TEXT - Fitch affirms Oklahoma's Cherokee National Healthcare bonds

Wed Feb 27, 2013 4:16pm EST

Related Topics

Feb 27 - Fitch Ratings takes the following action on Cherokee Nation, OK
(the Nation) debt: 

--$20.3 million Health Care System bonds, series 2006 affirmed at 'BBB-'. 

The Rating Outlook is Stable.

SECURITY

The bonds are secured by gross third-party revenues (primarily Medicare and 
Medicaid) of the health system and a full faith and credit pledge of the Nation.
Pledged health system revenues are swept daily, or when first received, to the 
trustee-held bond fund account with excess of the monthly requirement 
transferred back to the Nation. The Nation has also granted a limited waiver of 
sovereign immunity in conjunction with the bonds.

KEY RATING DRIVERS 

GAMING SUPPORTS STRONG GOVERNMENTAL OPERATIONS: The Nation is dependent upon the
cash flows of the gaming operation (Cherokee Nation Businesses, LLC, or CNB) to 
approximately half of general fund operations. CNB has a strong credit profile 
supported by its competitive position in the Oklahoma market. CNB is unlevered, 
generates consistent free cash flow (pre-dividend), and has stable EBITDA 
margins.

STRONG COVERAGE AND ESSENTIALITY: Health care services are essential to the 
Nation as a service to members and pledged third-party health care revenues 
provide ample debt service coverage.

TIGHT LEGAL STRUCTURE: Legal protections are solid and include a daily sweep of 
pledged revenues to a trustee-held lock box.

STABLE GENERAL FUND: Increased gaming income and lower spending has yielded 
positive general fund margins and an improved fund balance and liquidity 
position. 

RELATIVE REVENUE DIVERSITY: The Nation maintains relative revenue diversity 
compared to other gaming tribes in that although still concentrated, 
governmental operations receive support from non-gaming sources for about half 
of governmental spending.

RATING SENSITIVITIES

MATERIAL CHANGE IN GAMING ENTERPRISE PERFORMANCE: Strong performance at the 
gaming enterprise has been the key driver of the Nation's overall stable 
financial profile. Any material deterioration in finances, although not expected
by Fitch, would put negative pressure on the rating.

CREDIT PROFILE

The Nation, headquartered in Tahlequah, Oklahoma, is the second largest 
federally recognized tribe, with approximately 305,000 enrolled members. The 
tribal jurisdictional area consists of 9,234 square miles of land located over 
14 counties in northeastern Oklahoma near Tulsa. 

STRONG GAMING PERFORMANCE CONTINUES

Gaming revenues are the largest source of general fund income supporting tribal 
operations. Fitch considers this income stream to be relatively stable despite 
the discretionary nature of gaming and the competitive market in which the 
Nation's casinos operate. The Nation's eight casinos are well-dispersed 
geographically throughout northeast Oklahoma and the Nation continues to 
reinvest in its facilities.

 

The Nation's flagship property is the Hard Rock Casino & Resort Tulsa, which was
recently re-modeled in 2011. The Nation is also adding a third-tower to the 
property that should be open at the end of February 2013. The new tower adds 98 
new suites and was funded through cashflow. 

CNB has no material debt on its balance sheet as of Sept. 30, 2012. Liquidity is
strong at $151 million, comprised of $52.7 million in available borrowings under
its revolver and $98.1 million of cash. CNB generates strong positive free cash 
flow, totaling $78 and $86 million (pre-dividend) in fiscal 2012 and 2011, 
respectively, and it is expected to increase in the next few years. The positive
cashflow is also expected to internally fund capital improvements. Management is
actively looking at new opportunities to protect its market share and looks to 
spend $55 to $65 million annually toward that end. 

STABLE HEALTHCARE OPERATIONS; ESSENTIAL SERVICE

The Nation's health care system serves an eligible patient population of 
approximately 101,000 within its 14-county jurisdictional area. The health care 
system includes nine clinics and one hospital, Hastings Hospital, which prior to
fiscal 2009 was an Indian Health Services (IHS) managed facility. Primary care 
visits have steadily increased and climbed to 425,000 in fiscal 2012, up from 
approximately 345,000 in 2009. 

Given the growth in demand, the Nation recently opened an additional clinic in 
Vinita, which was funded by a private placement with the Bank of Oklahoma. Under
a joint venture funding agreement with IHS, the construction and operation of 
the facility should result in enhanced IHS funding beginning in fiscal 2013. IHS
funding has been relatively stable at $139 million in fiscal 2010, $137 million 
in fiscal 2011, and $145 million in fiscal 2012. The fiscal 2013 appropriation 
is expected to be at least $140 million. However, this funding is subject to a 
5% sequestration cut in March if Congress and the administration fail to reach 
an agreement on the federal deficit. The potential cut to the Nation is 
approximately $10 million, which the Nation will need to manage through expense 
reductions.

Additional capital needs of the Nation include up to $80 million to build a 
replacement hospital and expand/replace several outpatient clinics. The Nation 
is in the early stages of planning but is considering pay-go fund these projects
with surplus cashflow from its gaming operations.

The series 2006 bonds are secured by the Nation's full faith and credit as well 
as by third-party revenues, which have experienced strong growth due to enhanced
services and efforts to qualify patients for Medicare and Medicaid. Third-party 
revenue increased to $73 million in fiscal 2012 compared to $70 million in 
fiscal 2011 and $58.6 million in fiscal 2010. The bonds require annual level 
sinking fund payments of $2.9 million and the pledged revenues provide ample 
coverage of debt service of roughly 25x. Coverage is much higher than projected 
at the time of issuance due to some early debt retirement and significant growth
in third-party revenues as noted above.

GOVERNMENTAL FINANCIAL OPERATIONS SUPPORTED BY GAMING AND OTHER ENTERPRISES

The Nation's primary general fund revenue source is a dividend paid from the net
income of CNB. The transfer amount is dictated by tribal policy, which now 
requires at least 35% of CNB's net income transferred to the tribe annually, up 
from 30% prior to fiscal 2012. The dividend comprised between 40% - 45% of total
general fund revenues from fiscal years 2006 - 2011 and increased significantly 
in fiscal 2012 (to $54 million from $30 million). The increase was due to the 
policy shift noted above and strong growth in gaming income; management reports 
the additional monies will be used to fund one-time capital acquisitions out of 
the general fund. Diversification of the revenue stream supporting general 
government services is provided by the collection of motor fuel, tobacco and 
motor vehicle taxes. 

General fund balances declined in fiscal 2009 and 2010 due to capital 
expenditures and increased contributions to certain programs, but fiscal 2011 
results were positive. The Nation concluded the year with an unrestricted 
general fund balance of $23.9 million or 37% of spending. Total fund balance is 
much higher, close to 100% of spending, with a large portion of reserves set 
aside for spending on the Nation's major programs: highway, health care and 
education.

The unaudited fiscal 2012 operating margin was large at 28% of spending, due to 
the increase in the gaming dividend and conservative budgeting. Officials 
anticipate closing the year with an unrestricted fund balance of $41.5 million 
or over 50% of spending, with some of these funds to be used for capital outlays
in fiscal 2013. 

NEW LEADERSHIP; SEQUESTRATION PRESENTS BUDGET UNCERTAINTY

The Nation has a tripartite government operated pursuant to a tribal 
constitution. The executive branch of the Nation is led by the Principal Chief, 
who is elected at large for a four-year term. A controversial election in June 
2011 was followed by a special election in September 2011, at which time a new 
Principal Chief was elected; the new chief replaced people in key financial 
management roles.

The current-year budget is the first under the new administration and is 
essentially flat from the fiscal 2012 budget. Fitch views positively the 
consistency in the Nation's conservative financial management approach and 
considers this management trait a key credit strength. However, federal 
sequestration (effective March 1) could directly impact housing and other 
federally-funded government services offered by the Nation. Officials have plans
to manage the cuts through spending reductions, and Fitch views successful 
management of the potential budget reductions a key credit consideration.
FILED UNDER:
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.