Fitch Upgrades Reno-Sparks IDR to 'BB+'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings takes the following rating action on Reno-Sparks Indian Colony, NV (RSIC):

--Long-term Issuer Default Rating (IDR) upgraded to 'BB+' from 'BB'.

The Rating Outlook has been revised to Stable from Positive.

KEY RATING DRIVERS

CONTINUED DIVERSIFICATION: The upgrade reflects important strides in diversifying away from declining tobacco related sales tax revenues. Tobacco-related sales now account for less than half of the Colony's tax base. Top taxpayers include Wal-Mart and several high-end car dealerships.

SURPLUS CREATES FINANCIAL FLEXIBILITY: The upgrade further reflects improved financial flexibility evidenced by solid reserves driven by four years of general fund surpluses.

ECONOMICALLY SENSITIVE REVENUES REMAIN: RSIC revenues remain concentrated and heavily dependent on economically sensitive sales and excise taxes. Although the Reno economy shows signs of improvement, it remains vulnerable to economic downturns due to its reliance on the leisure and tourism industries.

ELEVATED BUT MANAGEABLE DEBT: A long-expected financing scheduled for July 2013 will markedly increase the Colony's debt level. However, pro forma carrying costs continue to represent a manageable burden on the budget.

RATING SENSITIVITIES

FINANCIAL FLEXIBILITY: The rating is sensitive to shifts in the Colony's financial flexibility. Maintenance of strong reserves and liquidity are important mitigants to the Colony's significant reliance on economically sensitive revenues and revenue concentration in a few major taxpayers.

CREDIT PROFILE

The RSIC is a federally recognized tribe with a reservation consisting of noncontiguous trust land totaling over 2,000 acres in and around downtown Reno, Nevada, within Washoe County (the county). The tribe has approximately 1,064 enrolled members and employs approximately 300 people, 45% of which are tribal members. The tribe is governed by an eight-member tribal council and a tribal chairman, all elected to four year staggered terms.

DEPENDENCE ON SALES TAX REVENUES

The tribe's authority to levy and collect sales and excise taxes on businesses operating on tribal trust land is generated from an agreement with the state signed in 1991. The agreement stipulates that the tribe must charge a rate at least equivalent to the state's sales and excise tax rate on retail sales activity on tribal trust land.

The Colony maintains an important pricing advantage over its non-tribal competitors for the tobacco products sold at its five smoke shops, because the Colony does not pay taxes to the state on tobacco products purchased for sale. There are no other tribally owned smoke shops in the RSIC service area.

DIVERSIFYING SALES TAX BASE AWAY FROM TOBACCO

Fiscal 2012 marked the second year in which the Colony's non-tobacco business contributed the majority of general fund revenues. Fitch notes that the Colony's credit profile will always include a dependence on economically sensitive revenue streams and concentration among a few top taxpayers but diversification within this revenue source is a credit positive.

Sales tax revenues from the five tribal-owned smoke shops have been the Colony's largest source of revenues historically but fell significantly as a share of general fund revenue due to declining consumption for tobacco products and the Colony's execution of a long-term diversification plan. The preliminary fiscal 2012 results show tobacco-related sales and excise taxes totaling under 50% of general fund revenues for the second consecutive year, down from 56% in fiscal 2010 (audited) but reduced dramatically from 93% in fiscal 1999.

Tobacco revenues started declining in fiscal 2006 between 1-3% with more severe declines of in fiscal 2011 and 2012. Management attributes the sharper drop largely to higher gas prices as Colony smoke shops are focused on bulk sales with many customers from outside the area.

The Colony remains focused on its diversification efforts to counteract the long-standing trend of declining tobacco revenues. Following some delays, Wal-Mart (rated 'AA', Stable Outlook by Fitch) opened on Colony land in October 2010 and is now the largest tax-payer contributing 33% of estimated fiscal 2012 sales tax receipts. The Colony's majority of remaining non-tobacco sales taxes is generated from high-end car dealerships with Mercedes and Acura rounding out the top three payers.

Tobacco and non-tobacco sales tax revenues in fiscal 2012 are estimated at 44% and 56%, respectively, of $11.9 million in total sales tax receipts based on preliminary audited financial results. The Colony projects continuation of favorable trends in fiscal 2013 with a further addition to unrestricted general fund balances.

SALES TAX SHARING AGREEMENT SUPPORTS FUTURE DIVERSIFICATION

The Colony will obtain six acres of state land adjacent to its Wal-Mart site which will be used for future economic development, pursuant to a revenue sharing agreement with the state. In exchange, the Colony will finance $8 million to construct a state restitution center and satisfy its total revenue sharing obligation to the state.

The revenue sharing agreement also includes the Colony sharing revenue with the Washoe County school district. The Colony's annual revenue sharing obligations is limited to no more than 2.5% of annual taxable sales generated from Wal-Mart. The Colony reports that loan payments on the $8 million have a first priority, followed by payment to the schools, with the excess flowing to the Colony.

Current Colony projections show construction starting in 2014 with completion expected in the first quarter of 2015. With 2% annual growth in Wal-Mart sales tax receipts, the Colony projects Wal-Mart revenues to the Colony after revenue sharing will drop in fiscal 2015. However, the Colony is projecting strong growth in other non-tobacco sales tax receipts based on economic development projects underway, the largest of which are a new Infiniti dealer in 2013 and a CarMax Superstore in 2014. Fitch views the Colony's base line sales tax growth assumption of 2% as reasonable given apparent signs of recovery in the region.

GENERAL FUND RESERVE GROWTH

RSIC completed fiscal 2011 with a $2.5 million unrestricted general fund balance, reversing a trend of negative fund balance positions that reflected the Colony's initial support for a new health clinic (opened in 2008) and recessionary conditions of the region. The preliminary fiscal 2012 audit adds $3.7 million to unrestricted reserves, representing a solid 61% of expenditures and transfers out. Fiscal 2012 results benefited from broad-based budgetary savings.

RSIC's general fund service spending is focused on tribal court and administration, public works and education. The Colony has proven consistently conservative on budgeting expenditures but with a revenue base concentrated in sales taxes, remain vulnerable to budget shocks. The Colony's health clinic operations maintain profitability. Officials report that the clinic is expected to fully fund fiscal 2013 debt service on the series 2006 debt issued to fund its expansion.

GROWING DEBT PROFILE; MANAGEABLE CARRYING COSTS

The RSIC has outstanding debt of $13.3 million, series 2006 fixed rated bonds rated 'AA-' by Fitch based on a direct-pay letter of credit (LOC) provided by U.S. Bank, National Association. The RSIC's debt profile includes $6.8 million in outstanding bank loans in addition to the series 2006 bonds.

Total debt service represents a manageable 7.8% of the Colony's fiscal 2012 total governmental spending, net of capital. The aforementioned $8 million planned loan for the restitution center will increase the Colony's debt by 40%. While representing a significant jump in fixed costs, Fitch notes that the increased debt service payments will be taken off the top of sales tax revenues generated by Wal-Mart with a manageable net effect on the general fund budget.

The LOC supporting the series 2006 bonds was auto-renewed again and expires in June 28, 2014. If the LOC is terminated without substitution, a mandatory tender is triggered. At that point the bonds become bank bonds and the terms of the indenture specify that the RSIC must pay the bonds in full within 36 hours or pay a rate to the bank of 5% above prime until the bonds are paid in full. Ongoing payments required under a bank bond scenario would add significant additional stress to the RSIC's financial profile.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, National Association of Realtors.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=795071

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Contacts

Fitch Ratings
Primary Analyst
Rebecca Meyer, +1 512-215-3733
Director
Fitch Ratings, Inc.
111 Congress Ave. Ste. 2010
Austin, TX 78701
or
Secondary Analyst
Blake Roberts, +1 512-215-3741
Assistant Director
or
Committee Chairperson
Jessalynn Moro, +1 212-908-0608
Managing Director
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Rebecca Meyer, +1 512-215-3733
Director
Fitch Ratings, Inc.
111 Congress Ave. Ste. 2010
Austin, TX 78701
or
Secondary Analyst
Blake Roberts, +1 512-215-3741
Assistant Director
or
Committee Chairperson
Jessalynn Moro, +1 212-908-0608
Managing Director
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com