Fitch Affirms Laguna Development Corp (NM) Issuer Rating at 'BB-'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed Laguna Development Corporation's (LDC) credit ratings as follows:

--Issuer rating at 'BB-';

--$100 million enterprise revenue bonds, series 2006, at 'BB'.

The Rating Outlook is Stable.

LDC's 'BB-' issuer rating is primarily supported by the stable operating history of its casino gaming operations. LDC is owned by the Pueblo of Laguna (POL) and operates two primary casino locations as well as gas and convenience store retail outlets, all of which are located along the I-40 corridor, west of the Albuquerque, NM metro area. The primary economic drivers of LDC, and therefore its primary credit drivers, are its two larger casino gaming operations, Route 66 and Dancing Eagle.

Proceeds of the 2006 enterprise bonds were used to construct a 150-room hotel property connected to the Route 66 casino. The project opened in September 2007 and operating results have benefited, with LDC posting strong year-over-year growth in revenue and EBITDA in the first three full quarters since the expansion opened.

The main credit concern is the limited geographic diversity of the gaming operation. Although the operation of a second casino contributing 25% of consolidated EBITDA is meaningful relative to a single-site gaming operation, LDC's properties are reliant on a single gaming market in the Albuquerque metro area. However, it is notable that based on casino player's club information, the two primary casino properties appear to be drawing from different customer bases. The majority of Route 66 rated play comes from Albuquerque residents, while Dancing Eagle appears more heavily reliant on I-40 traffic as a segment of its customer base.

The Albuquerque, NM gaming market is highly competitive, with five other Native American gaming entities operating six properties in the area. Most recently available data as of June 30, 2008 indicates that the Albuquerque gaming market has been performing well relative to other local gaming markets in the U.S. during the current economic downturn. However, Fitch expects that this market will show deterioration in the second half of 2008, with more operators exhibiting slower or negative growth. Notably, LDC has been outpacing the overall market growth rate by a wide margin since the opening of the Route 66 hotel property in September 2007, with LDC increasing its market share to 19.5% from 18.5% for the latest 12 months (LTM) ended June 30, 2008 versus the prior year period. Fitch notes that based on its recent market gain, LDC appears well positioned to weather the impact of the overall poor market trends that are likely to continue into 2009.

LDC's credit metrics, including leverage and debt service coverage ratios, are slightly stronger relative to other Fitch 'BB-' rated corporate credits. However, the lower level of financial risk is offset by business risk inherit in the somewhat limited operating profile of the entity. For the fiscal year ended Dec. 31, 2007, Route 66 was the most significant contributor to the combined entity's EBITDA, with Dancing Eagle, Xpress Casino and the retail outlets combined providing a smaller contribution. While the other casino operations provide some diversification to the cash flow, it is anticipated that Route 66 will continue to be the primary revenue generator going forward.

EBITDA for the combined enterprises for the LTM ended Sept. 30, 2008 increased from the prior year period. Operating margins, while remaining healthy, compressed slightly, primarily due to increased promotional and marketing costs as well as pre-opening expense of the Route 66 hotel property. LTM leverage and debt service coverage ratios were 2.1x times (x) and 4.5x, respectively.

The 2006 enterprise revenue bonds are term bonds maturing in 2015 and 2021. 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 maturity. A 'BB' rating is assigned to the bonds, which are secured by a lien on the cash flows of LDC. The bonds 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.

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