Fitch Affs San Manuel Entertainment Auth's (CA) Issuer Rtg at 'BBB-'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed San Manuel Entertainment Authority's (SMEA) credit ratings as follows:

--Issuer Rating at 'BBB-';

--$110 million gaming project bonds, series 2004A at 'BBB'

--$54.4 million gaming project bonds, series 2004B at 'BBB'

--$48.2 million public improvement bonds, series 2004C at 'BBB'.

The Rating Outlook is Stable.

SMEA's 'BBB-' issuer rating is primarily supported by the strong operating performance of its highly profitable casino, the San Manuel Indian Bingo and Casino. The casino is the main economic driver and primary source of cash flows of the San Manuel Band of Serrano Mission Indians (San Manuel, or the Tribe). The property benefits from a favorable location in the highly competitive Southern California gaming market. Located near Highland, CA, immediately outside of San Bernardino and 65 miles east of Los Angeles, there are no other tribal governments with reservation lands approved for gaming purposes between SMEA's property and the Los Angeles area. The tribe has conducted gaming on its reservation lands since 1986. Since the opening of the current facility in early 2005, a project requiring a $265 million capital investment that was mostly debt funded from the 2004 bond issuance, the operation has produced very strong cash flow, resulting in credit metrics that are strong for the rating category.

A 'BBB' transaction rating is assigned to debt secured by a lien on the gaming enterprise cash flows. The transactions are rated one notch above the issuer rating due to credit enhancement provided by security covenants included in the legal documents associated with the transactions.

The primary credit concern constraining SMEA's issuer rating to low investment grade is the business risk inherent in its single-site casino operation, which is prone to event risk and is highly dependent upon a single market area in San Bernardino, a region that has been significantly affected by the current economic downturn.

Other Fitch rated gaming credits that have achieved investment grade issuer ratings, including the Seminole Tribe of Florida and the Agua Caliente Band of Cahuilla Indians, exhibit weaker financial profiles and credit metrics than SMEA, but have a measure of geographic and operational diversification, operating multiple resort destination type facilities in distinct market locations.

Additional credit concern centers on Fitch's relatively limited visibility of the financial health of the tribal government. While Fitch is not permitted to keep copies of the audited financial statements of the tribal government, it is provided with copies of audited financial statements for the casino operation and is permitted to view the annual governmental audit in the presence of San Manuel management. This level of review is sufficient to ascertain that the financial condition of the tribal government is healthy.

SMEA currently offers Class III gaming at its facility pursuant to a compact negotiated with the state in 1999 and amended in 2008. The compact negotiated in 1999 allowed SMEA to operate up to 2,000 Class III machines; the 2008 amendments increased the number of permitted machines to 7,500, with SMEA paying a significantly higher amount in revenue sharing to the state. SMEA management indicates that there is capacity at the existing facility to place up to 5,000 Class III slots on the floor and plans to increase to this number in increments based on market response over the next several years. Unlike many of its competitor facilities in the Southern California market, which have made significant capital investments to expand non-gaming amenities and create full-scale destination resorts, SMEA plans to continue to operate its facility as a locals' market destination, which has proven to be a profitable business strategy to date.

Credit metrics, including leverage and debt service coverage ratios, are very strong relative to other credits in this rating category. However, the low level of financial risk is offset by business risk inherit in the single-site gaming operation. Fitch expects the facility to experience some compression of operating margins beginning in fiscal 2008 due to increased state revenue sharing payments under the amended compact, and promotional spending and marketing costs that are expected to increase and plateau at a higher level as slot capacity is added in the maturing Southern California market. However, given the very strong financial profile of the operation and no plans for additional leverage, credit metrics are expected to remain strong.

The 2004 bonds are term bonds with maturities in 2010, 2015 and 2016. The bonds are subject to mandatory monthly sinking fund payments of principal in an amount sufficient to fully amortize by maturity, resulting in a level debt service schedule through 2016.

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