New York state claims the tribe owes $214 million in overdue fees from its casino business

Moody’s Investors Service has downgraded Seneca Gaming Corp. and $500 million of its senior unsecured debt amid the company’s dispute with New York state over $214 million the state claims it is owed in overdue fees from Seneca’s casino business.

Moody’s cut the rating to B1 from Ba2 and said in a note today it’s reviewing the possibility of further cuts. The casinos are the “sole source of debt repayment” for Seneca Gaming’s $500 million of notes due in 2012, Moody’s said.

The Seneca Nation Indian Tribe, which operates three casinos in western New York through Seneca Gaming, is withholding the payments because it says the state violated an exclusivity agreement by introducing slot machines at racetracks.

Gov. David Paterson’s Office informed Seneca on October 6 that its failure to remit revenue-sharing payments for the past two years constitutes a breach of contract and that the state is entitled to terminate the 8-year-old compact between the tribe and the state governing the tribe’s casino activities. The tribe had 14 days to resolve the matter.

The disputed payments aren’t in a restricted account or being held by an independent third party so “there is no formal assurance that the Nation will have or make these funds available if it is determined that as part of any settlement, all or a portion of it has to be paid,” Moody’s analysts wrote.