CHICAGO--()--Fitch Ratings affirms the 'BB+' rating on approximately $16.3 million of Pueblo of Santa Ana's (Santa Ana) outstanding enterprise revenue bonds. Fitch also affirms Santa Ana's Issuer Default Rating (IDR) at 'BB'. The Rating Outlook is Stable.
KEY RATING DRIVERS:
The 'BB' IDR reflects the strong financial flexibility of Santa Ana's enterprises and the stable market position maintained by Santa Ana's gaming enterprise in the competitive Albuquerque market. The Pueblo's Santa Ana Star casino continues to garner around 15% market share in the Albuquerque market based on state reported net slot win through the end of calendar year 2012.
Santa Ana's revenues largely track the Albuquerque market, and grew by 2% in calendar 2012. Santa Ana's EBITDA margin expanded 400 basis points (bps) in calendar 2012, reflecting a decrease in overall operating expenses.
For 2013, Fitch expects flat to negative revenue growth for regional markets. Fitch has previously commented that the expiration of the payroll tax holiday creates an additional hurdle to an already lackluster outlook for U.S. casino operators. Management's plans to reinvest in the property partially offset Fitch's concerns related to the Albuquerque's difficult competitive environment.
Santa Ana's enterprises consist of the 1,350 slot machine and 16 table game Santa Ana Star casino, a separate Hyatt-managed hotel and two golf courses (together 'Enterprises'), with the casino comprising 92% of the latest 12 month (LTM) through Dec. 31, 2012 Enterprises' EBITDA.
Santa Ana's debt to LTM EBITDA was 0.8 times (x) at Dec. 31, 2012 and EBITDA and pledged tribal tax coverage of interest and principal was 5.0x. Improvement in credit metrics should continue as Santa Ana's debt amortizes quickly.
Liquidity and Financial Flexibility
Cash at the enterprise level remains well in excess of the amount needed for casino cage cash purposes, and the Enterprises generated positive free cash flow in 2012 (cash from operations less capital expenditures and transfers to the tribal government). In contrast, many Native American gaming credits exhibit free cash flow close to zero after transfers to tribal government. The Pueblo does not distribute per cap payments to its members, enabling for additional flexibility with respect to governmental budgeting and enterprise transfers to the tribe. Pueblo Santa Ana does not provide tribal financials or tribal budgets, which is negatively reflected in the ratings. Partially mitigating this non-disclosure is the maintenance of tribal liquidity at the enterprise level.
There are no bullet maturities within Santa Ana's capital structure and near-term capital expenditure plans should be covered through cash flow. Longer term, Santa Ana may pursue a larger scale project; however, Santa Ana's strong financial profile can support a moderate amount of additional debt that may accompany the project without pressuring the 'BB' IDR.
The one notch differential on the revenue bonds from the IDR takes into account a senior security interest in the Enterprises' net revenues and certain tax revenue of the tribe. The pledged revenues are subject to a trustee directed flow of funds if debt service coverage by EBITDA and pledged taxes is less than 2.0x. In addition, should debt service coverage dip below 2.0x, distribution levels of revenues to fund essential government services are restricted. Further supporting the rating is the Pueblo's limited ability to incur additional pari passu debt, which is limited by the bonds' covenants to $10 million ($20 million when including separate carveouts for FF&E debt and 'short-term debt').
Negative rating actions are limited, reflecting the Santa Ana's sizable financial cushion. Negative rating actions could be considered should Santa Ana primarily fund a sizable hotel development in a leveraging transaction. This concern is however diminished on the enterprise revenue bond rating level based on its additional pari passu indebtedness covenant.
Positive rating actions are also limited in the near-to-medium term given the Santa Ana Star's marginal operational diversification and the competitive nature of the Albuquerque market, with four other Pueblos operating casinos in the area. Mitigating these concerns somewhat is Santa Ana Star's attractive location in close proximity to the local population of Rio Rancho. The lack of tribal disclosures additionally limits potential positive momentum on the rating.
Fitch affirms Pueblo of Santa Ana ratings as follows:
--IDR at 'BB';
--Enterprise revenue bonds at 'BB+'.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', (August 2012);
--'2013 Outlook: U.S. Gaming (Return Generation in Full Swing)', (December 2012);
--'Native American Gaming Insights -- Default and Recovery Study: Mohegan the Latest Restructuring', (March 2012)
--'Native American Gaming Insights -- Off-Reservation Gaming: Three Years into the Obama Administration', (February 2012);
--'Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers', (November 2012).
Applicable Criteria and Related Research
Corporate Rating Methodology
2013 Outlook: U.S. Gaming (Return Generation in Full Swing)
Native American Gaming Insights -- Default and Recovery Study: Mohegan the Latest Restructuring
Native American Gaming Insights -- Off-Reservation Gaming: Three Years into the Obama Administration
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers