive announcement has not been made. If you didn’t know that, you do now.

These facts have understandably weighed on the market price of the bonds, particularly as no Indian casino has ever tested the bankruptcy courts and the customary bankruptcy remedies would be unavailable even if they had.

The latest conference call contained little in the way of new information, but in response to a question River Rock management did answer that they had an “underwriter” that was shopping the deal around. As I said at the time, the engagement of a specific investment bank is an early step in the refinancing process, but the fact that they have found one is a positive concrete development.

Last week, I was informed via email that a reader of my articles and a member of the investing website was in a position to pass on information from a conversation between another member and a senior employee of River Rock. In this conversation, the employee identified the underwriters as BofA-Merrill Lynch and Credit Suisse. This struck me as unusual; those are after all very large investment banks–both of them in the “bulge bracket”–and I am surprised that they are taking such an interest in our little casino. CIBC, the investment bank that handled the offering of the bonds originally, is less than a third the size, based on assets, of Credit Suisse, the smaller of the two new banks. This employee also agreed with most of us that River Rock has sufficient cash flows to obtain a refinancing, and that many of the issues are “political,” a topic I will address later.

Curiously, this employee did also mention that he feels that 51% of bondholders would be likely to approve an extension of the maturity date. Obviously I don’t know what manner of canvassing River Rock has done on this matter, but I am concerned that his volunteering of this information could imply that an extension is the new plan, rather than the backup plan.

Following this conversation, this reader then telephoned this same employee for further information. Mostly the conversation contained the same information, but a few interesting highlights did emerge. First was an idea from Merrill Lynch about taking advantage of the Build America bonds program, as much of the borrowing went towards building infrastructure (although the employee may have been thinking of a different stimulus program, based on what I’ve found Googling for the Build America bonds). He also clarified that the political issues mentioned above pertained to the casino’s discussions with Sonoma County, which have now been resolved now that the land on which the road is to be built has been purchased.

As for a possible tender or extension offer, the employee stated that the extension proposal would have a definite maturity, as the bondholding community is understandably wary of an open-ended commitment, and that it would be possible to sweeten the deal with a small increase in coupons. He also added that any definite plan to deal with the upcoming maturity would be disclosed via an 8-K filing, most likely before the November deadline.

The employee also reiterated that River Rock’s cash flows are excellent and in fact the casino’s financial ratios are the best in the country. This is probably a true statement at least for certain financial ratios; River Rock offers better free cash flow coverage of interest than, say, the Mohegan Tribal Gaming Authority, which I have discussed elsewhere on this site.

So, those were the key points of the conversation, and here are my thoughts. I am intrigued about the use of stimulus programs; it would make a refinancing deal more marketable, and a subsidy on part of the borrowing would make the interest coverage on the remaining part, which would consist of ordinary high yield debt, look much better on an interest coverage basis. However, qualifying for the program presumably adds an extra quantum of time to the refinancing process.

One thing that is conspicuously absent in this conversation, I notice, is the possibility of a bridging loan. If Merrill Lynch or Credit Suisse are genuine underwriters, meaning that they will assume the risk of having to keep unsold bonds, this is an expression of their confidence in the value of the new bonds. As such, they might be willing, for an appropriate interest rate and fee, to lend River Rock the money it needs to pay off the old bonds against the proceeds of the sale of the new bonds. Obviously, the new bond deal would have to be pretty definite at that point, but it is a presumably viable option and I am surprised not to hear it discussed.

The main takeaway from this conversation and the current situation, though, is that we bondholders are certainly at the point where we must consider the shape of the extension offer. Certainly the bond prices already indicate that this possibility has been priced in. First off, I am convinced that the issue is one of time and not ultimately one of solvency; River Rock does have sufficient cash flows to support the debt in my opinion, and I do think that an extension at a slightly higher interest rate would not significantly increase the risk of a permanent loss of value.  I would probably vote in favor of an extension with my own bonds if November 1 passes with no refinancing and I haven’t closed my position before then. I would say that the extension, if it proceeds along the lines described above, is certainly preferrable to forcing the company into default, which would certainly hamper any refinancing deal in process, and even taking an optimistic view of the River Rock Entertainment Authority’s waiver of sovereign immunity, there are nowhere near enough seizable assets to satisfy the bond issue.

So, the situation is certainly not ideal for River Rock’s bondholders, but the continuation of interest in an extension offer would make the offer more palatable, and River Rock’s cash flows are still clearly capable of supporting the refinancing, which still may happen on time but I would not rely on it. Naturally I am worried about the future course of bond prices if an extension offer is made, but based on River Rock’s financials I am not greatly concerned about an ultimate impairment in value.

I would like to once again express my gratitude towards the Valueforum member who communicated these conversations to me, and I hope that this signals a trend of River Rock’s management being more forthcoming.

Disclosure: At the time this article was written, Geoffrey Rocca owned bonds of River Rock Entertainment Authority.

171 Responses to “Conversations with the River Rock Entertainment Authority”

  1. Full Payout Redemption is back out for the second time. What a bunch of idiots.

    Anyone have a clue when the “plan” mentioned in the 8-K will be released.

  2. as expected

    NEW YORK (Standard & Poor’s) Nov. 2, 2011–Standard & Poor’s Ratings Services today said it has lowered its issuer credit rating on Native American casino operator River Rock Entertainment Authority (RREA), as well as its issue-level rating on RREA’s existing $200 million senior notes, to ‘D’ from ‘CCC’. The rating actions followed RREA’s failure to repay the principal on its existing $200 million senior notes at maturity.

    In addition, we withdrew our preliminary ‘B-‘ issue-level rating on RREA’s proposed new $205 million senior notes, as well as our issue-level rating on the existing notes.The rating action stems from RREA’s inability to successfully repay the principal on its senior notes, due on Nov. 1, 2011, which constitutes a default under the terms of the notes’ indenture.

  3. But maybe they will take it back given the recent agreement.

    P.S. Complained to Fidelity people, this is ridiculous what they do, in and out, in and out. How many more?

  4. This is NOT the new 8K, it’s a brief article about Foxwoods.

    A new R-Rock 8K IS out now (the Exchange Offer NOT in it)

  5. New filing just hit the street

  6. Looked at the terms of the exchange offer (see RREA site) and they look good, actually real good to me. Looks like we will made whole. All’s well that ends well. 11/18 don’t forget to vote.

  7. Here’s the jist – Existing senior note holders receive the same par value of new senior notes with 9.00% Coupon to 2018 Maturity plus unpaid 9.75% interest payment accrued from 5/1/11 thru consummation date, which could be to 12/31/11. Solicitation period must commmence by 11/18/11 – even though the 60% who negotiated this exchange offer will have already agreed – for us small retail people and 66 2/3% is required for completion of the exchange. The new 9.00% notes appear to have better securitization/collateral than the 9.75% existing ones plus the applicable portion of new 9.00% notes must be redeemed at 100% every 6 months with River Rock’s excess cash flow if EBITDA for rolling 12 month calendar month period prior to distribution is less than $50 million. In other words, the new 9.00% notes will realistically be redeemed prior to 2018 assuming continued success at the Casino. Overall, could have been a lot worse. Those not agreeing to the exchange offer will probably be offered a deal not quite so great and would be welcome to pursue legal proceedings per the original Indenture. I just don’t see the benefit of doing so …. that’s my 2 cents, which equates to my net worth and overall intelligence ….

  8. For those too lazy to look for it the major points are:

    – Full exchange for new 9% notes due 2018, same seniority/security.

    – The accrued interest will be paid.

    – Amortization on frankly rather draconian terms. 90% sweep!

    – A few technical changes to the indenture.

    P.S. Impressive list of major holders.

  9. FYI Etrade reversed the interest payment as I’m sure you probably surmised would happen

  10. Don’t be deranged; exchange!

  11. Valuehound,

    I want to thank you (and many others) for your insightful contributions to this site. If you are not a professional money manager, you should be. If you are, please post (if the site owner will allow) your professional contact information

  12. >>>Looked at the terms of the exchange offer (see RREA site)
    I can’t find this the River Rock Investor relations site does not have it. Google has no listing. Can you tell me the URL

  13. I own 100 of the bonds and read the filing. I also read this to show that the new bonds will be better secured than the defaulted bonds. I did not read the old bond indenture. Is the waiver of sovernity a new element? If so it would be a major improvement in our security.

  14. The terms of the exchange are in an appendix in the SEC filing at


    The major bond holders are in this document:

  16. The waiver of sovernity is not a new element it is in the old 10k

    Unincorporated instrumentalities of Indian tribes formed pursuant to tribal law, such as the Authority, have sovereign immunity under federal law and may not be sued without their consent. We have granted a limited waiver of sovereign immunity on behalf of the Tribe and expressly consented to legal proceedings by the Trustee to interpret or enforce the terms of the Indenture or the Senior Notes as against any of our assets and revenues and against the revenues of our casino and related amenities. Express waivers of tribal sovereign immunity generally are valid if properly made, and if such waivers of sovereign immunity are held to be ineffective investors may not be able to enforce their rights and remedies under the Senior Notes or exercise any remedy for violations of federal securities laws.

  17. I’ve scanned through the exchange offer docs. The punishment in terms of revision to the existing note indenture is so harsh, you are forced to to opt in. I had hoped they would be able to round up 90%+ of holders and pay out the remaining (likely retail) holders at par. No such luck. If fact, they are unfairly discriminating against small holders of less than $50k (which includes me). We do not get the partial cash paydown of about 3pts). The indenture revisions forced on the hold-outs are quite clearly in breach of the indenture. First, and the company points this out, they are subordinating our liens (for which 100% participation is required). Second, they can not move the maturity date, again, without 100% participation. As a group, we can achieve a better recovery. If any holders would like to join me in forming a committee to push our case, please let me know.

  18. I own a small amount of these bonds. Does anybody know when the exchange offer is supposed to come out? I thought it would be by November 18th but it hans’t happened. Is there a possibility that the exchange doesn’t take place and they let the bonds default?

  19. What will happen if I do not exchange my bond? Do I still get interest and principle back ?.

  20. The lawyers that did the restructuring deal got an award……

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