Fitch Affirms Southern Ute Indian Tribe (CO) Ratings at 'AAA/F1+'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed its AAA/'F1+' 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.

The Rating Outlook is Stable.

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

SIZEABLE ASSET BASE: The 'AAA' long-term rating is supported by SUIT's substantial asset balances which total over seven times that of direct debt, its conservatively invested balance sheet resources, limited operational risk and no direct debt plans in the near term.

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 assets from business enterprise operations. SUIT employs disciplined investment practices of preserving capital by utilizing endowment-like allocations resulting in a sizeable cash and investment asset base.

RATING SENSITIVITIES

GOVERNMENTAL SUPPORT FOR ENTERPRISE OPERATIONS: SUIT's Growth Fund (GF) businesses are primarily limited liability corporations and at times experience losses while SUIT's governmental funds are self-supporting and do not rely on profits from these enterprises. A tribal decision to offer consistent significant support for these entities would be detrimental to credit quality over the long run but Fitch believes this is unlikely as the enterprises are not essential to the viability of SUIT governmental operations.

INVESTMENT & OPERATIONAL DIVERSIFICATION ESSENTIAL: An inability to maintain the diversification of both investment exposure to any one sector and business lines away from on-reservation energy related enterprises may negatively affect long term fiscal stability.

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 both the short-term and long-term ratings.

CREDIT PROFILE

SUIT is a federally recognized tribe with 1,502 members and a reservation totaling approximately 350,000 acres in southwestern Colorado. SUIT operates pursuant to a 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 (1,502) in perpetuity and strategically invest in various business operations that are intended to expand and diversify the economic resources of the tribe. The tribe operations are separated into two distinct but inter-related segments - the governmental Permanent Fund (PF) and business enterprises consolidated under the GF. The PF's goal is to create a pool of financial resources derived from investment earnings and passive energy revenue. The policies expect the GF to be operated in an aggressive fashion with the intent of diversifying the economic base 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 a $70 million liability as of fiscal 2014.

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 2014, the governmental net assets reflected sufficient cushion under the threshold. The PF also maintains liability for a $200 million revolving credit facility. There is no draw outstanding on the facility which is due to expire in May 2018.

'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 March 2015, SUIT's liquid investments, consisting primarily of money market funds, plus U.S. government and agencies securities, and investment grade U.S. corporate bonds, totaled $436 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 1.43x, 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 $2.2 billion at fiscal year-end (FYE) 2014. 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 has generally tracked the market. The FY14 return was equal to 7.2% which is a decline from 11.2% in 2013. Management reports that fiscal 2012 and 2013 were extremely strong years for investment performance due to the allocation among fixed income, equity, and hedge fund investments. SUIT's investment return over the past decade averaged 7.1% and as of February 2014 it maintained an alternative asset allocation of approximately 23%. 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 and Related Research:

--'Revenue-Supported Rating Criteria', dated June 2014;

--'U.S. College and University Rating Criteria', May 2014;

--'Rating U.S. Public Finance Short-Term Debt', dated January 2015.

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

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

U.S. College and University Rating Criteria

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

Rating U.S. Public Finance Short-Term Debt

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=846969

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=981120

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Contacts

Fitch Ratings
Primary Analyst
Maura McGuigan
Senior Director
+1-212-908-0591
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Ryan Pami
Associate Director
+1-212-908-0803
or
Committee Chairperson
Jessalynn Moro
Managing Director
+1-212-908-0608
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Maura McGuigan
Senior Director
+1-212-908-0591
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Ryan Pami
Associate Director
+1-212-908-0803
or
Committee Chairperson
Jessalynn Moro
Managing Director
+1-212-908-0608
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com