Rhode Island Eyes Bonds to Buy 'Racino'

Rhode Island could use tax-exempt bonds to keep its third-largest revenue source from coming up craps.

General Treasurer Frank Caprio has proposed that the state sell bonds to purchase the financially troubled Twin River dog racing track and video slot machine facility, known as a racino, in Lincoln.

In September, after having purchased the track in 2005 and embarking on a $225 million expansion, the facility's owner, BLB Management Services Inc., defaulted on a subordinate loan, and a forbearance on a senior lien loan is due to expire on Saturday. The facility faces the possibility of bankruptcy, according to a Moody's Investors Service report.

The state receives about $250 million annually from the video lottery slot machines, making it the state's third largest source of revenue from a total revenue pool of an estimated $3.11 billion in the current fiscal year.

"What I'm proposing is that the state look at possibility of acquiring the actual physical real estate, and look to the [creditors] and obviously the current owners to work out a deal where then we would take our percentage of take from the machines up from 60% to somewhere over 80%," Caprio said.

Caprio said the owners have put approximately $700 million into the facility, which has $500 million of debt outstanding. The senior-lien debt isn't publicly traded but some paper has recently changed hands for 60 cents on the dollar, he said. Caprio suggested the state could sell between $200 million and $300 million of bonds structured as a certificate of participation deal to purchase the facility. .

The Rhode Island State Lottery has operated video slot machines in the Twin River facility for the past 18 years. The state collects the money from the machines and divides the profits. The state keeps 60% of the profit, while the owners of the facility get 26% and the remaining 14% goes to the owners of the machines and a private company that provides technology for the system.

If the state took over that 26% now kept by the owners, it would get approximately $100 million more per year.

"We would obviously have more than enough revenue to pay [debt service] and still be in a better position than we are now with the number of dollars we'd be profiting from the operation," Caprio said. He said the net benefit to the state would be somewhere between $30 million to $50 million annually.

A spokeswoman for Gov. Donald Carcieri yesterday downplayed Caprio's proposal and said the governor's office had not been in direct talks with the racino's owners, though it had been in talks with the consulting firms Willkie Farr & Gallagher and the Blackstone Group about the racino and is monitoring the situation.

"The state will protect the interests of the taxpayers but beyond that, I'm not going to comment," said Amy Kempe. Kempe noted that BLB Management had come up against deadlines on its debt before and gotten extensions.

Twin River spokeswoman Patty Doyle said: "We have ongoing dialogue with creditors and lenders as well as the state and legislative leaders to try to find a resolution." BLB Management is a joint venture holding company comprising Kerzner International, Starwood Capital Group, and Waterford Group LLC.

Moody's assigns BLB its Caa3 corporate family rating. Under the forbearance agreement, Twin River suspended interest payments to its junior lenders, Moody's said in its rating report. That suspension would allow those lenders to take actions that could result in the Twin River filing for bankruptcy when the forbearance ends.

"They borrowed too much money to renovate and expand the existing facility and they're not generating enough revenue to cover the cost to carry the debt," said Moody's analyst Peggy Holloway. "The current rating certainly indicates that the company has a high probability of defaulting on the entire capital structure."

The facility is too big relative to the surrounding area and the gaming industry is in a slump due to the weak economy, she said.

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