River Rock’s Exchange Offer has Arrived

November 3, 2011

I said in my comments for my previous article about the River Rock Entertainment Authority bonds that I would have an update when there was something to update people about. I think the default and exchange offer qualifies

River Rock has filed with the SEC a forbearance agreement that has the votes of over 60% of existing bondholders, as well as the basic shape of an exchange offer. In my previous article I expressed some concern that an exchange offer was becoming the new plan, and not just the backup plan. My concerns were eased when the company was showing progress in a refinancing deal, but now that time has run out on that deal I’m glad to see a plan all the same.

As has been pointed out, the terms of the proposed exchange are as follows: Each holder will receive $1000 in principal in new senior notes for every $1000 worth of old notes, plus accrued interest, plus his or her prorated share of the amount of cash on River Rock’s balance sheet that exceeds $13.7 million. However, this cash distribution will count against the principal value of the notes. The new terms require the company to use 90% of its excess cash flow if EBITDA is above $50 million, and 100% if below that figure, to repurchase the bonds. However, I believe this will be on the individual bond level and not prorated. EBITDA in the trailing four quarters was $55 million, and looking back at the last three fiscal years this figure has remained stable at around $54 million.

The distribution of excess cash interests me; had things worked out differently I would have suggested throwing it at River Rock’s investment banks as a sweetener of any underwriting deal. However, the use of the cash to sweeten an exchange offer does not surprise me. I have been considering the assets available for creditors to seize in the event of a lawsuit, and that cash is pretty much it. Despite the waiver of sovereign immunity, only an Indian tribe can run and Indian casino, and the land under the casino is also held in trust. Thus, the only assets that would be realistically available to creditors would be from garnishing the casino’s bank accounts, and by draining its coffers in this manner the casino is offering a disincentive to holdouts. As detailed in Moyer’s Distressed Debt Analysis, a useful guide to distress and bankruptcy investing, finding some means of punishing holdouts in order to incentivize them to transfer is a common practice among debt workouts.

In terms of the early redemption of these bonds, I have mentioned the possibility of amortization in conversations with some readers. Certainly such an action would bring confidence to the lending community, particularly with the possibility of the Graton casino opening within the next few years. And of course with the expansion put on indefinite hold the casino doesn’t really have much else to do with its money. I would be very interested in the redemption mechanics; whether the company chooses the bonds randomly or simply repurchases from the large institutional holders, leaving us retail holders at the end of the line (I assume most of my readers are retail holders (or perhaps contemplating becoming a retail holder)).

On the whole, then, I think the proposed refinancing deal will work out well for us bondholders. I am actually surprised that a refinancing deal along these lines, perhaps with a separate amortizing and a standard bullet issue, could not have been accomplished. As I’ve always said, and as has been pointed out in the comments, there is ample cash flow to support the existing debt structure with money to spare. As such, I think that the the failure of River Rock and its banks to get a refinancing accomplished is not merely an unfortunate surprise; it is inexplicable, even considering the short time frame.

I think part of the problem could be a constituency issue based in the decision to issue part of the debt as municipal bonds. The core constituency of the existing bonds is high yield investors; even setting aside the sovereignty issue the casino has a fixed charge coverage ratio of only about 2.5. The high yield community, I’ve noticed, seems to give financial analysis much more scope, and thinks of due diligence as something other than simply a process to avoid getting sued. That is why, as I’ve said before, we don’t need a rating from the ratings agencies to tell us what is going on. The municipal bond community, on the other hand, would be more likely to adopt a defensive, ratings-based approach and less willing to take a flier on an unusual issue. But on the other hand, Credit Suisse had apparently been trying to place an ordinary high yield issue for some time before the idea of the Build American bonds was adopted, and of course there no doubt is a large (and growing) group of specialists in distressed municipal debt.

At any rate, I remain optimistic about this refinancing in terms of recovering my principle at some point. However, I am not happy about the the lower interest rate, which contradicts the plan proposed in my last article. Furthermore, the early redemption might work against us if the situation at River Rock improves or the interest rate in the high yield markets decline, thus depriving us of earning what could be an above-market rate. As I stated before, I believe that accepting the exchange offer will be preferrable to rejecting it. As valuehound, the well-known commenter on my previous post pointed out, it is the cash flows and economics of the situation that will drive this deal and should be our main concern, and those are adequate to support this issue.

Disclosure: At the time of this writing, the author owned River Rock Entertainment Authority bonds.

141 Responses to “River Rock’s Exchange Offer has Arrived”

  1. Jeffery,

    I also received a redemption but it represented about 5% of my holdings which is about the amount of float that was retired (~5 million of the 9%). If you had 1000 redeemed and that represents 5% of your stake you must own 20% of all the bonds. I was worried that my RR bond stake was approaching 8% of my total assets. If you are at my worry point you must have about 175mm. I don’t think I’ll be able to catch you 🙂

  2. Luke, any luck with the attorney?

    From the Q1 report it appears that the old bonds (~3.6mm) will be redeemed after the senors are retired. They are carrying accrued interest on the books so I assume the redemption will include the accrued interest. Kinda like a zero coupon bond. I saw some of these bonds available on Etrade bond desk but don’t remember the price. By my calc, taking into account the mandatory redemptions on the 9% at about 5% per 6 mo period, and the current price for the 9% bond the old bonds would have to price around 46 to be equivalent. You should just do the conversion. Just my two cents.

  3. On interest payment date 11/1/12 I had 10% of my bonds also redeemed


  4. More bond redemptions coming per this October 2012 notice?

    SERIES A NOTES DUE NOVEMBER 1, 2018 CUSIP #768369AF7 and
    NOTICE IS HEREBY GIVEN to the holders of the Authority’s Series A Senior Notes due 2018 (the “Series A Notes”) and the Authority’s Series B Senior Notes due 2018 (the “Series B Notes” and together with the Series A Notes, the “Notes”) issued pursuant to that certain Indenture, dated December 21, 2011 (the “Indenture”), between River Rock Entertainment Authority (the “Authority”), an unincorporated governmental instrumentality of the Dry Creek Rancheria Band of Pomo Indians, a federally recognized Indian Tribe (the “Tribe”) and Deutsche Bank Trust Company Americas, a state banking corporation duly organized and existing under the laws of the State of New York, as trustee and paying agent (the “Trustee and Paying Agent”), that the Authority has deposited $11,014,000 with the Trustee which the Trustee shall apply on November 1, 2012 (the “Redemption Date”) to the partial redemption of the Notes at par (the “Redemption Price”) pursuant to Section 3.10 of the Indenture. Based on the current outstanding amount of Notes being $181,259,000, of which $92,903,000 are Series A Notes and $88,356,000 are Series B Notes, the Trustee and Paying Agent shall apply the Redemption Price as follows, or as close to pro rata as is practicable pursuant to Section 3.02 of the Indenture: $5,650,000, or 51.3% of the Redemption Amount, shall be applied to redeem Series A Notes; and $5,364,000, or 48.7% of the Redemption Amount, shall be applied to redeem Series B Notes; provided that the Notes shall be selected in amounts of $1,000 and integral multiples of $1,000.
    Dated: October 26, 2012 By: Deutsche Bank Trust Company Americas,
    As Trustee

  5. Q3 results as well as the conference call replay are now available on their web site. There were no analyst questions on the conference call. It appears that that Wall St. has lost interest in this issue since they are no longer doing SEC filings and it is no longer rated by any ratings agencies.

    Q3 results were very solid. EBIDTA was comparable to last year and would have been considerably better if not for additional reimbursement of costs to Sonoma County. Management seems to be very focused on reducing costs and improving operations before the expected opening of the Rohnert Park Casino in Nov 2013. Interest costs are declining as they keep calling more bonds (about 5.8% of the total on the 11/1 call).

    I am covering River Rock in my newsletter which is focused on high yield and deferred interest issues. The partial calls of River Rock bonds at par increase the internal rate of return of the issue which is higher than the listed yield to maturity. I have setup an Excel model to calculate the IRR including the partial calls. Email me at mrpanick@yahoo.com if you’d like me to email you a free copy of my newsletter as well as the River Rock Excel IRR model.

  6. Please forgive my ignorance. I own only $5000 of RIVER ROCK ENTMT AUTH CAL*BE 9.7511012011 (CB69AB). They are valued at $3,750.00. I am unable to get any information on this investment and am unable to trade it. Based on the information above, should I be expecting any redemption of any part of my investment? Thanks for your patience.

  7. Phillip,

    About 5% of the issue is being partially called every 6 months at par. This happens with each interest payment and the amount called is based on a cash flow formula in the indenture. Next partial call and interest payment are May 1st. The call is by a lottery so more or less than 5% can be called from your account when a call is made.

    You should be able to trade it by calling your broker’s bond desk with the CUSIP. River Rock has financial and other information on their web site if you setup an account on the IR section there. My newsletter is following the River Rock bonds (one of my top picks in fact) and other distressed issues trading at a discount. You can email me for a sample copy and more info. If you want email alerts and analysis on breaking news and earnings of River Rock and similar issues, a writeup and an updated Excel internal rate of return model (taking effect of partial calls into account).

    Email is mrpanick@yahoo.com


  8. Fantastic Q4 report. Highest quarterly revenues and operating earnings in the past 2 years even though Q4 is a weak seasonal quarter.

    More detailed analysis and an Excel IRR model in my newsetter covering this and other microcap distressed debt and equity issues. Email is mrpanick@yahoo.com for more info.


  9. Anyone have any insight as to the effect of the new casino set to open in November on the RR revenues? I would think after this November bond redemption that the debt load will be low enough to handle the reduced revenues/earnings.

  10. River Rock redeemed another 1000 bonds at $100 in my account. I don’t understand why the bond price is around 81 when the company is redeeming at 100. Where can I buy more at $81 so I can wait for my $100 redemption? My broker can’t find it anywhere.

  11. Recent weakness in the River Rock 9% bond a week before the 4th quarter conference call???

  12. The weakness in the bonds was well deserved. If you compare Q3 revenues to revenues for the trailing 3 months (which was lower than Q4 and discussed in the annual report) they lost 50% of revenues. That’s a tough hurdle to overcome. The River Rock bonds were dropped as a pick in my newsletter in May at 88 for a big gain. The Panick Value Research report is still covering them as a “watch list” issue with a near term target of 50 and a sell recommendation. A sell alert with a 50 price target went out as soon as the annual report came out earlier this week. Probably wouldn’t touch it even below 50. If you trade distressed debt and pref stock issues check out the Panick Report. The FBP pref issues which just had a big rally today have been a pick. My email is mrpanick@yahoo.com for the 2 week free trial. Back alerts on River Rock included on request.

  13. Anyone still following this Bond? I got a coupon payment today, but the price has dropped to about 50 cents on the dollar.

  14. I think I figured it out – this just came out — http://www.pressdemocrat.com/article/20140501/articles/140509955#page=2

  15. @BigBill, probably an ETrade account? They pay before they get the money from the Trustee then reverse the transaction in a few days when it doesn’t show up.

  16. River Rock bonds showing at 0.37 to the dollar. They have to May 31st to resolve the default. At least some of my bonds were redeemed at par last two years. Let’s hope they come up with another creative financing that does not haircut the bond holders. They claim to have enough money to keep operating so it’s not in their interest to screw the bondholders unless they want to do future financing at 25%.

  17. River Rock has defaulted.

    However, while I can’t recommend buying bonds (LOL), there is mention of a “waterfall” provision that will protect the bondholders interests as much as possible and likely induce the Tribe to restructure (assuming they can).

  18. The bonds are down below $20, which seems insane. I think some are just dumping for whatever they can. What’s odd is when there was no negative news 6-9 months ago, the bonds were selling for $80-$84 but I cannot find any brokers that actually had bonds to sell.

  19. Why is there no new forthcoming on a possible solution to the default? I guess it is business as usual at the casino and screw the people that are owed two hundred million? Waterfall agreement?????

  20. Since they do not publish any financial data no one can make any decesions based on facts. We are just pawns with no real power, they may say something today or 2 years from now who the hell knows.

    I at one time could see financials by logging in and searching website that has been shut down.

  21. Update to last input. I was just successful in finally getting my password to work. Read info that was available, no mention of a time schedule concerning bonds, however there was an excess cash flow statement.


  22. Nothing new posted on the investor website for River Rock since May 28, 2014, however the earlier post suggesting the website was “down” is not accurate. You do need a password to access the investor section which you can get by emailing the company.

  23. So, RR bonds trade @ 15 ask 10 bid in the last month or so. Most of these transactions are for 5-10 bonds, so not much money changing hands. Have not seen any big blocks traded since the default so it appears the big institutional investors are sitting still. It also appears they are quite nonchalant about the situation based on the questions I heard them ask in the conference calls.

    So they said the parity lien account had 4 million deposited into it at the end of July. Worst case the casino machine generated 4 million in 2 months to pay the bondholders. That is $24 million a year. There are about $140 million face senior bonds with an interest burden of about $12 million annually.

    Why are these bonds not a good deal @ $15? Even if you never got your principal back, you will be repaid your initial investment in about 2 years, that’s a pretty nice annuity.

    Any thoughts??

  24. Why are these bonds not a good deal @ $15?
    Because they are not making enough money at the casino.

    They are not generating $4M/month in free cash flow. That’s a one time transfer at best.

    Check out the income statement and statement of cash flows from the investor site (and reconciliation of income to net cash flow provided by operations….

    They are negative cash flow after adding in transfers to the tribe (which happened) and payments to the county (which did not happen). That’s before bondholders have seen $0.01.

  25. They are required by the indentures to deposit at the end of each month. They defaulted on 5/1/14, made it official on 5/31/14. At the end of june, they did not transfer any money into the parity lien account, then on 7/31/14 they transferred $4 million. Where did it come from?

  26. Who thinks there will be a distribution on 11/1?

  27. There was no distribution in November. Nothing but silence but the major bondholders must be talking to them.

  28. There was a distribution on 11/25. 1.6% of face about 1/3 of a normal 6 month payment. That was a major portion of the 4.9 million in the parity lien account but not all of it. There is a new trustee and a bondholder advocate. They provide announcements periodically on the state of affairs.

  29. I did get that payment on December 1st, better than nothing.

    Do you have a link to the new bondholder advocate. I see nothing about that on the investor affairs websites for River Rock.

  30. 1.5% of face paid on 4/15/15. Represented 2.1 million out of the parity lien account. There was 3.6 million in the account as of 12/31/14, so at least 1.5 in there now.

  31. Ditto got the payment.

  32. Also bond price creeped up to 12 dollars from $10.50 but might just be a fluctuation.

  33. Another distribution (the 5th since the default) on 2/26/16, 1.89% of face. That was 2.6 million out of the parity lien account. They left 2 million in for reserve.The payments keep coming and they are regular. The advocate has indicated that they want to try and establish a bimonthly payout schedule in the near future. Before the default the yearly debt service was about 12 million for the senior notes. Since the 5/1/14 default, in 1.833 years there have been 16.4 million distributed and 2 million in reserve for a total of 18.4 million. This represents 84% of what they are supposed to payout (~22 million) before default. Not bad considering you can pick up these bonds at 1/8 face value.

  34. I saw a trade go through today at $14.14

  35. Well you pick them up Bob S at $10. LOL
    I still see $7.40 as the value on Option Express.
    I did get $185 credited on 3-2-16 on 100 bonds.
    Still these are doing better than oil/gas investments right now.

  36. Etrade has them at 21.996 ask 10.125 bid. A lot higher than a week or so ago.

  37. Last April distribution was .3% of face or 3% market price. They are going to try to do an even month distribution from now on. Should see one coming up in June. After 2 or 3 of these should be able to extrapolate a realistic yearly return.

  38. The distribution on 6-29-16 was only $33 on 100 bonds. That’s only a third of a percent, much less than last time.

  39. Distributions on 8-26-16 and 10-25-16 were $33.56 and $56.75. So a little over 1% for 2/3rds of the year. If we end up around 1.4% tax free that will be tolerable I suppose and then hope for redemptions.

  40. After small distributions in Feb & April 2017, nothing in June, suddenly a $166 payment in August 2017. That’s $221 so far in 2017 or about a 2.2% return so far tax free. Could be worse. Hope we get another payment end of October.

  41. That’s 2.2% of face, 11% on market. Not bad, the Oct payment should be coming soon. I think the reason there was no June pmt was the parity fund was just shy of $2 million. They like to leave $2m in the fund. So the August pmt was essentially two payment rolled into one.

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