Fitch Affirms Seminole Tribe's IDR at 'BBB-' & Gaming Debt at 'BBB'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed Seminole Tribe of Florida's (STOF) Issuer Default Rating (IDR) at 'BBB-', the gaming division's parity debt at 'BBB', and the tribe's special obligation bonds at 'BBB-'. The Rating Outlook is Stable. A full list of rating actions follows at the end of this release.

KEY RATING DRIVERS

The 'BBB-' IDR and the Stable Outlook reflect the STOF gaming division's strong operating and financial profiles. STOF has sizable gaming operations in two distinct, populous Florida markets and benefits from having no competition in Tampa and limited competition in southeast Florida. The affirmation of STOF's IDR at investment grade is further supported by Fitch's continued comfort with the tribe's governance and fiscal management.

The 'BBB-' IDR recognizes the uncertainty over the expiration of STOF's authority to operate table games and the potential for gaming expansion in the state of Florida.

STOF has seen steady, positive operating trends, with the gaming division reporting 20 straight quarters of revenue growth. STOF's gaming division revenues and EBITDA for fiscal year ending Sept. 30, 2015 grew by 6% and 7%, respectively, on a year-over-year basis. Fitch attributes STOF's strong operating trends to STOF's relatively protected markets and strength in the Florida economy.

STOF's financial metrics including tribal debt are strong for 'BBB-' IDR. As a result of EBITDA growth and a heavy mix of amortizing debt in STOF's capital structure, STOF's total debt/EBITDA ratio as of Sept. 30, 2015 improved to 1.3x from 1.5x for the prior year's period. Excluding the tribe's special obligation bonds, leverage is 0.9x. Debt service coverage is 5.3x including the special obligations bonds and is 7.0x with gaming division debt only, both higher on a year-over-year basis.

Since a new council was elected in May 2011, STOF has taken measures to improve the tribe's fiscal management. Major measures include growing the tribe's reserves and eliminating per capita payments to newly born minors. Governmental leadership has been relatively stable with a majority of the tribal council re-elected in 2015, including Chairman James E. Billie. The tribe's reserves as of Sept. 30, 2014 provide for about four and half months of governmental operations including per capita payments, an improvement from two months of operations three years ago and less than a month of operations prior to the new council taking office. The tribe intends to grow the reserve with surpluses, to a level consistent with seven-to-eight months of government operating expenses.

Fitch's long-term leverage threshold for 'BBB-' IDR for STOF is 2x including the tribal debt. There is room for leverage to exceed this threshold temporarily if Fitch expects leverage to decline back within 2x over a reasonable time horizon. Fitch believes that STOF may look to expand its flagship properties, which may result in additional borrowing and leverage to increase above this threshold. Although Fitch does not expect leverage to exceed 2.5x through the development cycle, additional borrowing could pressure the financial cushion within the 'BBB-' IDR against any adverse legislative and/or compact negotiation outcomes.

REGULATORY OVERHANG

STOF's authority to offer table games as per its compact with the state of Florida expired in July 2015 and the 90-day grace period has ended. The tribe has reported 'significant progress' negotiating a new compact that would extend tables but also filed a suit alleging the state is not negotiating in good faith (a requirement of Indian Gaming Regulatory Act) and that the electronic table games at tracks constitute a breach of the current compact. STOF's table game operations have continued as usual following the end of the 90-day grace period and the tribe has continued to make all revenue share payments. Fitch believes that the loss of table games is a less likely scenario as it would be politically unpalatable given the associated job losses and reduced compact fee payment to the state.

Fitch believes that there is cushion in STOF's financial position to maintain investment grade ratings in an event STOF's authority to operate table games (about 20%-25% of EBITDA) is not extended or the state approves additional gaming in the state. STOF's improved fiscal prudence on the tribal side and ability to stop or reduce revenue share payments in case of gaming expansion or expiration of table games provide a degree of comfort.

Per its 2010 compact, if STOF's authorization to offer table games is terminated, STOF can eliminate revenue share payments from its Broward County casinos. There are a number of other revenue share reduction provisions based on varying scenarios, including expansion of gaming in Southeast Florida or elsewhere in the state. The effective revenue share is roughly 12% of gaming revenue and about half of the gaming enterprise's revenues are generated in Broward County.

According to media reports, STOF's negotiations with the state included potentially increasing the guaranteed compact payments, extending the term of the compact and allowing craps and roulette.

The state's legislative sessions begins Jan. 12, 2016 and ends March 11, 2016. Fitch feels that the political momentum for passing legislature permitting large scale casino resorts has cooled since the initiative failed to get traction after Spectrum Group's 2013 study. However, a more pertinent risk remains that the southeast tracks can get table games and/or tracks outside Broward and Miami-Dade Counties (e.g. Palm Beach) get slots.

KEY ASSUMPTIONS

Fitch's expectations are based on the agency's internally produced, conservative rating case forecasts. They do not represent the forecasts of rated issuers individually or in aggregate. Key Fitch forecast assumptions include:

--STOF's ability to operate table games is extended through the compact term and no major expansions of gaming elsewhere in Florida.

--Continued positive operating trends resulting in steady revenue and EBITDA growth.

--Tribal distributions and casino maintenance capex levels consistent with the past few years.

--Debt paydown follows the amortization schedule. Fitch assumes additional debt to fund some level of expansion at STOF's flagship properties and fund the incremental term loan 2017 maturity.

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to a Positive Outlook or an upgrade of the IDR to 'BBB':

--An extension of STOF's exclusive ability to operate table games over the long-term and greater clarity on the potential for gaming expansion elsewhere in Florida;

--Continued growth in tribal reserves and a better understanding by Fitch of the potential uses of the reserves;

--Total leverage including tribal debt remaining below 1.5x.

Negative: Future developments that may, individually or collectively, lead to a Negative Outlook or a downgrade in the IDR to 'BB+':

--A decline in the tribe's reserves related operating pressure on the gaming division and/or reversal in the tribe's prudent fiscal management;

--Leverage increasing above 2x for extended period of time due to operating pressure or incremental borrowing. There is capacity in the ratings for leverage to increase slightly above 2x in conjunction with expansion related financing if Fitch expects STOF to deleverage back to below 2x following the completion of the expansion projects (approximately 24-36 months).

Inability to continue offering table games or a broader gaming expansion, such as slots at all race tracks, could lead to a revision in the Outlook to Negative. Fitch considers both scenarios to be low probability. The decision to revise the Outlook would depend on STOF's financial profile at the time of the event and the tribe's ability and willingness to adjust governmental spending in anticipation of reduced casino distributions.

LIQUIDITY

STOF's liquidity is strong with considerable cash balances at the governmental and the gaming division levels. The nearest maturity is the incremental term loan in 2017, at which point a $237 million balloon will be remaining. STOF could also look to refinance the 2005B gaming division bonds, which become callable around the same time. STOF's gaming division maintains modest positive free cash flow (FCF) after tribal distributions, which it uses for debt reduction or to grow cash balances. The tribe operates the government at a surplus and cash balances have been growing since 2011. Outside of gaming, the tribe also receives dividends from its Hard Rock International business.

TRANSACTION SPECIFIC RATINGS

The one notch differential on the gaming division debt (includes the bonds and the term loan) relative to the IDR and the investment grade rating reflects:

--The additional debt incurrence test in the credit agreement of 2.5x net leverage for the senior lien gaming division debt and gaming division interest coverage by EBITDA test of 3.0x. The 2005B bonds limit debt incurrence if parity debt leverage exceeds 3.5x.

--The gaming division has seniority in the casino revenue trustee guided waterfall relative to the special obligations bonds.

--The gaming division debt holders' ability to shut off the flow of funds at the gaming division level before distributions into the Governmental Distribution Fund are made if maximum annual debt service (MADS) coverage by EBITDA goes below 2x. Money retained in the waterfall would go towards redeeming the gaming revenue debt with some carve-outs for payments to the tribe to maintain critical governmental operations.

The special obligation bonds only have recourse to the funds available in the Governmental Distribution Fund so there is risk that the debt service on these bonds will not get paid if MADS coverage goes below 2x on the gaming side. The special obligation bondholders do not have recourse to the tribe outside of the cash in the Governmental Distribution Fund, which receives the flow of funds monies through a trustee after the gaming division debt is paid. Money is released to the tribe from the Governmental Distribution Fund once the debt service on the special obligation bonds is paid.

The special obligation bonds' indenture has an additional debt incurrence covenant stipulating that pari passu debt cannot exceed 15% of pledged revenues.

FULL LIST OF RATING ACTIONS

Fitch affirms the following ratings:

Seminole Tribe of Florida

--IDR at 'BBB-'; Outlook Stable;

--$212 million gaming division bonds, series 2005B at 'BBB';

--$619 million term loan B due 2020 at 'BBB';

--$316 million incremental term loan B due 2017 at 'BBB';

--$382 million special obligation bonds, series 2007A&B at 'BBB-';

--$56 million special obligation bonds, series 2008A at 'BBB-'.

Date of Relevant Rating Committee: Nov. 23, 2015.

Additional information is available on www.fitchratings.com.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

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Contacts

Fitch Ratings
Primary Analyst
Alex Bumazhny, CFA
Director
+1-212-908-9179
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Michael Paladino, CFA
Managing Director
+1-212-908-9113
or
Committee Chairperson
Jack Kranefuss
Senior Director
+1-212-908-0791
or
Media Relations
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Alex Bumazhny, CFA
Director
+1-212-908-9179
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Michael Paladino, CFA
Managing Director
+1-212-908-9113
or
Committee Chairperson
Jack Kranefuss
Senior Director
+1-212-908-0791
or
Media Relations
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com