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Fitch Upgrades Quechan's IDR to 'B'; Outlook Stable
July 6, 2017 / 7:43 PM / in 3 months

Fitch Upgrades Quechan's IDR to 'B'; Outlook Stable

(The following statement was released by the rating agency) NEW YORK, July 06 (Fitch) Fitch Ratings has upgraded the Quechan Indian Tribe's (Quechan) Issuer Default Rating (IDR) to 'B' from 'B-'. In addition, Fitch has upgraded Quechan's approximately $30 million in outstanding tribal economic development bonds (TED bonds) to 'BB-/RR2' and approximately $30 million in governmental project bonds (general obligation bonds) to 'B/RR4'. The Rating Outlook is revised to Stable from Positive. 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 Fitch's upgrade of Quechan's IDR to 'B' reflects the tribe's prudent financial policies, consistent deleveraging, and more stable operating profile. Quechan has experienced material deleveraging over the last five years, driven primarily by debt paydown vis-a-vis 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, 2017 are 2.3x and 2.1x, respectively, or 3.0x and 1.9x when including the tribe's GO bonds. This is an improvement from leverage and coverage, including the GO bonds, of 4.2x and 1.5x, respectively, at the end of FY2014 (FY ends Dec. 31). Going forward, Fitch believes a relatively stable operating environment and the adjustment of per capita distributions will allow for a build-up of tribal cash reserves, consistent with the tribe's stated financial policies. Fitch projects leverage inclusive of all tribal debt declining to low-2xs by the end of 2019, despite our projection of flat revenue growth after 2017. The operating environment in the Yuma, AZ metropolitan statistical area (MSA) remains challenging, though unemployment has been slowly declining. Quechan's term loan amortizes by $11 million in FY2017 with a bullet maturity in FY2018. The TED bond and GO bonds amortize by roughly $2 million per year beginning FY2017 and FY2018, respectively. The GO bonds become callable on Dec. 1, 2017 at 102% and a comprehensive refinancing of the term loan and GO bonds could increase free cash flow through reduced annual debt service. In addition, Fitch forecasts improved EBITDA generation through the forecast period as a result of the tribe's adjusted revenue share payments to the state of California. The tribe has experienced leadership turnover during the past two years with new Presidents, Vice Presidents and tribal council members. Despite the turnover, the new leadership remains committed to continuing the previous leadership's prudent fiscal policies regarding liquidity and government spending. Fitch will continue to monitor the tribal council's policies and the potential for political turnover is reflected in the current IDR. Fitch expects unrestricted cash levels at the tribal government to increase in 2017 aided by the recent adjustment of per capita payments. The tribe intends to maintain its' cash balances at an amount that will cover 25% of annual expenditures. Fitch views the build-up of tribal reserves as a positive credit factor. TRANSACTION RATINGS Fitch views 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, 2017, coverage of debt service was at 2.1x. This mechanism allows Fitch to partially segregate the credit risk of the casino operations from the tribe, which has a weaker credit profile. (There are no cross default provisions between casino revenue backed debt and the GO bonds). However, the tribal credit profile is still heavily 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 adequate liquidity and critical governmental services. The tribe does maintain a debt service reserve fund for the benefit of the GO bonds. DERIVATION SUMMARY Quechan's 'B' IDR reflects a moderate leverage profile, relatively stable operating trends, and the tribe's maintenance of prudent fiscal policies. Steady cash flow generation at the casino enterprise level has allowed for meaningful debt paydown since 2013. The adjustment of per capita payments in 2017 with the intention to build up tribal cash reserves to cover 25% of annual expenditures is also favorable for the credit profile. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: --1% revenue growth in 2017 due to a strong first quarter, with flat growth thereafter; --EBITDA margins grow slightly in 2017 after realizing full-year benefit of the change in revenue share payments to the state of California; --Tribal distribution levels consistent with the past few years and relatively low amounts of casino capital expenditures; --The tribe refinances its credit facility and GO bonds by the end of 2017. Cash balances build at the tribal level after per capita payments are adjusted in 2017. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action Positive rating action could be considered if the tribe maintains leverage below 2x; if tribal cash reserves increase and are maintained through-the-cycle at the tribe's stated goal of providing for 25% of annual governmental expenditures; and Yuma area's economic conditions continue to improve or remain stable. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action --Casino level debt/EBITDA increasing and remaining above 3x and 3.5 including the GO bonds; --A substantial decrease in tribal reserves or a change of financial policies to maintain lower cash reserves; --The tribe failing to maintain prudent fiscal management policies (i.e. adjusting governmental spending to match casino distributions and other revenue sources). CRITERIA VARIATION Fitch utilizes the 'Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers' criteria to derive Quechan's transaction specific ratings. Fitch is identifying a variation of this criteria substantiated by the unique recovery prospects for the GO bonds, in which the GO bonds are adjusted to be on par with the IDR. LIQUIDITY Liquidity is adequate with the unrestricted cash at the tribal level commensurate with the size of the tribe and its governmental budget, though this is set to improve over the next few years. 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, as well as the credit facility covenants that limit tribal distributions based on cash flow. Quechan's nearest maturity is in 2018 for the term loan, which Fitch expects to be refinanced. FULL LIST OF RATING ACTIONS Fitch has taken the following rating actions: Quechan Indian Tribe --Long-Term IDR upgraded to 'B' from 'B-'; Outlook revised to Stable from Positive; --Tribal economic development bonds upgraded to 'BB-/RR2' from 'B+/RR2'; --Governmental project bonds upgraded to 'B/RR4' from 'B-/RR4'. Contact: Primary Analyst Joe Fontana Associate Director +1-646-582-4968 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Colin Mansfield, CFA Director +1-212-908-0899 Committee Chairperson Alex Bumazhny, CFA Senior Director +1-212-908-9179 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 10 Mar 2017) here Non-Financial Corporates Notching and Recovery Ratings Criteria (pub. 16 Jun 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here 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 WEB SITE AT 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. 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