Fitch Affirms San Manuel Entertainment Authority's (CA) Issuer Rating at 'BBB-'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed San Manuel Entertainment Authority's (SMEA) credit ratings as follows:

--Issuer Rating at 'BBB-';

--$110 million gaming project bonds, series 2004A at 'BBB';

--$15.1 million gaming project bonds, series 2004B at 'BBB';

--$48.2 million public improvement bonds, series 2004C at 'BBB'.

The Rating Outlook is Stable.

SMEA's 'BBB-' Issuer Rating is primarily supported by the strong financial profile of the credit. Its highly profitable casino, the San Manuel Indian Bingo and Casino, is the main economic driver and primary source of cash flows of the San Manuel Band of Serrano Mission Indians (the tribe). The property benefits from a favorable location in the highly competitive Southern California gaming market. Located near Highland, CA, immediately outside of San Bernardino and 65 miles east of Los Angeles, there are no other tribal governments with reservation lands approved for gaming purposes between SMEA's property and the Los Angeles area. The tribe has conducted gaming on its reservation lands since 1986. Since the opening of the current facility in early 2005, the operation has produced very strong cash flow, resulting in credit metrics that are strong for the rating category.

The primary credit concern constraining SMEA's Issuer Rating to low investment grade is the business risk inherent in its single-site casino operation, which is prone to event risk and is highly dependent upon a single market area in San Bernardino, a region that has been significantly affected by the current economic downturn. Fitch believes the southern California gaming market will remain soft for the next six to 12 months. California's Inland Empire is still plagued by heavy levels of foreclosures, which in the near term should suppress growth in the housing related jobs, a major economic driver for the area prior to the housing market collapse. According to RealtyTrac, there were 40,998 foreclosures (about 3% of the households) filed in Riverside-San Bernardino metropolitan statistical area (MSA) during the first quarter of 2010 (1Q'10), which is a 19% decline on year-over-year basis and a 4% increase from the previous quarter. The unemployment rate for the Riverside-San Bernardino MSA of 13.9% for May 2010 far exceeds the national average (9.7% in May) but is below the high of 15% reached in 1Q'10.

Additional credit concern centers on Fitch's relatively limited access to the finances of the tribal government. While Fitch is not permitted to keep copies of the audited financial statements of the tribal government, it is provided with copies of audited financial statements for the casino operation and is permitted to view the annual governmental audit in the presence of SMEA management.

Despite the poor outlook for the forward operating trend in the regional gaming market, the Stable Rating Outlook reflects the strong financial profile of the SMEA credit. While many other casino properties in the region exhibited double digit revenue declines in 2008 and 2009, SMEA's revenue grew in 2008 in response to additional slot machines being installed and revenue declined only modestly in 2009. Through March 31, 2010 latest 12 month (LTM) revenue is down by 6% over the prior year period. The firm top-line performance throughout the recession is reflective of SMEA's protected market area and closer proximity to major Southern California urban areas relative to other facilities. SMEA, with a high focus on the locals market, also has a more limited exposure to non-gaming operations, which tend to be more cyclical than gaming. SMEA's EBITDA declines have been more severe mainly due to the higher fees paid to the state under the 2008 compact and, more recently, due to its heavier promotional and advertising spending. Through March 31, 2010 LTM EBITDA is down 11.6% from the period a year ago. Fitch notes that some margin compression would be expected as the market matures and that SMEA's margins are still healthy relative to other facilities in the market.

SMEA entered into a new compact with the state in January 2008, which allowed the tribe to increase the number of slot machines at its facility from 2,000 to 7,500 but also required SMEA to increase its payments to the state. Under the compact, tribe pays an annual fixed fee of $47 million and 15% of net win on the first 3,000 machines in excess of the 2,000 it originally operated. Thus far, the additional revenue from the increased capacity has not offset the additional fees, which are about four times what the tribe paid in 2007. Since the expansion to 3,500 machines, SMEA permanently removed 200 machines from the gaming floor and is contemplating other methods in an attempt to control the variable portion of the fees.

Despite the recent EBITDA compression, the liquidity profile of the credit remains very strong; the property generates significant free cash flow after debt service and maintenance capital expenditures and prior to distributions to the tribal government. There are no significant debt maturities, and no major projects under development. Given the very strong financial profile of the operation and no plans for additional debt issuance, credit metrics, including debt service coverage ratios and leverage, are expected to remain very strong relative to other credits in this rating category. Upward movement in the rating continues to be constrained by business risk inherent in the single site operation.

The Stable Outlook indicates Fitch's view that SMEA is well positioned to weather continued weakness in the regional gaming market, which will likely persist for the remainder of 2010 and into early 2011. However, there may be downward pressure on the ratings of all Fitch-rated Southern California gaming operators if operating trends in the market continue to weaken more than anticipated, or if there is rapid and significant expansion of Class III gaming in the market which does not substantially boost revenues and results in pressure on the cash flows of the operators in the market. Fitch believes that the latter is an unlikely scenario as capital expansion is currently hampered by poor operating trends and lack of access to external financing due to strained capital market conditions.

The 2004 bonds are term bonds with maturities in 2010, 2015 and 2016. The bonds are subject to mandatory monthly sinking fund payments of principal in an amount sufficient to fully amortize by maturity, resulting in a level debt service schedule through 2016.

A 'BBB' transaction rating is assigned to debt secured by a lien on the gaming enterprise cash flows. The transactions are rated one notch above the Issuer Rating due to credit enhancement provided by security covenants included in the legal documents associated with the transactions.

Additional information on Fitch's recent rating actions on the San Manuel Entertainment Authority and the Native American gaming industry outlook is available in the following reports, all available on Fitch's web site at www.fitchratings.com:

--'Native American Gaming Insights: Rules, Regulations and the Outlook for Off-Reservation Gaming Approvals' (Nov. 11, 2009);

--'Native American Gaming Insights: Growing Pains for California's Gaming Industry' (Aug. 24, 2009)

--'Credit Update: San Manuel Entertainment Authority' (July 28, 2009)

--'Managing Through Distress (Considerations for Investors in Distressed Native American Gaming Credits)' (May 11, 2009);

--'Fitch: Native American Gaming Issuer Ratings Unaffected by U.S. Supreme Court Decision' (Feb. 25, 2009);

--'Tough Odds to Continue for Gaming: Industry Recovery Unlikely Until 2010' (Jan. 30, 2009);

--'Fitch: Workout Scenario Considerations for Creditors of Native American Gaming Operators' (Dec. 16, 2008);

--'Liquidity Focus: US Gaming and Lodging' (Oct. 23, 2008);

--'Credit Analysis: San Manuel Entertainment Authority' (June 18, 2008).

Additional information is available at www.fitchratings.com.

Related Research:

Native American Gaming Insights: Rules, Regulations and the Outlook for Off-Reservation Gaming Approvals
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=483626

Native American Gaming Insights: Growing Pains for California's Gaming Industry
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=463108

Managing Through Distress (Considerations for Investors in Distressed Native American Gaming Credits)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=437648

Credit Update: San Manuel Entertainment Authority
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=460276

Credit Analysis: San Manuel Entertainment Authority
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=390270

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