NEW YORK--(BUSINESS WIRE)--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 in July 2015 and the potential for gaming expansion in the state of Florida.
STOF has seen positive operating trends, and the gaming division has reported 15 straight quarters of revenue growth. This is in contrast to broader national gaming trends, which have been largely negative on a same-store basis over the past 12-18 months. STOF's gaming division revenues and EBITDA for the last-12 month (LTM) period ending June 30, 2014 grew by 5% and 6%, respectively, on a year-over-year basis. Fitch attributes STOF's strong operating trends to STOF's relatively protected markets and Florida's faster than national average economic recovery.
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 June 30, 2014 improved to 1.5x from 1.7x for the prior year's period. Excluding the tribe's special obligation bonds, leverage is 1.1x. Debt service coverage is 4.5x including the special obligations bonds and is 5.7x with gaming division debt only.
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 since 2011; however, all five council seats are up for election in 2015. The tribe's reserves as of Sept. 30, 2013 provide for about three months of governmental operations including per capita payments, which is an improvement from two months of operations two 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, which are targeted at roughly 5% of gaming EBITDA. STOF's plans for the reserve are not yet concrete.
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 relatively short 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 somewhat pressure the financial cushion within the 'BBB-' IDR against any adverse legislative and/or compact negotiation outcomes.
Fitch believes that there is cushion in STOF's financial position to maintain investment grade ratings in an event the state approves additional gaming in the state or STOF's authority to operate table games (about 20% of EBITDA) is allowed to expire in 2015. (The two events are mutually exclusive under most plausible scenarios because if the state permits table games at commercial casinos STOF's ability to operate table games will automatically be extended.) Fitch believes that the loss of table games is unlikely and would be politically unpalatable given the associated job losses and compact fee payment to 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 an additional degree of comfort. Per its 2010 compact with the state, STOF can suspend revenue share payments completely if gaming is approved outside of southeast Florida. STOF can suspend payments from its Broward County casinos if integrated resorts are approved in southeast Florida or if STOF's ability to operate table games is not extended past 2015. In an event pari mutuels in southeast Florida are permitted table games, STOF can reduce payments from its Broward County casinos by 50% if revenues there drop below a base level established prior to table games becoming operational at the pari mutuels. The effective revenue share is just over 12% of gaming revenue and about half of the revenues are generated in Broward County.
The state's legislative session begins March 3, 2015 and ends to May 1, 2015. The state may look to permit large scale resorts in southeast Florida and/or table games at pari mutual casinos. The state may also consider permitting gaming at all of the state's pari mutuel facilities although such a broad expansion may see more resistance in the legislative session. There are three tracks in Tampa, one in Naples and one in Palm Beach that would affect STOF if permitted to convert to casinos.
According to news sources STOF had a blueprint for a new compact negotiated with the Governor Rick Scott earlier in 2014. However the compact was not ratified by the legislature. According to Associated Press the negotiations called for no resort style casinos in Miami for seven years, an extension of table games, addition of craps and roulette at south Florida casinos, an additional casino in Fort Pierce, and guaranteed revenue share payments of $2 billion over seven years. Rick Scott is up for election this November and is competing against Charles Crist, who negotiated STOF's existing compact in 2010.
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 $237 million will be remaining. STOF's gaming division maintains modest positive FCF after tribal distributions, which it uses for debt reduction or to grow cash balances. The tribe operates the government at a surplus, which are roughly targeted at 5% of the gaming division's EBITDA. 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 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.
Positive: Future developments that may, individually or collectively, lead to a Positive Outlook or an upgrade of the IDR to 'BBB':
--Greater clarity on gaming expansion in the state of Florida and STOF's ability to operate table games past 2015;
--Continued growth in tribal reserves and a better understanding by Fitch of the potential uses of the reserves;
--Total leverage including tribal debt declining and 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 within 24-36 months.
Inability to extend table games past 2015 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.
Fitch affirms the following ratings:
Seminole Tribe of Florida
--IDR at 'BBB-'; Outlook Stable;
--$247 million gaming division bonds, series 2005B at 'BBB';
--$684 million term loan B due 2020 at 'BBB';
--$365 million incremental term loan B due 2017 at 'BBB';
--$385 million special obligation bonds, series 2007A&B at 'BBB-';
--$70 million special obligation bonds, series 2008A at 'BBB-'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 20, 2014);
--'Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers' (Nov. 19, 2013);
--'Fitch Rates Seminole's $395MM Incremental Term Loan 'BBB'; Upgrades IDR to 'BBB-' (Oct. 8, 2013);
--'2014 Outlook: U.S. Gaming' (Dec. 16, 2013).
Applicable Criteria and Related Research:
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
2014 Outlook: U.S. Gaming (Deleveraging Potential)
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage