December 2, 2016 / 4:06 PM / 8 months ago

Fitch Upgrades Seminole Tribe's IDR to 'BBB'; Outlook Stable

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(The following statement was released by the rating agency) NEW YORK, December 02 (Fitch) Fitch Ratings has upgraded Seminole Tribe of Florida's (STOF) Issuer Default Rating (IDR) to 'BBB' from 'BBB-'. Fitch has also affirmed the gaming division's parity debt at 'BBB' and the tribe's special obligation bonds at 'BBB-'. The Rating Outlook is Stable. A full list of rating actions follows at the end of this release. Fitch's upgrade of STOF's IDR reflects the diminishing uncertainty over the tribe's ability to continue offering table games and established track record of adherence to prudent financial policies. Fitch's increased confidence the tribe will maintain leverage below 2.0x (including tribal debt) through its planned development pipeline are also reflected in the IDR's upgrade to 'BBB'. The IDR also incorporates the STOF's gaming division's strong operating and financial profile. DIMINISHING REGULATORY OVERHANG The recent court ruling in favor of STOF helps to alleviate a previous overhang for the credit. Under the current compact, STOF's authority to offer table games expired in July 2015 but operations continued as usual as both sides negotiated a new compact and filed suits against each other. In November 2016, a U.S. district court found that the exception to STOF's five-year limitation to offer table games was triggered due to the state allowing another entity to offer banked table games. Therefore, the tribe has the right to offer banked table games for the compact's entire 20-year term ending 2030 at its seven locations. The state has until early December to file an appeal. Fitch feels that the risk of additional significant competition in STOF's primary markets, another historical overhang, is benign. Political momentum for passing legislature permitting large-scale casinos has cooled, since the initiative failed to gain traction after Spectrum Group's 2013 study. Additionally, Fitch believes that the recent court ruling gives STOF a greater seat at the table if the state picks back up expansion talks, since the ruling frees the tribe from making compact payments. GOVERNANCE TRACK RECORD STOF has a six-year track record of political stability while instituting sound financial policies and building reserves. STOF continues to operate the tribal government at a surplus and grow tribal cash reserves. The tribe's reserves as of Sept. 30, 2015 provide for about five months of governmental operations including per capita payments, an improvement from less than a month of operations prior to a largely new council being elected in May 2011. In September 2016, STOF tribal council removed Chairman James Billie. Subsequently, the tribe held a special election in which Marcellus Osceola, Jr. was elected. However, the October special election is being contested and a new special election is scheduled for December 29. The election results from October were close between Billie and Osceola and there were two other candidates garnering about 12% of the vote each. To Fitch's best understanding, all of the major candidates for the Chairman post in the upcoming election support the tribe's current prudent policies. In removing Chairman Billie, the council acted on a recall petition filed by tribal members. The petition cited "various issues with policies and procedures of the chairman's office." However, it is to Fitch's best knowledge that the action was not related to any improprieties that may lead to sanctions or penalties by the federal or state authorities against the tribe or its gaming operations. STRONG OPERATING AND FINANCIAL PROFILE Fitch's previous leverage threshold for STOF's 'BBB' IDR was 1.5x, including the tribal debt. However, Fitch increased STOF's leverage sensitivities by 0.5x due to the established track record of prudent financial policies and the diminishing uncertainty surrounding the tribe's ability to offer table games on a go-forward basis. The diminished probability of a large-scale expansion in STOF's markets also supports the new sensitivities. The previous leverage sensitivities were conservative due to concerns around the aforementioned issues. STOF's financial metrics including tribal debt are strong for the 'BBB' IDR. As a result of EBITDA growth and a heavy mix of amortizing debt in STOF's capital structure, STOF's total debt/EBITDA ratio as of Sept. 30, 2016 improved to 1.1x from 1.3x for the prior year's period. Excluding the tribe's special obligation bonds, leverage is 0.8x. Debt service coverage is 5.5x including the special obligations bonds and is 7.2x with gaming division debt only, both higher on a year-over-year basis. Fitch expects STOF to maintain a credit profile consistent with a 'BBB' rating through its planned development pipeline at its existing properties. There is room for leverage to exceed the 2.0x 'BBB' IDR threshold temporarily if Fitch expects leverage to decline back below 2.0x over a 12-24 month time horizon. STOF intends to expand its flagship properties, which we expect to result in additional borrowing and leverage to increase above this threshold. Fitch forecasts leverage to temporarily peak during FY2018 (fiscal year ends Sept. 30) at 2.1x before declining back below 2.0x within a 12-month time frame. Fitch views STOF's planned expansion favorably given the strength in the underlying operating environment and benefits it will provide to STOF's competitive positioning. STOF's gaming division continues to experience steady, positive operating trends compared to more flat growth seen in other U.S. gaming markets. STOF's gaming division revenues and EBITDA for the fiscal year ending Sept. 30, 2015 both grew by 4% on a year-over-year basis. STOF has sizable gaming operations in two distinct, populous Florida markets and benefits from having no competition in Tampa and limited competition in southeast Florida. KEY ASSUMPTIONS --STOF maintains table game operations and pays a slightly higher compact fee percentage under a newly renegotiated compact; --Low single-digit revenue and EBITDA growth with more notable upticks in years when Tampa and Hollywood projects open; --Tribal distributions and casino maintenance capex levels consistent with the past few years; --Debt paydown follows the amortization schedule. New debt to fund expansion and refinance the incremental term loan maturing in 2017 amortizes at a similar rate. RATING SENSITIVITIES Fitch does not anticipate additional upward rating momentum in the near term. However, further upward rating momentum is possible and would be consistent with STOF adopting and broadly articulating more conservative leverage targets to its creditors. Fitch believes that 1.5x total debt/EBITDA is consistent with a 'BBB+' IDR given STOF's operating profile. When considering an upgrade, Fitch would also consider the tribe's governmental financial policies and established reserves as well as the regulatory environment vis-a-vis the compact and the potential for new competition. Negative: Future developments that may, individually or collectively, lead to a Negative Outlook or a downgrade in the IDR to 'BBB-': --Leverage increasing above 2.0x for extended period of time (longer than 24 months) due to operating pressure or incremental borrowing. There is capacity in the ratings for leverage to increase slightly above 2.0x in conjunction with expansion-related financing if Fitch expects STOF to deleverage back to below 2.0x within 12-24 months; --A decline in the tribe's reserves related to operating pressure on the gaming division and/or the tribe running deficits. LIQUIDITY STOF's liquidity is strong with considerable cash balances at the governmental and the gaming division levels. The nearest maturity is the incremental term loan in 2017, at which point a $237 million balloon will be remaining. STOF could also look to refinance the 2005B gaming division bonds, which become callable around the same time. STOF's gaming division maintains modest positive free cash flow (FCF) after tribal distributions, which it uses for debt reduction, capex or to grow cash balances. The tribe operates the government at a surplus and cash balances have been growing since 2011. Outside of gaming, the tribe also receives dividends from its Hard Rock International business. TRANSACTION-SPECIFIC RATINGS Fitch rates the gaming revenue debt on par with the IDR and the special obligation bonds a notch below the IDR. Fitch had historically rated STOF's gaming revenue bonds & term loans one notch above the IDR to reflect their seniority in the casino revenue trustee guided waterfall and other additional security features. However, Fitch compresses issue-specific ratings as entities move up the ratings scale. The special obligations bonds' notching below the IDR reflects their subordinated position in the flow of funds relative to the gaming revenue debt. FULL LIST OF RATING ACTIONS Fitch upgrades the following rating: Seminole Tribe of Florida --IDR to 'BBB' from 'BBB-'; Outlook Stable. Fitch affirms the following ratings: --$175 million gaming division bonds, series 2005B to at 'BBB'; --$566 million term loan B due 2020 at 'BBB'; --$277 million incremental term loan B due 2017 at 'BBB'; --$335 million special obligation bonds, series 2007A&B at 'BBB-'; --$46 million special obligation bonds, series 2008A at 'BBB-'. 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 John Culver, CFA Senior Director +1-312-368-3216 Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com. Date of Relevant Rating Committee: Dec. 1, 2016 Additional information is available on www.fitchratings.com. 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