News Column

Fitch Affirms Agua Caliente's IDR at 'BB', Rev Bonds at 'BB+'; Stable Outlook

August 13, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed the Agua Caliente Band of Cahuilla Indians' (Agua Caliente) Issuer Default Rating (IDR) at 'BB'. Fitch has also affirmed Agua Caliente's gaming revenue bonds at 'BB+'. The Rating Outlook is Stable. A full list of rating actions follows at the end of this press release.

KEY RATING DRIVERS

The affirmation of Agua Caliente's IDR at 'BB' reflects the tribe's strong balance sheet, the tribe's continued commitment to a sustainable tribal per capita distribution policy, stable operating profile and a level of diversification relative to other Native American gaming issuers.

Agua Caliente's credit metrics are solid. For the last 12-month (LTM) period ending March 31, 2014, debt/EBITDA and EBITDA/debt service ratios are at 1.8x and 2.9x, respectively. Fitch expects the debt/EBITDA ratio to decline to or below 1.3x by fiscal year ending Sept. 30, 2016 with interim debt amortization being the main catalyst for the improvement. Debt service coverage will remain at around 3x increasing closer to 4x by fiscal 2016 as a meaningful tranche of debt matures in October 2015 resulting in a material decline in annual debt service. At that time, credit metrics will be more consistent with the higher end of the 'BB' rating category. Agua Caliente has no plans to issue additional debt although the tribe's compact permits a third casino.

Agua's revenues have been steadily recovering since bottoming in 2011. The positive revenue trends have continued into 2014 despite the recent generally weak trends across U.S. regional gaming markets. Fitch expects Agua's operating performance to remain stable, supported by improving employment and real estate markets in its primary Inland Empire market. The employment levels in the Riverside-San Bernardino metro area in June 2014 are up 2% from the same period in prior year and up 8% since 2009. Federal Housing Finance Agency's housing index for the area is up 17% in January 2014 on a year-over-year basis and is up 33% from the trough level reached in early 2012. Economic conditions remain fragile with unemployment and foreclosure rates exceeding national averages.

The rating reflects Fitch's comfort with respect to the tribe's commitment towards prudent tribal financial policies. Previously, Fitch was concerned that the tribe was depleting its reserves, which were being used to supplement per capita payments when casino distributions declined during the downturn. Starting 2011, the tribe reduced per capita payments in an effort to stabilize the reserves and according to management has maintained or grown reserves since then. Fitch is unable to verify the tribal reserves since the tribe does not share its governmental financials and the management is somewhat opaque when discussing the tribe's financial health. Fitch views this lack of disclosure as a credit negative.

Debt Structure and Liquidity

All of Agua Caliente's debt is pari passu with respect to bondholders' security interest in the cash flows of the tribe's casino gaming operations. The 2003 bonds have the benefit of a fully funded trustee held debt service reserve fund. There are also reserve accounts established for the 2006 and 2007 notes but the tribe can access these funds between quarterly deficiency test dates.

There is a financial maintenance coverage covenant set at 2.0x of maximum annual debt service (MADS). A breach of the covenant would be an event of default. However, Fitch considers this threshold to be high relative to the agency's rated universe, so obtaining a waiver or an amendment in case of a breach would not be difficult, in Fitch's view.

There is also an additional debt test limiting debt issuance if pro forma MADS coverage is less than 2.25x or leverage exceeds 3.0x. There is a $20 million carveout for additional debt. The tribe's limited capacity to issue pari passu debt supports strong recovery prospects for the bonds in an event of default and the one notch positive differentiation from the IDR.

The tribe is required to make mandatory sinking fund payments with respect to the debt outstanding, so there is low refinancing risk. Cash at the casinos just meets cage cash and day-to-day operating needs with the bulk of the tribe's cash kept at the governmental level. Fitch believes that the tribe's reserves remain sizable but is not able to verify. The tribe does not have access to external liquidity, such as a revolving credit facility.

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

--EBITDA/debt service exceeding 4.0x;

--Debt/EBITDA levels falling below 1.5x;

--Increased disclosure of the tribe's financials;

--Continued improvement in the operating environment.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

--EBITDA/debt service falling below the 2.5x;

--Debt/EBITDA levels moving towards 3.0x;

--Undertaking of a large scale project or sharp operating declines leading to sizable deterioration in the credit metrics;

--Tribe straying away from its more prudent fiscal practices (i.e. depleting reserves).

Fitch affirms the following ratings:

Agua Caliente Band of Cahuilla Indians

--IDR at 'BB';

--Senior secured notes due 2015, 2016 and 2021 at 'BB+';

--Revenue bonds due 2018 at 'BB+'.

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

Applicable Criteria and Related Research:

--'Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 28, 2014);

--'2014 Outlook: U.S. Gaming (Deleveraging Potential)' (Dec. 16, 2013).

Applicable Criteria and Related Research:

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

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

2014 Outlook: U.S. Gaming (Deleveraging Potential)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=726622

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=850495

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, Inc.

Primary Analyst

Alex Bumazhny, CFA, +1-212-908-9179

Director

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Michael Paladino, CFA, +1-212-908-9113

Senior Director

or

Committee Chairperson

Shalini Mahajan, +1-212-908-0351

Senior Director

or

Media Relations

Brian Bertsch, +1-212-908-0549

brian.bertsch@fitchratings.com

Source: Fitch Ratings


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