NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed its 'AAA' rating as well as its 'F1+' short-term rating on the following bonds issued by the Southern Ute Indian Tribe (SUIT) of the Southern Ute Indian Reservation, CO:
--$69 million tax-exempt adjustable-rate bonds series 2001;
--$127 million taxable adjustable-rate bonds series 2007;
--$110 million taxable adjustable-rate bonds series 2010.
The Rating Outlook is Stable.
SECURITY
The bonds are general obligations of SUIT.
KEY RATING DRIVERS
SIZEABLE ASSET BASE: The 'AAA' long-term rating is supported by SUIT's substantial asset balances characterized by nearly five times cash to direct debt, conservatively invested balance sheet resources, limited operational risk and no direct debt plans in the near term.
LIQUIDITY PROFILE AFFORDS FLEXIBILITY: The 'F1+' rating is secured by SUIT's sufficient cash and highly liquid investment balances in excess of 125% of outstanding variable rate demand obligation debt. Sound internal procedures for the timely access to and transfer of internal funds in event of a failed remarketing further anchors rating confidence.
COMPREHENSIVE,CONSERVATIVE POLICIES: Management's diligence in following financial policy in separating governmental assets from business enterprise operations and disciplined investment practices in preserving capital by utilizing endowment-centric allocations results in a sizeable cash and investment asset base. These resources are expected to support governmental obligations to the members in perpetuity.
RATING SENSITIVITIES
GOVERNMENTAL SUPPORT FOR ENTERPRISE OPERATIONS: SUIT's growth fund businesses are limited liability corporations and at times experience losses while SUIT's governmental funds are self-supporting and do not rely on profits from these enterprises. The tribe's decision to offer consistent significant support for these entities would be detrimental to credit quality over the long run but Fitch believes this is unlikely as the enterprises are not essential to the viability of SUIT.
INVESTMENT & OPERATIONAL DIVERSIFICATION ESSENTIAL: SUIT's intention to lower investment exposure to any one sector in the market and a continued focus on diversifying business lines away from on-reservation energy related enterprises, is necessary for long term fiscal stability.
CREDIT PROFILE
SEPARATION OF GOVERNMENTAL AND BUSINESS ACTIVITIES
SUIT adopted a financial plan in 1999 that was established to ensure governmental services to the membership (1,489) for perpetuity and strategically invest in various business operations that are intended to expand and diversify the economic resources of the tribe. The tribe operations are separated into two distinct but inter-related segments - the governmental permanent fund (PF) and business enterprises, consolidated under the growth fund (GF). The PF's goal is to create a pool of financial resources derived from investment earnings and passive energy revenue. The policies expect the GF to be operated in an aggressive fashion with the intent of diversifying the economic base away from on-reservation energy-related enterprises.
Fitch acknowledges that the GF operations, spanning upstream and midstream energy as well as real estate investments and equity ventures, are generally self-supporting. However, Fitch's primary concern that the PF would provide significant financial support to failing GF enterprises is tempered since no single business operation is essential to the overall fiscal viability of the tribe.
DIRECT-DEBT LEVELS UNCHANGED, NON RECOURSE DEBT EXPECTED
Outstanding general obligation debt includes series 2001, 2007 and 2010 adjustable-rate bonds in the amount of $305 million. PF also maintains liability for a revolving credit facility with a $200 million commitment at the GF level, $110 million is available. The credit facility expires in July of 2014. The adjustable-rate bonds mature in 2027, 2031 and 2040 and feature swaps expiring in 2026, 2027 and 2030, respectively. The swap fair market value reflected a $105 million liability as of fiscal 2012.
The adjustable-rate bonds are general obligations of SUIT, payable from all available government assets. SUIT provided a limited waiver of sovereign immunity within the bond indenture for the purposes of offering bond holders recourse against pledged assets. Additionally, the indenture limits GO debt to 40% of the net assets of SUIT's primary government activities. As of fiscal 2012, the governmental net assets reflected sufficient cushion under the threshold.
As the GF is looking to expand and diversify its business lines, SUIT may incur additional leverage to fund projects. But Fitch expects these non-recourse financings would rely on the financial wherewithal of the business segments for repayment. While non-recourse debt will not impinge the government's ability to meet its financial obligations, financial strain or losses at the segment level could pressure SUIT's GO rating if significant financial support is provided for the potential losses despite no legal obligation to do so.
'F1+' RATING SUPPORTED BY ADEQUATE LIQUIDITY
The adjustable-rate bonds are subject to optional tenders by investors. SUIT is providing an internal liquidity facility in the form of a standby bond purchase agreement, under which it is obligated to purchase bonds which are tendered and are not successfully remarketed. As of Feb. 28, 2013, SUIT's liquid investments, consisting primarily of money market funds, plus U.S. government and agencies securities, and investment grade U.S. corporate bonds, totaled $561 million (after discounts based on asset type and maturity per Fitch's short-term rating criteria). These liquid assets would cover the tribe's $305 million of variable-rate demand bonds by 1.84 times (x), exceeding the 1.25x coverage Fitch expects for an 'F1+' rating. If the liquidity facility at the GF were not included as available to the PF, the coverage factor would decline to 1.48x, still in excess of the minimum required.
STABLE LIQUIDITY REFLECTS CONSERVATIVE INVESTMENT STRATEGY
SUIT's unrestricted cash and investments, defined as available funds totaled a strong $1.88 billion at fiscal year-end (FYE) 2012. This prolific balance sheet resource constituted over 11x annual operating expenses and nearly 5x long-term debt. This cushion is atypically strong for colleges and universities similarly rated.
Investment performance for SUIT has generally tracked the market. Annual returns over the past decade averaged 7.5% and represent an asset allocation of no more than 20% of alternative investments. Conversely, Fitch's 'AAA' rated private colleges and universities in the portfolio which may demonstrate higher average returns, have a relatively less conservative allocation. Alternative investments constitute on average, over 50% of the portfolio. Fitch also views SUIT's relatively low debt burden inclusive of the swap rate payments favorably, as it comprises 3.3% of fiscal 2012 operating revenues.
SUIT is a federally recognized tribe with 1,489 members and a reservation totaling approximately 350,000 acres in southwestern Colorado. SUIT operates pursuant to a tribal constitution originally adopted in 1936. The governing body is the seven-member SUIT tribal council, which is elected at large by the tribal membership to serve staggered three-year terms. SUIT provides significant governmental services to its membership, including education, social, health and family services.
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:
--'Revenue-Supported Rating Criteria', dated June 12, 2012;
--'U.S. College and University Rating Criteria', dated May 25, 2012;
--'Criteria for Assigning Short-Term Ratings Based on Internal Liquidity', dated June 15, 2012;
--'Tax-Supported Rating Criteria', dated Aug. 14, 2012;
--'Fitch Affirms Southern Ute Indian Tribe's GOs at 'AAA/F1+'; Outlook Stable', dated April 8, 2011.
Applicable Criteria and Related Research
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015
U.S. College and University Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679152
Criteria for Assigning Short-Term Ratings Based on Internal Liquidity
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681822
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
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