Fitch Ratings has downgraded and placed the following ratings of The Quechan Tribe of the Fort Yuma Indian Reservation (Quechan) on Rating Watch Negative:
--Issuer Rating to 'CCC' from 'B+';
--$110 million Gaming Enterprise revenue bonds series 2008 to 'CCC+' from 'BB-';
--$45 million Governmental Project bonds series 2007 (Tax-Exempt) to 'CCC' from 'B+'.
Quechan is currently constructing a replacement facility for its current California casino. The downgrade and the placement of the ratings on Watch Negative reflects the inability of the tribe to secure $25 million in external completion financing to fund the remainder of the $214 million total project cost. The gaming enterprise bond indenture requires the tribe to secure $25 million in completion financing for the project, to be funded either from an external source or by an equity contribution from the tribe.
Due to adverse market conditions, the tribe has not been able to secure the financing externally. As a result, a project fund deficiency is occurring under the gaming enterprise bond indenture, which has triggered the occurrence of a project fund funding event. In order to cure the project fund funding event, the tribe must either deposit $25 million in the project fund, or must fund the deficiency amount of $25 million in six equal monthly installments of $4.2 million. The tribe has elected to begin to fund the deficiency over six months while continuing to attempt to secure external financing. The first monthly installment of $4.2 million was contributed last week using the funds of the tribal government.
If the project fund deficiency does not continue to be remedied on a timely basis, there is the potential for disruption of project construction as distributions from the project fund to the contractor could be delayed. In addition, in the event the tribe must continue to fund the project fund deficiency from cash on hand, Fitch is concerned the tribe will violate covenants of the governmental project bond indenture, which requires the maintenance of an unrestricted net asset balance at the tribal government equal to at least 125% of the principal amount of long-term indebtedness outstanding that does not have a security interest in the cash flows of the casino operation (only the series 2007 governmental project bonds at this time). The unrestricted net asset balance is required to be certified to the governmental project bond trustee by the tribe within 45 days after the end of each fiscal quarter. If this covenant is violated, the tribe will be required to fund the contingent reserve account in an amount equal to 100% of the outstanding par amount of the 2007 bonds.
At present, Quechan is meeting its financial commitments in that it is covering debt service charges from the cash flows of its existing casino operations and funding the project fund deficiency from cash on hand at the tribal government. However, in the event external funding cannot be secured for the completion financing, the tribe likely will become unable to meet its financial commitments in that it will not have sufficient cash on hand to fund both the project fund deficiency and the contingent reserve account requirement. Failure to fund the contingent reserve within 90 days after violation of the unrestricted net asset test will result in an event of default on both series of bonds, as cross default provisions exist. In an event of default, bondholders would have the ability to declare all outstanding principal immediately due and payable. If an event of acceleration were to occur, Fitch believes it is likely that a payment default would result.
The downgrade of the ratings to the 'CCC' category reflects Fitch's view that a real possibility of payment default exists at this time. If the tribe faces a liquidity crisis due to its inability to secure external financing to complete the casino project, maintenance of the ratings in the 'CCC' category may depend upon the ability of the tribe to negotiate with bondholders to avoid the occurrence of an event of acceleration, possibly by obtaining covenant waivers. A downgrade to the 'CC' category would reflect Fitch's view that a payment default has become probable.
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