The Rating Outlook is Stable.
The tribe in 2013 refinanced all of its
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
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
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
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
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
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.
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
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.
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:
--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'.
--'Corporate Rating Methodology', (
--'2013 Outlook: U.S. Gaming (Deleveraging Potential)', (
--'Native American Gaming Insights -- Default and Recovery Study: Mohegan the Latest Restructuring', (
--'Native American Gaming Insights -- Off-Reservation Gaming: Three Years into the
--'Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers', (
2013 Outlook: U.S. Gaming (Return Generation in Full Swing)
Native American Gaming Insights -- Default and Recovery Study: Mohegan the Latest Restructuring
Native American Gaming Insights -- Off-Reservation Gaming: Three Years into the
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
Alex Bumazhny, CFA
Source: Fitch Ratings
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