NEW YORK – It’s no secret that the U.S. gaming industry has experienced record declines in 2008, but financial analysts note there are big differences between the solvency of tribal gaming compared to commercial gaming. Some say financial institutions are largely not taking into account the differences, which has resulted in a more difficult – and perhaps unjust – borrowing climate for Indian gaming.

Research indicates that the nation’s economy is in recession – and the tribal gaming market, which has sometimes been viewed as recession-resistant, is more likely than in recent years to experience the harmful effects of a recession.

Already, tribal gaming operators are in crisis mode, with some making decisions to halt additions, tighten spending, and even lay off employees. Casinos owned by the Mohegan Tribe of Connecticut, the Seneca Nation of New York and the Sault Ste. Marie Tribe of Chippewa Indians have been among the bellwethers of the downturn in the Indian country gaming market.

Craig Parmelee, a top credit analyst at the Standard & Poor’s financial research corporation, said it is not surprising that some tribal enterprises are struggling, given what he calls “very challenging” economic times for the gaming market in general.

In a recent conference call sponsored by the Native American Finance Officers Association, he said loan default rates of casino operators are expected to rise to about 5 percent by August 2009. Some experts foresee default rates rising as high as 9 percent by next summer. (The default rate for the last 12 months has averaged about 2.7 percent.)

Parmelee said the increases in defaults can largely be attributed due to tighter credit offerings, limited availability of capital from banks and global economic woes.

In the first nine months of 2008, six gaming companies rated by Standard & Poor’s have defaulted on their loans. From 1997 – 2007, there were a total of nine defaults of rated gaming companies.

Despite the grim and unprecedented statistics, tribal gaming default rates are nonexistent compared to their corporate counterparts. Of the six rated gaming companies that defaulted this year through September, none was tribally owned.

Parmelee said that as a result of the negative economic tide, his firm has downgraded its financial ratings of 22 gaming entities this year. (A downgrade means that the firm’s opinion of that entity’s credit quality has declined.) Nineteen of these entities have been commercial; three have been Native.

As of early October, more than 40 percent of the commercial gaming operators that Standard & Poor’s rates had been downgraded, compared to about 15 percent of the Native operators it rates.

One of the most recently downgraded tribes is the Mashantucket Pequot Tribal Nation, which operates Foxwoods Resort Casino in Connecticut.

Of the 12 companies currently ranked on Standard & Poor’s list of lowest-rated gaming enterprises, two are American Indian.

Frank King, managing director of tribal banking for Merrill Lynch, said during the NAFOA conference call that it is to the detriment of tribal gaming to be linked with corporate gaming’s risky financial background.

“Difficult times in corporate gaming are going to have a significant impact on tribes’ ability to borrow,” he predicted, noting that many financial companies see the industry as monolithic – not distinguishing between the types of gaming investors and their different behaviors. “Investors tend to like to throw the baby out with the bathwater.”

He added: “Corporate gaming has placed some pretty big bets in the last couple of years, and they look like they’re going to lose on those bets.”

In contrast, tribes have generally entered the economic downturn with better balance sheets. Leveraged buyouts, for instance, have no place in Indian country, and tribes do not generally face the same growth pressures as public gaming companies.

Tribal operators also, on average, tend to be more conservative than many commercial gaming operators; and in many cases, tribes operate casinos where few other casinos are located, reducing competition during challenging periods.

Noting Parmelee’s numbers, King said tribal gaming enterprises are performing much better than their corporate counterparts in terms of not defaulting on loans and maintaining positive financial ratings.

King said it is necessary for tribal operators to look at all upcoming projects they have on the table and realize that they may end up costing more than they ever believed they might.

“It may not seem fair,” he said. “But it’s the reality.”

Reflecting on concerns about the linkage between commercial and tribal gaming, NAFOA President Bill Lomax said that the commercial lenders and investment bankers have done a generally good job of learning about the differences between tribal casino facilities and the corporate gaming entities. He noted that from 2005 – 07, tribes experienced the most favorable lending climate they have ever seen, although those conditions have now come to a halt due to the credit crisis.

Lomax added, however, that tribes do tend to face a more difficult time in borrowing than the corporate casinos, but he believes this reality is not really the fault of bankers.

“The biggest problem is that when a bank seeks an investor to participate in a bond issuance, the investors will often ask for some type of comparable entity so that they can use that comparable as a benchmark when they try to assess the risk of the investment.

“When this is done in the nontribal gaming world, comparables are readily available in Las Vegas and Atlantic City and elsewhere because corporate entities typically have to disclose financial information to their shareholders or regulators.

“Tribes, however, do not disclose financial information to the wider world and thus there is no comparable information for an investor to use to make an informed decision concerning the risk of the investment. A lack of information about risk will always lead to the investor requiring a higher return on their investment.”

Lomax said tribes would be helped “significantly” if an independent body were to gather financial information on a regional basis that could be used in aggregate form to provide comparable information for the region. He said this scenario would not only lower costs for tribes trying to borrow money for a new facility or an expansion, it would give tribal casino managers a benchmark to gauge the relative success of their facility.

In a follow-up interview, Parmelee said he couldn’t speak as to how investors are treating tribal operators compared to commercial operators.

Still, he added that U.S. consumers are significantly pulling back their spending, and from his vantage point, the majority of casinos – both tribal and commercial – are experiencing meaningful earnings declines.

“In this environment, it seems to me that investors would naturally be cautious,” he said.