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Fitch Rates Seminole's Senior Secured Credit Facility 'BBB'; Affirms IDR
June 15, 2017 / 12:38 PM / 5 months ago

Fitch Rates Seminole's Senior Secured Credit Facility 'BBB'; Affirms IDR

(The following statement was released by the rating agency) NEW YORK, June 15 (Fitch) Fitch Ratings has assigned a 'BBB' rating to Seminole Tribe of Florida's (STOF) gaming division's announced senior secured credit facility consisting of a $500 million revolver, $700 million term loan A, and $1.2 billion term loan B. The proceeds will be used to refinance the existing term loans, fund the planned expansions at the Tampa and Hollywood properties, and for general corporate purposes. Ftich has affirmed STOF's Issuer Default Rating (IDR) at 'BBB' and all existing issue-specific ratings. The Rating Outlook is Stable. A full list of the rating actions follows at the end of this release. KEY RATING DRIVERS CREDIT PROFILE REMAINS STRONG Pro forma for the refinancing, Fitch expects STOF's gross leverage, including tribal debt, to remain within its sensitivities for 'BBB' through the development phase of its Tampa and Hollywood expansions. The overall leverage trajectory will be eased by a $500 million portion of the term loan A being delayed draw. Fitch forecasts leverage including tribal debt to peak at 1.9x during FY 2018 (fiscal year ends Sept. 30) and to improve thereafter through EBITDA growth and term loan amortization (10% per year). Pro forma total leverage including tribal debt and excluded the delayed draw is 1.5x, compared to 1.1x as of March 31, 2017. Fitch has a 2.0x negative sensitivity at the 'BBB' level; however, there is some 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. 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 last 12 months ending March 31, 2017 were flat and grew by 1% on a year-over-year basis, respectively. Revenues have been temporarily impacted by construction disruption at Tampa since the fall of 2016 but have grown in the mid-single digit range consistently since 2011. 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. DECEMBER 2016 UPGRADE Fitch upgraded STOF's IDR to 'BBB' from 'BBB-' in December 2016, reflecting the diminishing uncertainty over the tribe's ability to continue offering table games and established track record of adherence to prudent financial policies. The upgrade also reflected Fitch's increased confidence that the tribe will maintain leverage below 2.0x (including tribal debt) through its planned development pipeline. The tribe has been party to a number of favorable court rulings in the past year. STOF's authority to offer table games under its existing compact expired in July 2015, but table operations continued as the tribe and the state 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 is appealing the decision. Fitch believes the risk of additional significant competition in STOF's primary markets, another historical overhang, is benign. In May 2017, the Florida Supreme Court's ruled against the ability of individual counties' conducting voter referendums to determine slot expansions. 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 rulings 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 track record of instituting sound financial policies, including operating tribal government with a surplus. The tribe's reserves as of Mar. 31, 2017 provide for about six 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. A new chairman was elected in December 2016, Marcellus Osceola, Jr., who continues to support the tribe's prudent fiscal policies. The tribe may use part of its cash reserves to repay its special obligation bonds and to fund certain tribal capital improvements. Tribal reserves could decline to about two months of operations but the tribe remains committed to rebuilding cash reserves to cover nearly a full year of operations over the medium term. Fitch views further reduction in tribal debt favorably as well as the commitment to building liquidity at the tribal level, further supporting STOF's credit profile. DERIVATION SUMMARY Fitch's rating reflects STOF's steady, positive operating trends as well as its strong, competitive position in the Florida gaming market. STOF's 'BBB' IDR considers Fitch's expectation for STOF to maintain a credit profile consistent with a 'BBB' rating through its planned development pipeline at its existing properties. KEY ASSUMPTIONS --STOF maintains table game operations and continues to pay compact fee percentages as defined under the current compact; --Low single-digit revenue and EBITDA growth with more notable upticks in years when Tampa and Hollywood projects open; --Recurring tribal distributions and casino maintenance capex levels consistent with the past few years; --Free cash flow is negative from 2017 - 2019 due to development capex, but returns to more normalized, positive levels in 2020 after the Tampa and Hollywood projects are complete. 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 pro forma for the recent transactions. STOF could also look to refinance the 2005B gaming division bonds, which become callable at the end of 2017. Fitch expects negative free cash flow throughout the forecast period as capex rises due the Hollywood and Tampa expansion projects. STOF's maturity schedule is more manageable with no debt maturing until 2020 and the new $500 million revolver provides additional liquidity. STOF did not previously maintain a revolver. FULL LIST OF RATING ACTIONS Fitch has assigned the following ratings: Seminole Tribe of Florida --$500 million senior secured revolver 'BBB'; --$700 million senior secured term loan A 'BBB'; --$1.2 billion senior secured term loan B 'BBB'. Fitch has affirmed the following ratings: --IDR at 'BBB'; Outlook Stable; --Gaming division bonds, series 2005, at 'BBB'; --Term loan B due 2020 at 'BBB'; --Incremental term loan B due 2017 at 'BBB'; --Special obligation bonds, series 2007A&B, at 'BBB-'; --Special obligation bonds, series 2008A ,at 'BBB-'. Contact: Primary Analyst Colin Mansfield, CFA 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 Carla Norfleet Taylor, CFA Senior Director +1-312-368-3195 Summary of Financial Statement Adjustments - --Adjustment of deferred bonuses added back to EBITDA calculation; --Tribal debt included in gross leverage calculations. Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com. Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. 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