Fitch Affirms Southern Ute Indian Tribe's (CO) Short-Term Rating at 'F1+'

NEW YORK--()--Fitch Ratings has affirmed the '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 'F1+' short-term ratings will expire upon the expiration or termination of the respective standby bond purchase agreements.

SECURITY

The bonds are general obligations (GO) of SUIT which pledges repayment from its available assets. A perfected security interest in such assets does not exist; however, bondholders can exercise recourse against these assets as provided by the trust indenture.

KEY RATING DRIVERS

FINANCIAL STRENGTH OF SUIT: Fitch maintains a Long-term 'AAA' rating on the Southern Ute Indian Tribe's GO bonds which are supported by its substantial asset balances, conservatively invested balance sheet resources and the absence of direct debt plans in the future.

ADEQUATE LIQUIDITY PROFILE: 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. Additionally, there are sound internal procedures in place for the timely access to and transfer of internal funds in the event of a failed remarketing.

COMPREHENSIVE, CONSERVATIVE POLICIES: Fundamental to the rating is SUIT's financial policies that strictly separate governmental operations and assets from business enterprise operations and assets. SUIT employs disciplined investment practices of preserving capital by utilizing endowment-like allocations resulting in a sizeable cash and investment asset base.

RATING SENSITIVITIES

FINANCIAL DETERIORATION: A decrease in SUIT's liquid asset base resulting in diminished resources of the Tribe which are insufficient to service variable-rate obligations by at least 1.25x could put downward pressure on the short-term rating.

CREDIT PROFILE

SUIT is a federally recognized Tribe with 1,505 members and a reservation covering approximately 350,000 acres in southwestern Colorado. SUIT operates pursuant to its 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.

SEPARATION OF GOVERNMENTAL AND BUSINESS ACTIVITIES

SUIT adopted a financial plan in 1999 that was established to ensure governmental services to the membership (1,505) in perpetuity by strategically investing in various business operations that are intended to expand and diversify the economic resources of the Tribe. The Tribe operations are separated into two distinctly managed but inter-related segments - the governmental operations 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 to fund government operations in perpetuity. The goals of the GF are to own and operate assets in an aggressive fashion with the intent of diversifying the economic base of the Tribe away from on-reservation energy-related enterprises.

DIRECT-DEBT LEVELS UNCHANGED

Outstanding GO debt includes series 2001, 2007 and 2010 adjustable-rate bonds totaling $305 million and are payable from all government assets in the PF. The adjustable-rate bonds mature in 2027, 2031 and 2040 and are linked to corresponding swaps expiring in 2026, 2027 and 2030, respectively. The swap fair market value reflected an $86 million liability as of fiscal 2015.

SUIT provided a limited waiver of sovereign immunity within the bond indenture and submitted to the jurisdiction of the United States District Court for the District of Colorado for the purposes of offering bond holders recourse against pledged assets. The indenture limits GO debt to 40% of the net assets of SUIT's primary government activities. As of fiscal 2015, the governmental net assets reflected sufficient cushion under the threshold. The PF also provides a guarantee for and maintains the liability of a $400 million revolving credit facility. There is $125 million draw outstanding on the facility which is due to expire in June 2020.

'F1+' RATING SUPPORTED BY ADEQUATE LIQUIDITY

The adjustable-rate bonds are subject to optional and mandatory 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 December 2015, SUIT's liquid holdings consisted primarily of cash and U.S. government and agencies securities along with a portion of funds (18%) invested in investment grade U.S. corporate bonds totaling $387 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 1.27x, exceeding the 1.25x coverage Fitch expects for an 'F1+' rating.

STABLE LIQUIDITY REFLECTS CONSERVATIVE INVESTMENT STRATEGY

SUIT's unrestricted cash and investments, defined as available funds totaled a strong $2.1 billion at fiscal year-end (FYE) 2014 and 2015. This prolific balance sheet resource constituted over 20x annual governmental operating expenses and nearly 7.2x long-term debt. This cushion is atypically strong for similarly rated public finance credits that maintain robust balance sheets such as similarly rated colleges and universities.

Investment performance for SUIT demonstrated a -1.8% loss in FY 2015 which is a decline from the 6.0% gain in FY 2014. Management reports that investment returns in FY 2015 performed below its historical average and the PF also recognized losses associated with the changes in the market value of certain interest rate swaps related to its three series of bonds. SUIT's annual investment returns over the past decade averaged approximately 5.3% and as of December 2015 its PF maintained an alternative asset allocation of approximately 25%. Compared to Fitch's 'AAA' rated private colleges and universities in the portfolio, which include higher alternative asset allocations (50% or more) and may demonstrate higher average returns, SUIT's allocation appears conservative.

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

Applicable Criteria

Rating U.S. Public Finance Short-Term Debt (pub. 17 Nov 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=873508

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

U.S. College and University Rating Criteria (pub. 12 May 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=748013

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1000425

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1000425

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Maura McGuigan
Senior Director
+1-212-908-0591
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Susan Carlson
Director
+1-312-368-2092
or
Committee Chairperson
Mario Civico
Senior Director
+1-212-908-0796
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Maura McGuigan
Senior Director
+1-212-908-0591
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Susan Carlson
Director
+1-312-368-2092
or
Committee Chairperson
Mario Civico
Senior Director
+1-212-908-0796
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com