In the course of routine surveillance, Fitch Ratings affirms the Cherokee Nation, Oklahoma's $23.6 million health care system bonds, series 2006 at 'BBB-'. The bonds are secured by a gross lien on third party health system revenues and a full faith and credit pledge of the Cherokee Nation (the Nation). The Rating Outlook is Stable.
The 'BBB-' primarily reflects strong financial operations of the health system providing ample debt service coverage, the successful completion and integration of bond-funded health facility projects, and solid legal provisions supported by a lock box mechanism and daily cash sweep of pledged revenues. Tempering these credit strengths is the overall weakening in the economy which could pressure pledged health system revenues and will most certainly weaken casino operations, the dividends from which support almost half of the Nation's general government budget. The rating further reflects the Nation's revenue diversity relative to other gaming tribes. Key rating drivers include health care revenues continuing to outperform projections and the maintenance of high debt service coverage, resulting in no reliance on general government support.
The bonds are secured by a gross lien on third party payor revenues of the Nation's health care system, including Medicaid, Medicare and private insurance company payments. Pledged revenue coverage of maximum annual debt service (MADS) is high at 6.7 times (x) in fiscal 2008, which is well ahead of original projections due to the buyback of a portion of the 2006 bonds and to management's efforts to qualify patients for third-party insurance coverage. Debt service coverage on an EBITDA basis for fiscal 2008 was also strong at 4.0x. Series 2006 bond proceeds funded the construction of two health care clinics and an annex to an existing clinic. Projects were completed close to schedule and within budget. The Nation's health care system serves an eligible patient population of approximately 179,000 within its fourteen county jurisdictional area. Patient visits totaled about 325,000 in fiscal 2008, up from 305,000 in 2006.
Security provisions are strong and include the requirement that the Nation comply with a rate covenant requiring health care system revenues net of operations and maintenance (including revenues from the federal government under grant programs, which are not pledged to bondholders) equal to 1.25x MADS. Issuance of parity bonds requires that net revenues for the two fiscal years immediately proceeding issuance of the bonds equal at least 1.15x MADS on the series 2006 and proposed debt issuance. No additional issuance is currently planned.
The Nation's primary revenue source is derived from its gaming operations. In fiscal 2008 the dividend paid by Cherokee Nation Enterprises, LLC (CNE), which operates its gaming facilities, comprised 45% of general fund revenues. According to tribal policy, CNE transfers 30% of its net income to the tribe annually. Diversification of the revenue stream supporting general government services is provided by the collection of motor fuel, tobacco and motor vehicle taxes. The Nation maintains ample general fund reserves, equal to over 100% of expenditures and transfers out based on unaudited fiscal 2008 results. Although the impact of poor macro economic trends on consumer discretionary spending was muted in 2008 in Oklahoma's regional gaming markets relative to most other gaming markets nationally, Fitch believes the subsequent collapse of commodity prices and deepening recessionary conditions will more heavily impact the Tulsa regional economies in 2009.
The Nation is the second largest federally recognized tribe with approximately 284,000 enrolled members and a tribal jurisdictional area consisting of 9,234 square miles of trust land located over 14 counties in northeastern Oklahoma. The Nation has a tripartite government operated pursuant to a tribal constitution. The executive branch of the Nation is led by the Principal Chief, who is elected at large for a four year term.
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Megan Neuburger, 212-908-0501
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