Fitch Affirms Ratings on Seminole Tribe of Florida's Debt; Assigns IDR 'BB' Rating

NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the 'BB+' rating on approximately $1.8 billion of Seminole Tribe of Florida' (STOF) outstanding gaming division bonds and terms loans and 'BB' on approximately $530 million of STOF's special obligation bonds. A detailed list of ratings actions follows at the end of this release.

Fitch also assigns a 'BB' Issuer Default Rating (IDR) to STOF and withdraws the previously assigned 'BB' Issuer Rating. The assignment of an IDR incorporates Fitch's updated methodology, which was published on March 18, 2011 in the criteria report 'Native American Gaming: Rating Methodology'. The Rating Outlook is Stable.

The 'BB' IDR and the Stable Rating Outlook reflect STOF gaming division's strong operating and financial profiles. STOF has sizable gaming operations in two distinct, deep Florida markets and benefits from having no competition in Tampa and limited competition in southeast Florida. Financial metrics are strong for the 'BB' IDR, with debt-to-EBITDA through last twelve months (LTM) period ending March 31, 2011 at 2.2 times (x) and debt service coverage by EBITDA at 3.4x.

The ratings incorporate Fitch's concerns relating to STOF's tribal-side governance and controls, which became heightened at the time the Native American Gaming Commission's (NIGC) submitted Notice of Violation (NOV) to STOF. The June 2010 NOV letter cited STOF's failure to comply with the tribe's own bylaws and the Indian Gaming Regulatory Act (IGRA) with respect to allocating gaming related revenues.

Notice of Violation Resolved but Concerns Remain:

Since the NOV, STOF has entered into a Civil Fine Assessment (CFA) agreement with the NIGC whereby the tribe pays a fine of $500,000 and agrees to undergo an annual audit of its adherence to the use of net gaming revenue provisions. The audit will span three years.

The tribe also agreed to be assessed a $1.5 million fine should the tribe violate any terms of the CFA and not cure the violations within a stipulated timeframe. Fitch views the CFA agreement positively as it will provide a timelier and more transparent reporting framework pertaining to STOF's progress in implementing policies and control measures related to the tribal distributions from the gaming revenues. Fitch has not received the report for fiscal year 2010 (fiscal years ends Sept. 30), but management has indicated that there were no findings in the audit process.

More recently, STOF held elections for its tribal council in May 2011, which resulted in three new council members defeating the incumbents. When counting the 2010 election of Manuel Tiger, who replaced David Cypress after the latter resigned, four of the five council positions turned over in the past year.

The turned over positions included the position of the tribal Chairman, which is now filled by Chairman James Billie. Billie was STOF's Chairman from 1979 up to 2003, but there was a dispute during the last two years of his term as to his authority to act as Chairman.

Uncertainty relating to the new government's decisions regarding the gaming enterprise and its commitment to improving the tribe's controls and governance is a concern. Fitch intends to meet with the newly elected tribal leaders in upcoming quarters to better discern the leadership's approach with the respect to the above. Greater confidence in the new leadership's governance practices, plus a track record of receiving clean annual audits of the tribe's gaming revenues use, will be positively factored into the ratings.

In the near-term, as it relates to the new leadership, Fitch is most concerned about future decisions pertaining to the employment of the gaming division's top management. STOF's current gaming management is very well regarded, so Fitch could have increased concern if the new tribal leadership caused management turnover at the gaming enterprise. The employment contracts of the gaming division's CEO and CFO expire in May 2013.

Potential Future Gaming Expansion in FL is a Concern, But Downside Risk is Limited:

Two bills have been introduced in Florida legislature in the 2011 session to allow for up to five full scale casino resorts throughout the state. Both bills died at the committee level and the session came to an end in May.

Genting Berhad (Genting, 'A-' IDR/Stable Outlook by Fitch) announced in May 2011 the purchase of 14 acres of prime land in Miami for $236 million from the McClatchy Company ('B-' IDR/Stable Outlook, owner of Miami Herald). Genting announced plans for a $3 billion mixed use project for the site, which will include entertainment, meeting space and retail as well as residential units. Ultimately, Genting hopes to build a casino on the site if future legislature approves it. The complex will be branded Resorts World.

Other major gaming operators have also expressed interest in opening integrated casino-resorts in Florida. Fitch thinks the expansion bill will be revisited in 2012 and the legislature will balance the potential for new revenues through the licensing fees and gaming taxes plus the boost to the state's economy against the general political impartiality towards continued proliferation of gaming and the loss of revenue share payments currently paid by STOF. The potential legislation would also face considerable political pressure from STOF and the southeast Florida pari-mutuel industry.

Under STOF's state Class III compact, STOF would stop paying its revenue share fee to the state based on the revenue generated in its Broward County facilities (generate about 45% of EBITDA) if commercial gaming was approved in either the Broward or Miami-Dade Counties. A commercial casino permitted elsewhere in the state, including near STOF's Tampa facility (50% of EBITDA), would violate the compact and jeopardize the entire revenue share fee for the state. Tampa's exclusivity for table games ends in 2015; however, exclusivity on slots extends to 2030.

Fitch believes that the downside risk for STOF's ratings in case of approved expansion is limited, as increased competitive pressure will be offset by STOF's ability to cut its revenue share payments to the state. Fitch's projection scenarios assume minimal impact on EBITDA as long as revenue declines related to increased competition remain close to or less than 20%. Additionally, Fitch thinks that if STOF will be at a considerable competitive advantage relative to the commercial peers given the anticipated stark contrast in the tax/revenue share structures.

Liquidity and Financial Flexibility:

The gaming division transfers the bulk of residual cash flow to the tribal government, with free cash flow of the gaming division following the distribution being nominal. Nevertheless, cash at the gaming division is adequate and can meet about 40 days of operations after taking into account cage cash. STOF's gaming division does not maintain access to committed external liquidity in the form of a credit revolver or the like. The somewhat flexible nature of the free cash flow distribution to the government mitigates risk related to the lack of committed external liquidity.

As is typical for a tribal gaming entity, the government is reliant on distributions from the gaming division, as the government produces significantly negative free cash flow before those distributions.

STOF's nearest bullet maturity is in March 2014, when a term loan comes due. With the loan amortizing at about $77 million per year, there will be $715 million outstanding at the time of maturity. The next bullet maturity is in 2017, when the 2010 gaming division bonds come due. All other debt is subject to level monthly sinking fund payments of principal and fully amortize by maturity.

Capital Structure:

As of March 31, 2011, STOF had $2.3 billion of debt outstanding, comprised of approximately $950 million in term loans (41%), $840 million in gaming division bonds (36%) and $530 million special obligation bonds (23%). The term loans and the gaming division bonds are pari passu and are secured by a pledge of the trust estate, which includes a pledge of net revenue from Immokalee, Brighton and Coconut Creek gaming facilities, as well as certain revenues from Tampa and Hollywood enterprises. Tampa and Hollywood revenues pledged to the trustee include the tribe's minimum distribution payment from casino operations and the assignment of other revenues as governed by the series 2002 indenture.

Debt service coverage below 3x triggers daily sweeps into trustee held funds and coverage below 2x triggers an adjustment to the tribal distribution payments so as to maintain core governmental operations. There is an additional debt test that prevents debt issuance if pro forma coverage is above 3x and EBITDA/debt ratio is below 4.5x (3.5x on the senior debt). Leverage through the senior debt measured using LTM period ending March 31, 2011 EBITDA is 1.7x and is 2.2x including special obligation bonds. There is a contingency debt service reserve fund for the gaming division bonds, which is triggered when coverage declines below 3x.

Special obligation bonds are secured by bondholders' interest in the collateral, defined as all revenues deposited in the governmental distribution fund pursuant to the distribution agreement. Special obligation bondholders do not have an interest in the cash flows until such time as they are transferred from the gaming revenue bond trustee to the government distribution fund. Per the distribution agreement, STOF covenants that debt service will be paid before any distribution revenues are used for governmental purposes or per capita payments to members. There is no debt service reserve fund for the special obligation bonds.

Fitch affirms the following ratings:

Seminole Tribe of Florida
--IDR at 'BB'
--$367 million Gaming Division Bonds, Series 2010A&B at 'BB+'
--$473 million Gaming Division Bonds, Series 2005A&B at'BB+'
--$948 million Term Loan at 'BB+'
--$435 million Special Obligation Bonds, Series 2007A&B at 'BB'
--$93 million Special Obligation Bonds, Series 2008A at 'BB'

Additional information is available at www.fitchratings.com.

Applicable Criteria and Related Research:
--'Native American Gaming: Rating Methodology' (March 18, 2011);
--'Corporate Rating Methodology' (Aug. 16, 2010);
--'Recovery Ratings and Notching Criteria for Nonfinancial Corporate Issuers' (May 12, 2011);
--'2011 Outlook: Gaming' (Feb. 1, 2011);
--'Fitch Rates Seminole Tribe of Florida's 2010 Gaming Division Bonds 'BB+' (Oct. 28, 2010)
--'Credit Analysis: Seminole Tribe of Florida (Sept. 4, 2008).

Applicable Criteria and Related Research:
2011 Outlook: Gaming
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=601106
Credit Analysis: Seminole Tribe of Florida
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=399630
Native American Gaming: Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=612565
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=628489

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