News Column

Fitch Affirms Quechan Indian Tribe's TED Bonds at 'B/RR3' and GOs at 'B-/RR4'; Affirms IDR at 'B-'

June 27, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings affirmed Quechan Indian Tribe's (Quechan; the tribe) Issuer Default Rating (IDR) at 'B-'. In addition, Fitch affirmed a 'B/RR3' rating on Quechan's approximately $30 million in outstanding tribal economic development bonds (TED bonds) and $30 million in the tribe's governmental project bonds (general obligation [GO] bonds) at 'B-/RR4'.

The Rating Outlook is Stable.

The tribe in 2013 refinanced all of its $98 million in outstanding revenue bonds with the proceeds from a $107 million five-year credit facility (includes a $5 million outstanding revolver that has $4.2 million outstanding as of March 31, 2014), which Fitch does not rate. The credit facility ranks pari passu to the TED bonds and has additional financial covenants including: a 1.05x fixed-charge coverage test (which includes tribal distributions), a minimum EBITDA test, maximum capital expenditure test, and a leverage maintenance test. The credit agreement does permit additional pari passu borrowings although there is a $10 million FF&E carve-out.

KEY RATING DRIVERS:

The affirmation of Quechan's bonds and the IDR reflects the tribe's improving credit profile, stable liquidity and the tribe's prudent fiscal management. Quechan's casino enterprise's debt/EBITDA and EBITDA/debt service ratios for the latest 12-month (LTM) period ending March 31, 2014 are 3.29x and 2.95x, respectively, or 4.05x and 2.54x including the tribe's GO bonds. This is largely in-line with the ratios from the same period last year when debt/EBITDA and EBITDA/debt service for casino recourse debt was 3.01x and 2.36x, respectively, and 3.68x and 2.11x including the GO bonds. However, this is below Fitch's forecasts from last year as the interim amortization payments only partially offset the weaker operating performance.

Liquidity is adequate with the unrestricted cash at the tribal level providing for a bit over 12 months of operations without any further distributions from the casino operations. Available liquidity on the casino side is minimal but is adequate when taking into account the healthy free cash flow (FCF) at the casino enterprise before distributions to the tribe and the 1.05x fixed charge covenant in the credit agreement (subtracts the tribal distributions from the numerator). There are no near-term maturities with the exception of the sizable term loan amortization payments of $11 million - $13 million per year. Principal payments for the TED and GO bonds do not materially come into effect for several years, giving the Tribe more financial flexibility in the near term as it pays down the term loan.

Fitch expects unrestricted cash levels for the Tribe to remain stable even in light of the accelerated amortization of the term loan and future mandatory sinking payments of the TED/GO bonds (beginning in 2017 and 2018, respectively). Fitch's base case liquidity analysis incorporates LTM EBITDA levels, relatively low amount of casino capital expenditures, and tribal expenditures consistent with 2013. Fitch does not give credit in the base case for investment income being generated by the tribe's reserve funds due to the potential volatility. Investment income was substantial in 2012 and 2013.

Although the credit metrics are strong relative 'B-' IDR, positive rating pressure is precluded at this time given the near-term headwinds, which include the Yuma, AZ's weak operating environment and the risk of violating the credit agreement's leverage covenant for the period ending June 30, 2014. Also while Fitch expects Quechan's reserves to remain stable, there is little headroom for deterioration in casino operating performance in terms of the adequacy of the casino transfers to cover the tribe's governmental budget. Quechan's current leadership is committed to maintaining or growing its reserves, which is in contrast to three to four years ago when the risk of the tribe depleting its reserves was a more serious risk.

The reduced governmental spending was spearheaded by a largely new tribal council that took office in 2011. All seven council members are up for re-election this year. Fitch will monitor the results of the election and would view the re-election of the current council members or new council members that espouse prudent fiscal management favorably.

The tribe's current liquidity provides a meaningful buffer against a temporary decline in casino operations. However, a prolonged and/or more drastic decline in operations could force the tribe to take further austerity measures, which could be difficult to implement. The casinos' revenues in 2013 fell by 6.6% largely due to the weak local economy but management was able to incrementally cut costs to maintain stable margins and slightly offset the decline in EBITDA (-6% in 2013). In the first quarter of 2014 (1Q'14), revenues and EBITDA declined by 3% and 14%, respectively, but the quarter was affected by unfavourable slot and table game hold and Fitch estimates that revenue and EBITDA would be close to flat if adjusted for hold. Fitch remains cautious on revenue trends in the Yuma region given the consistently high unemployment rates and conservatively forecasts low-single-digit declines in revenue growth for Quechan's casino operations for the Fitch's base case projection horizon.

The tribe is at risk of violating its leverage covenant during 2014; however, Fitch believes that the banks will be amicable in providing waivers for the covenant violations given Quechan's improving financial profile. The leverage covenant steps down to 3.25x during 2Q'14, and continues to decline in coming years. Fitch projects leverage to be above the covenant threshold at period ending June 30, 3014 (3.27x) but expects leverage to decline below the threshold by year-end 2014 as the term loan amortizes. Thereafter, Fitch projects leverage to be in compliance with the covenant until 2016 when the headroom gets tight again as the covenant steps down to 2.5x. For year-end 2016, Fitch projects leverage at 2.61x. In addition, the headroom under the minimum EBITDA covenant gets tight as the covenant is set to step up in 3Q'14 and 1Q'16.

Management expects casino operations to improve for the balance of 2014 citing revenue enhancement initiatives but said that in the event EBITDA continues to be pressured the tribe is open to making adjustments to its governmental spending to preserve liquidity.

TRANSACTION RATINGS

Fitch views prospects for the TED bonds in terms of probability of default and recovery in case of default as distinctly better relative to the GO bonds. This is because the TED bonds are backed by casino revenues, whereas the GO bonds are not. The revenue pledge is strengthened by a trustee-controlled flow of funds that ensures the bond debt service is paid prior to any tribal distribution. The flow of funds is sprung if coverage falls below 1.65x. As of March 31, 2014, coverage of debt service was at 2.95x. This mechanism allows Fitch to partially segregate the credit risk of the casino operations from the tribe, which has a weaker credit profile.

However, the tribal credit profile is still heavily factored into the TED bond ratings, since significant distress on the tribal side may potentially force the TED bondholders or lenders to make concessions to allow the tribe to maintain adequate liquidity and critical governmental services.

RATING SENSITIVITIES:

Quechan's IDR can move toward the mid-end of the 'B' rating category over the medium term (approximately two to three years) as credit metrics strengthen further, tribal liquidity improves, and/or casino EBITDA expands.

Specific rating triggers include:

Positive: Future developments that in some combination could lead to positive rating actions include:

--Casino level debt/EBITDA declining and remaining below 3x and 3.5x including the GO bonds;

--Tribe maintaining prudent fiscal management practices (i.e. adjusting governmental spending to match casino distributions and other revenue sources);

--Quechan maintaining or increasing tribal cash reserves. Reserves can currently sustain roughly over 12 months of operations without additional casino distributions;

--Comply with the credit agreement's financial covenants. Absent compliance, either amend the minimum EBITDA and maximum leverage covenants or display a track record of having these covenants waived without significant penalties.

Negative: Future developments that in some combination could lead to negative rating action include:

--Casino level debt/EBITDA ratio exceeding 4.0x (4.5x with GO bonds) for an extended period of time;

--Tribe deviating from prudent fiscal management (e.g. increases per cap payments at expense of depleting tribal reserves);

--Tribal reserves declining to a point that the Tribe can only cover about six months of operations without casino distributions. The Tribe's cash position fluctuates seasonally (first quarter being the highest point); therefore, there is some room for dips in cash levels during the low months (summer);

--Tribe has difficulty obtaining waiver(s) for breaching financial covenants.

Fitch has affirmed the following ratings:

Quechan Indian Tribe

--Long-term IDR at 'B-';

--Tribal economic development bonds at 'B/RR3';

--Governmental Project Bonds at 'B-/RR4'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology', (May 2014);

--'2013 Outlook: U.S. Gaming (Deleveraging Potential)', (December 2013);

--'Native American Gaming Insights -- Default and Recovery Study: Mohegan the Latest Restructuring', (March 2012);

--'Native American Gaming Insights -- Off-Reservation Gaming: Three Years into the Obama Administration', (February 2012);

--'Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers', (November 2013).

Applicable Criteria and Related Research:

2013 Outlook: U.S. Gaming (Return Generation in Full Swing)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=696684

Native American Gaming Insights -- Default and Recovery Study: Mohegan the Latest Restructuring

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=674249

Native American Gaming Insights -- Off-Reservation Gaming: Three Years into the Obama Administration

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=669850

Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=721836

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=836978

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Alex Bumazhny, CFA

Director

+1-212-908-9179

Fitch Ratings, Inc.

33 Whitehall St.

New York, NY 10004

or

Secondary Analyst

Michael Paladino, CFA

Senior Director

+1-212-908-9113

or

Committee Chairperson

Megan Neuburger

Senior Director

+1-212-908-0501

or

Media Relations

Brian Bertsch, +1-212-908-0549

brian.bertsch@fitchratings.com


Source: Fitch Ratings


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