Fitch Affirms Quechan’s IDR at ‘B-‘; Outlook to Positive


(The following statement was released by the rating agency) NEW YORK, July 07 (Fitch) Fitch Ratings has affirmed Quechan Indian Tribe’s (Quechan; the tribe) Issuer Default Rating (IDR) at ‘B-‘. In addition, Fitch has affirmed Quechan’s approximately $30 million in outstanding tribal economic development bonds (TED bonds) due 2025 at ‘B+/RR2’. Fitch has also affirmed Quechan’s $30 million in governmental project bonds (general obligation bonds) at ‘B-/RR4’. The Rating Outlook is revised to Positive from Stable. The tribe also has a credit facility that ranks pari passu to the TED bonds, which Fitch does not rate, that is comprised of a $102 million term loan and a $5 million revolver. KEY RATING DRIVERS The Positive Outlook reflects Fitch’s expectations that Quechan’s leverage metrics will decline below Fitch’s thresholds for a ‘B’ IDR within the next 12-24 months. Quechan has deleveraged over the last two years, primarily due to the heavy amortization of the term loan. Quechan’s casino enterprise’s debt/EBITDA and EBITDA/debt service ratios for the latest 12-month (LTM) period ending March 31, 2016 are 2.8x and 1.8x, respectively, or 3.7x and 1.6x when including the tribe’s GO bonds. Fitch will look for leverage through the GO bonds to sustain below 3.5x before considering an upgrade. Fitch projects leverage declining below this threshold by the end of 2016, despite our projection of low single-digit declines in revenue for Quechan’s fiscal year 2016 ending Dec. 31. The operating environment in the Yuma, AZ metropolitan statistical area (MSA) remains challenging, though unemployment has been slowly declining. Liquidity at the tribal level is adequate and cash & short-term investment balances provide for approximately seven months of estimated governmental services, including per capita payments. Available liquidity on the casino side is minimal but adequate for operating needs when taking into account the healthy free cash flow (FCF) at the casino enterprise before distributions to the tribe, which are restrained by the credit facility covenants. Quechan’s only near-term maturity is the modest revolver amount outstanding in 2018; however, the tribe has $11 million – $14 million of term loan amortization per year until the term loan matures in 2022. Total principal payments ramp up towards $16 million around 2018 after the amortization on the TED and GO bonds starts (TED bonds begin in 2017). Fitch forecasts relatively stable EBITDA generation through the forecast period and for Quechan’s EBITDA/debt service ratio (including the GO bonds) to also remain stable around 1.6x. While Fitch forecasts Quechan’s liquidity to remain stable, there is little headroom for deterioration in casino operating performance in terms of the casino transfers being able to cover the tribe’s governmental budget. A new President and Vice President were elected to the tribal council in mid-2015. The new leadership appears to hold the prior leadership’s commitment to maintaining its liquidity and prudent government spending. TRANSACTION RATINGS Fitch views the 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, 2016, coverage of debt service was at 1.8x. (There are no cross default provisions between casino revenue backed debt and the GO bonds). The tribal credit profile is still 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 critical governmental services. The tribe does maintain a debt service reserve fund for the benefit of the GO bonds. KEY ASSUMPTIONS Fitch’s key assumptions within its rating case for the issuer include: –Fitch projects low single-digit revenue declines reflecting continued weakness in the Yuma, AZ operating environment. –EBITDA margin remains steady as more efficient cost strategy is implemented. –No new debt issued and term loan repayment through the scheduled amortization payments. –Tribal distribution levels consistent with the past few years and relatively low amounts of casino capital expenditures. RATING SENSITIVITIES 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. Negative: Future developments that in some combination could lead to negative rating action include: –A depletion of tribal reserves as a result of the tribe deviating from prudent fiscal management, such that governmental expenses (including per cap payments) are not commensurate with the casinos’ cash flow generation and debt service obligations; –Casino level debt/EBITDA ratio exceeding 4.0x (4.5x with GO bonds) for an extended period of time. FULL LIST OF RATING ACTIONS Fitch has taken the following rating actions: Quechan Indian Tribe –Long-term IDR affirmed at ‘B-‘; Outlook revised to Positive from Stable; –Tribal economic development bonds affirmed at ‘B+/RR2’; –Governmental Project Bonds affirmed at ‘B-/RR4’. Contact: Primary Analyst Colin Mansfield, CFA Associate Director +1-212-908-0899 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Alex Bumazhny, CFA Senior Director +1-212-908-9179 Committee Chairperson Megan Neuburger, CFA Managing Director +1-212-908-0501 Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: [email protected]. Date of Relevant Rating Committee: July 6, 2016 Additional information is available on Applicable Criteria Corporate Rating Methodology – Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015) here Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (pub. 05 Apr 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1008546 Solicitation Status here Endorsement Policy here ail=31 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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. 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