Fitch Ratings upgrades approximately $1.74 billion of Seminole Tribe of Florida's (STOF) outstanding gaming division bonds and term loans to 'BBB-' from 'BB+' and approximately $528 million of STOF's special obligation bonds to 'BB+' from 'BB'. STOF's Issuer Default Rating (IDR) is also upgraded to 'BB+' from 'BB'. The Rating Outlook is Stable.
The upgrade of STOF's ratings reflects Fitch's increased level of comfort about the tribe's governance practices since the agency downgraded all of STOF's ratings out of investment grade in June 2010. The 'BB+' IDR is still being weighed down somewhat by the lack of an established track record of prudent governance practices at the tribal level in the context of concerns surrounding STOF's leadership history. Other concerns being incorporated into the IDR include:
--The expiration of the tribe's authority to operate table games in 2015;
--Possible legalization of expanded gaming in Florida (next session starts early 2013);
--The need to address the term loan bullet coming due March 2014, and
--Gaming division management's employment contracts expiring May 2013.
Longer-term, STOF's operating profile can support an investment grade IDR. Further reduction in debt levels through amortization and/or expansion of the gaming division's cash generation can expedite an upgrade to 'BBB-'.
STOF's 'BB+' IDR, which is among the highest in Fitch's Native American gaming universe, is largely supported by the gaming division's:
--Strong competitive position in southeast Florida and monopoly in the Tampa area;
--Considerable market/geographic diversification relative to other tribal gaming credits;
--Solid credit metrics.
GOVERNANCE
The downgrade in 2010 followed an issuance of a Notice of Violation (NOV) letter to the tribe by the National Indian Gaming Commission (NIGC). The NOV cited the tribe's failure to comply with the tribe's own bylaws and the Indian Gaming Regulatory Act (IGRA) with respect to allocating gaming related revenues.
Since the downgrade, STOF has cured all of the violations cited in the NOV and has entered into a Civil Fine Assessment (CFA) agreement with the NIGC. The tribe agreed to pay a $500,000 fine and agreed to undergo three annual audits of its adherence to the use of net gaming revenue provisions. So far the tribe completed two clean audits. Importantly, STOF canceled its tribal council's discretionary accounts, which historically increased the risk of mismanaging gaming revenues with respect to RAP compliance.
Fitch views positively STOF's recent dedication to building and maintaining cash and investment reserves at the tribal level. Relative to the time of the downgrades, Fitch is less concerned about the tribe's governance issues interrupting the gaming operations or the flow of funds that secures the rated debt.
Due to the tight trustee controlled flow of funds, interruption in debt service payments can only be caused by fraud at the gaming division or trustee level or by the closure of the casinos by regulators. (Flow of funds can also be shutoff prior to the special obligation debt service being paid if debt service coverage at the gaming enterprise declines below 2 times [x]). The tribe covenants to maintain fidelity insurance to protect against the possibility of fraud occurring that may prevent gaming revenues from entering the trustee waterfall.
Closure risk is also manageable within the context of the ratings. Fitch is aware of only ten Closure Orders from the NIGC and most were triggered by tribes operating casinos without a compact. There is one instance of a closure due to a leadership dispute and another due to failure to maintain proper records and conduct proper background checks.
OPERATING PROFILE
The tribe operates six major casinos throughout the state of Florida, including two flagship Hard Rock branded properties in Tampa and Hollywood. STOF recently expanded its casino in Coconut Creek adding 700 slot machines, 34 table games, a new parking structure and additional amenities. The Tampa Hard Rock is also undergoing an expansion which will add 750 new slots and a 1,200 space parking structure by the end of this June.
STOF's gaming division operating performance has been resilient through the 2008-2009 recession and the period of heavy expansion of slot machines at the pari-mutuel facilities in the Miami-Dade and Broward Counties (mostly in late 2006/early 2007 and late 2009/early 2010). The resiliency can be largely attributed to STOF's strong market position and the conversion to Class III slots and addition of table games starting 2008. Gaming division's revenues exhibited strong uninterrupted growth over the last five years with the exception of fiscal 2010, when revenues were flat.
Per the 2010 compact with the state, the tribe has exclusivity to Class III slots outside of Miami-Dade and Broward Counties through 2030. Table game exclusivity applies to the entire state but the tribe's authorization and exclusivity to operate table games expires in 2015 unless renewed.
COMPETITION
At present competition is limited to six pari-mutuel facilities that offer Class III slots - three in Broward County and three in Miami-Dade County. Each facility is permitted to operate 2,000 slot machines and there were 6,389 slot machines in aggregate at these facilities as of May 2012. Two more facilities can potentially open slot operations, including Dania Jai-Alai near Ft. Lauderdale and Hialeah Park in Miami.
The pari-mutuels are at a competitive disadvantage relative to STOF since they are taxed at 35% compared to STOF's 12% (on the first $2 billion of revenue), do not offer table games and are mandatorily non-smoking. The tax rate was reduced to 35% from 50% in 2010 when STOF's compact was ratified.
A more significant competitive threat is the possibility of the state legislature expanding gaming in the state. In 2011, two nearly identical bills were filed proposing three integrated casino resorts in Broward and Miami-Dade Counties. The minimum investment was set at $2 billion and the tax rate was initially proposed at 10%. Prior to going to committee in the 2012, session the bills were pulled due to lack of support. However, Fitch expects similar proposals in the 2013 session (starts March) since the initiative is heavily lobbied for by commercial operators, especially Genting Malaysia Berhad, which has purchased substantial prime land in Miami for a mixed-use development.
Fitch believes there is a low likelihood that the integrated resort proposal passes in the near-term since it faces heavy opposition from STOF, the pari-mutuels, the Orlando theme-park companies and other interest groups. If it eventually passes, Fitch expects the impact on STOF's financial profile will be manageable. Per the compact agreement, STOF would be able to stop making the compact fee payments from its Broward County casinos (Hollywood Hard Rock and the non-branded casinos in Hollywood and Coconut Creek) which account for about half of the gaming division's revenues. Other facilities in Immokalee, Tampa and Brighton would not be directly impacted.
CREDIT METRICS AND LIQUIDITY
The gaming division's credit metrics remain strong and are expected to improve as the tribe's debt amortizes and expansions at Coconut Creek and Tampa ramp up. STOF's leverage measured as total debt (including special obligation bonds) divided by the gaming division's LTM March 31, 2012 EBITDA is 2.1x. Scheduled principal amortization and interest coverage by EBITDA is 3.9x (4.9x for the gaming division debt only) for the same period.
There is some room in the ratings for modest deterioration in the credit metrics driven by mild recessionary pressures or additional borrowing for capital projects. At some point, Fitch expects that STOF may seek to further expand its Hard Rock branded properties in Tampa and Hollywood, as well as its Coconut Creek facility.
Cash levels are adequate at the casino and on the tribal government side to absorb a minor cash flow shock. However, STOF does not have a revolving credit facility and the total available liquidity is limited. About half of STOF's debt is self-amortizing but the tribe does have a $736 million term loan bullet that is due in March 2014. Also $367 million in outstanding gaming division bonds issued in 2010 come due in 2017. The looming term loan maturity is a concern that is factored into the ratings.
SECURITY SPECIFIC RATINGS
The one notch differential on the gaming division debt (includes the bonds and the term loan) relative to the IDR and the investment grade rating reflects:
--The additional debt incurrence test of 3.5x leverage for the senior lien gaming division debt (4.5x for total gaming division debt) and gaming division maximum annual debt service (MADS) coverage by EBITDA test of 3.0x. For covenant purposes, MADS is calculated by spreading bullet maturities over six years.
--The gaming division seniority in the casino revenue trustee guided waterfall relative to the special obligations bonds.
--The gaming division debt holders' ability to shut off the flow of funds at the gaming division level before distributions into the Governmental Distribution Fund are made if MADS coverage by EBITDA goes below 2x (3.4x as of March 31, 2012). Money retained in the waterfall would go towards redeeming the gaming revenue debt with some carveouts for payments to the tribe to maintain critical governmental operations.
The special obligation bonds only have recourse to the funds available in the Governmental Distribution Fund so there is risk that the debt service on these bonds will not get paid if MADS coverage goes below 2x on the gaming side. The special obligation bondholders do not have recourse to the tribe outside of the cash in the Governmental Distribution Fund, which receives the flow of funds monies through a trustee after the gaming division debt is paid. Money is released to the tribe from the Governmental Distribution Fund once the debt service on the special obligation bonds is paid.
The special obligation bonds' indenture has an additional debt incurrence covenant stipulating that pari passu debt cannot exceed 15% of Available Revenues.
Fitch upgrades the following ratings:
Seminole Tribe of Florida
--IDR to 'BB+' from 'BB';
--$367 million gaming division bonds, series 2010A&B to 'BBB-' from 'BB+';
--$412 million gaming division bonds, series 2005A&B to 'BBB-' from 'BB+';
--$889 million term loan to 'BBB-' from 'BB+';
--$435 million special obligation bonds, series 2007A&B to 'BB+' from 'BB';
--$94 million special obligation bonds, series 2008A to 'BB+' from 'BB'.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 12, 2012);
--'Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers' (May 3, 2012);
--'Fitch Affirms Ratings on Seminole Tribe of Florida's Debt; Assigns 'BB' IDR' (June 30, 2011);
--'2012 Outlook: Gaming' (Dec. 13, 2011);
--'Credit Analysis: Seminole Tribe of Florida (Sept. 4, 2008).
Applicable Criteria and Related Research:
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=677740
2012 Outlook: Gaming -- Market Exposure the Differentiating Factor
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=658770
Credit Analysis: Seminole Tribe of Florida
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=399630
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229
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