Fitch Affirms Pueblo of Santa Ana's Rev Bonds at 'BB+'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the 'BB+' rating on approximately $10.8 million of Pueblo of Santa Ana's (Santa Ana) outstanding enterprise revenue bonds. Fitch has also affirmed Santa Ana's Issuer Default Rating (IDR) at 'BB'. The Rating Outlook is Stable.

KEY RATING DRIVERS:

Financial Profile

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 16% market share in the Albuquerque market based on state reported net slot win through the end of Sept. 30, 2013 (market share excludes the Downs racetrack casino).

Santa Ana's enterprises grew revenue by 1% in calendar 2013 and 5% in calendar fourth-quarter 2013 over the respective prior year periods. Santa Ana's revenue growth benefitted from the completion of a remodel of Santa Ana Star casino, which was finished in the calendar second-quarter 2013 and increased the casino floor capacity.

Santa Ana's revenues outperformed other tribal casinos in the Albuquerque market as it was less affected by a casino expansion at the Downs, which opened in August 2013 with 700 slot machines. In calendar third-quarter 2013, the last quarter reported by the state, Santa Ana's slot revenues grew 1% relative to a 4% market-wide decline (excluding the Downs). Santa Ana is more cushioned against competition relative to its market peers as it focuses on the locals business in city of Rio Rancho, located northwest of Albuquerque, whereas the other casinos draw from the wider Albuquerque area.

Calendar 2013 and calendar fourth quarter 2013 EBITDA increased by 3% and 9%, respectively, showing solid revenue flow-through. Fitch expects low-to mid-single digit revenue and EBITDA growth for fiscal year ending Sept. 30, 2014. The growth will be driven by the recently completed remodel, which will anniversary in the fiscal third quarter, and easy comparisons to fiscal 2013, when Santa Ana Star experienced construction-related disruption. Beyond fiscal 2014 Fitch expects low-single digit revenue growth, which is consistent with Fitch's lackluster outlook for U.S. regional gaming markets.

Santa Ana's enterprises consist of the Santa Ana Star casino, a separate Hyatt-managed hotel and two golf courses, with the casino comprising 93% of total enterprises' EBITDA in the latest 12 month (LTM) ended Dec. 31, 2013.

Santa Ana enterprises' debt to LTM EBITDA was 0.6 times (x) at Dec. 31, 2013 and EBITDA and pledged tribal tax coverage of interest and principal was 5.1x. The improvement in credit metrics should continue as Santa Ana's debt amortizes quickly although the tribe may consider a larger facility expansion at some point, which may modestly pressure the credit metrics.

Liquidity and Financial Flexibility

Cash at the enterprise level remains well in excess of the amount needed for day-to-day operating purposes including casino cage cash, and the enterprises typically generate positive free cash flow after accounting for capital expenditures and transfers to the tribal government (2013 was an exception given remodelling-related capital expenditures). In contrast, many Native American gaming credits exhibit free cash flow close to zero after transfers to tribal government. To Fitch's best knowledge, 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 negatively affects 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. Santa Ana may pursue further capital projects; however, Santa Ana's strong financial profile can support a moderate amount of additional debt that may accompany the potential related capital spending without pressuring the 'BB' IDR.

Revenue Bonds

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 to the tribe is restricted to an amount necessary to meet the essential government services budget. 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').

RATING SENSITIVITIES

Increased disclosure with respect to the tribe's financial profile and policies could potentially result in positive rating pressure although the IDR is largely capped in the 'BB' category given the business risk associated with operating a single site facility in a competitive market.

Santa Ana's strong financial profile can absorb considerable stress before there would be rating pressure at 'BB' IDR. However, future developments that may, individually or collectively, lead to negative rating action include:

--Increase in leverage to 2x or above, likely as a result of a debt funded expansion; and/or

--Sharp operating pressure stemming from a recession and/or intensifying competitive pressure such that leverage starts to approach 2x and/or the tribe is required to use the enterprises' cash on hand to supplement distributions.

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'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology', (August 2013);

--'2014 Outlook: U.S. Gaming (Deleveraging Potential)', (December 2013);

--'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 2013).

Applicable Criteria and Related Research:

2014 Outlook: U.S. Gaming (Deleveraging Potential)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=726622

Native American Gaming Insights -- Default and Recovery Study: Mohegan the Latest Restructuring

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=674249

Native American Gaming Insights -- Off-Reservation Gaming: Three Years into the Obama Administration

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=669850

Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=721836

Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=821950

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Contacts

Fitch Ratings
Primary Analyst
Alex Bumazhny, CFA, +1 212-908-9179
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Michael Paladino, CFA, +1 212-908-9113
Senior Director
or
Committee Chairperson
John M. Witt, CFA, +1 212-908-0673
Senior Director
or
Media Relations:
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Alex Bumazhny, CFA, +1 212-908-9179
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Michael Paladino, CFA, +1 212-908-9113
Senior Director
or
Committee Chairperson
John M. Witt, CFA, +1 212-908-0673
Senior Director
or
Media Relations:
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com