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Fitch Rates Seminole's $750MM Term Loan 'BBB-'; Affirms IDR at 'BB+'; Outlook to Positive
April 1, 2013 / 9:47 PM / in 5 years

Fitch Rates Seminole's $750MM Term Loan 'BBB-'; Affirms IDR at 'BB+'; Outlook to Positive

(The following statement was released by the rating agency) NEW YORK, April 01 (Fitch) Fitch Ratings assigns a 'BBB-' rating to Seminole Tribe of Florida's (STOF) proposed $750 million term loan. Fitch also affirms STOF's Issuer Default Rating (IDR) at 'BB+', the gaming enterprise revenue bonds at 'BBB-' and special obligation bonds at 'BB+'. Fitch revises the Rating Outlook to Positive from Stable. See the full list of rating actions at the end of this release. The proposed term loan will be pari passu with STOF's existing term loan and gaming enterprise revenue bonds and will be secured by a revenue pledge of STOF's gaming operations, which include six major casinos in the state of Florida with nearly 13,000 slot machines and approximately 340 table games. The proposed term loan will amortize at a rate of 7% per year with a balloon payment in 2020. Proceeds along with cash on hand will be used to repay $794 million outstanding on the existing term loan due to mature in 2014. Preliminary financial maintenance covenants include a maximum net leverage test of 2.5x and minimum interest coverage of 3.0x. The term loan will come with an accordion option permitting STOF to borrow up to 2x leverage or $500 million, whichever is greater. KEY RATING DRIVERS The Rating Outlook revision to Positive on STOF's IDR is supported by Fitch's increased comfort with the tribe's governance and fiscal management since Fitch downgraded STOF out of investment grade in 2010 following a Notice of Violation (NOV) from National Indian Gaming Commission (NIGC). Since the NOV the tribe took measures to correct the violations related to the NOV. In the May 2011 tribal council elections, three of the five incumbents were not reelected, with a fourth incumbent resigning prior to the elections. Two of the prior council members were involved in actions that led to the NOV. The newly elected council pledged to increase tribal reserve levels to equal two months of governmental expenditures (or about three times historical levels). Reserves reached target level in 2012 and are budgeted to grow by additional 30% by fiscal year-end 2013 (ends September 30). In January 2013, STOF's council passed a resolution eliminating per capita payments to minors born after the resolution effective date, which is pending an approval from the Bureau of Indian Affairs. Nearly 60% of the governmental budget goes to pay per capita payments to tribal members and nearly 50% of the tribe's population is under 18. As a result of the measure, STOF estimates that aggregate per capita payments will be reduced by approximately 15% and 30% in years five and 10 of the implementation, respectively, compared to per capita payments at such time if the resolution was not passed. Relative to present per capita spending levels the estimated reduction is 3% after five years and 7% after 10. The full realized savings resulting from the resolution will materialize after 18 years following the implementation. Also reflected in the Outlook revision is the extension of the gaming division management's employment contracts (CFO through 2015 and CEO through 2018) and the improved maturity profile with the refinancing of the term loan that was due to mature in 2014. RATING SENSITIVITIES Fitch believes that STOF's operating profile and credit metrics are consistent with 'BBB-' IDR, and a further track record of fiscal prudence by the tribe may result in an upgrade of the IDR to 'BBB-' within the next 12-24 months. Specifically, an investment grade IDR can be supported by STOF's: --SOLID COMPETITIVE POSITION: In the state of Florida with a monopoly in Tampa (nearly half of EBITDA) and strong position relative to the pari-mutuels in southeast Florida, where STOF's three casinos benefit from a lower tax structure as well as ability to offer tables games and allow smoking. STOF's smaller casinos in Immokalee and Brighton (together accounting for 7% of EBITDA), as in in Tampa, have no competition. --STRONG CREDIT METRICS: Relative to industry peers (commercial and tribal), STOF's leverage through the gaming debt is 1.4x, and it is 1.9x if the special obligation bonds on the tribal side are included. Leverage metrics should improve in the near term as much of the debt in STOF's capital structure amortizes rapidly. STOF may look to borrow to fund expansion capex in the medium term as Fitch believes some of its properties are capacity constrained; however, leverage on the gaming side should remain at or below 2x. Fitch calculates total debt service coverage by EBITDA at 4.2x and STOF's covenant coverage, which is based on maximum annual debt service (MADS) and spreads the term loan balloon payment over six years, is 3.3x for period ending Dec. 31, 2012. --SIGNIFICANT OFFSETS TO REGULATORY RISK: Since STOF's gaming compact allows STOF to suspend compact revenue share payments, partially or completely, in the event the state legislature authorizes additional commercial gaming in the state or allows STOF's table games authorization to expire in 2015. Authorization of new facilities in Broward and/or Miami-Dade Counties or expiration of STOF's ability to offer table games would permit STOF to stop paying compact fees based on revenues generated at its Broward County facilities (about 50% of revenues). Expansion of gaming outside the two counties mentioned above would allow STOF to suspend compact revenue share payments completely. The next event Fitch will be monitoring closely is the May 2013 tribal council election, in which three of the five council seats will be up for re-election. A re-election of the current council members, or Fitch gaining comfort that the newly elected members similarly espouse fiscal prudence, would be a positive consideration for an upgrade. Continued buildup of reserves at the tribal level and/or at the gaming level would also be viewed positively. However, an upgrade would not be precluded if reserves are maintained at existing levels should STOF spend incremental accumulated surpluses on growth capex on the gaming side or more critical projects on the tribal side. On the operating side, build-out of slot operations at Dania Jai Alai (Dania) could pressure STOF's slot revenues at Seminole Hollywood Classic and to a lesser extent at Hard Rock Hollywood. Dania is being sold by Boyd Gaming to a private investor group for $65.5 million. The potential for additional competitive pressure is manageable in context of the 'BB+' IDR and can potentially be accommodated within the context of 'BBB-' depending on the general operating environment and the scope of the project. STOF's ability to operate table games expires in July 2015. A failure to extend table games past 2015 would be a negative as table games account for 17% of the gaming division's revenues and 14% of the EBITDA. As mentioned above, expiration of table games would be offset by reduced compact revenue share payments (STOF's revenue share percentage is effectively about 12%). Over the next 12-24 months, worse than expected downturn in the operating environment and/or regulatory changes that would add significant commercial gaming capacity in the state of Florida may prevent or delay an upgrade. There is, however, cushion in the 'BB+' IDR to withstand these potential pressures. Regulatory Change Considerations No major legislative action is anticipated in 2013, as the Florida Legislature set up a Senate gaming committee to conduct a comprehensive study of gaming in the state by the 2014 legislative session. The study will consider the impacts of potential gaming expansion. The committee did approve a ban on Internet cafes, which if passed in 2013 would be positive for STOF's gaming operations. Fitch believes there is a low likelihood that the integrated resort legislation passes in the near term, since it faces heavy opposition from STOF, the pari-mutuels, the Orlando theme-park companies and other interest groups. If it eventually passes, Fitch expects the impact on STOF's financial profile will be manageable. Per the compact agreement, STOF would be able to stop making the compact fee payments from its Broward County casinos (Hollywood Hard Rock, Seminole Hollywood Classic and Seminole Coconut Creek) which account for about half of the gaming division's revenues. Other facilities in Immokalee, Tampa and Brighton would not be directly impacted. In 2011, bills were filed proposing three integrated casino resorts in Broward and Miami-Dade Counties. The minimum investment was set at $2 billion and the tax rate was initially proposed at 10%. The bills were pulled in the 2012 session due to lack of support. Fitch expects similar proposals in the future, since the initiative is heavily lobbied for by commercial operators, especially Genting Malaysia Berhad, which has purchased substantial prime land in Miami for a mixed-use development. Operating Profile The tribe operates six major casinos throughout the state of Florida, including two flagship Hard Rock branded properties in Tampa and Hollywood. In 2012 STOF completed major expansions at Hard Rock Tampa, Seminole Coconut Creek and Seminole Hollywood Classic. Per the 2010 compact with the state, the tribe has exclusivity to Class III slots outside of Miami-Dade and Broward Counties through 2030. Table game exclusivity applies to the entire state but the tribe's authorization and exclusivity to operate table games expires in 2015 unless renewed. STOF's gaming division operating performance was resilient through the 2008-2009 recession and the period of heavy expansion of slot machines at the pari-mutuel facilities in Miami-Dade and Broward Counties. The resiliency can be largely attributed to STOF's strong market position and the conversion to Class III slots and addition of table games starting 2008. Revenues and EBITDA were up 4% and 2%, respectively, in fiscal 2012 while revenue and EBITDA in the quarter ending Dec. 31, 2012 were each up 5% and 3%. Management mentioned that January in 2013 was strong while February was softer. The stated reasons for the softness are common amongst regional gaming operators and include higher gas prices and increased payroll tax. Fitch expects revenue to be up slightly in 2013 as further ramp-up of expansion projects completed in 2012 offsets Fitch's lackluster outlook for the regional economy. Reported EBITDA will increase in line with revenues but operating cash flow will be pressured by an increase in compact payments that went into effect July 2012 (from $150 million to the higher of $233 million or 12% of gaming revenues). STOF uses the straight line accounting method to expense the $1 billion it guaranteed the state in compact revenue share payments over the first five years of the agreement ($200 million per year) so there will be little to no impact on the reported EBITDA. Cash flow available for tribal distributions should remain relatively constant as gaming division annual debt service may decline by nearly $60 million by October 2013. This includes reduced amortization on the new term loans, maturity of series 2005A notes and potential refinancing of the 2010 notes. STOF's gaming division added to an already strong management team in 2012 with the hire of Larry Mullin as COO. Mullin's previous position was as a CEO of Echo Entertainment, a major casino operator in Australia, and prior to that Mullin managed Borgata in Atlantic City. The hiring of Mullin should bolster STOF gaming division's marketing efforts and his employment contract runs through 2016. The gaming division made other high-profile hires recently including SVP of IT, SVP of HR and SVP of Slot Operations. Liquidity As part of the term loan refinancing STOF gaming division plans to move $97 million of restricted cash now in a debt service fund to the division's unrestricted cash. Another $61 million of restricted cash will be used to repay a portion of the 2007 term loan and to cover transactions costs associated with the refinancing. STOF does not maintain a revolver and historically maintained limited cash at the enterprise level in excess of what is required for day-to-day operations. Therefore, Fitch views the added liquidity positively as it cushions the tribe against the increased compact revenue share payments while debt service reduction discussed above materializes over the next six months and expansion projects completed in 2012 continue to ramp up. The tribe now has sufficient reserves to operate for two months without receiving any revenues including distributions from the gaming enterprises and expects to grow the reserve further. Besides its gaming division, the tribe also owns Hard Rock International, which paid dividends to the tribe over the past three years. Pro forma for the term loan issuance, the maturity profile is favorable. The next bullet maturity will be in 2017, when $367 million revenue notes series 2010 come due. These notes trade at a significant premium and could be called in October 2013, when they become callable. 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 2005 indenture of 3.5x leverage for the senior lien gaming division debt (4.5x for total gaming division debt) and gaming division MADS coverage by EBITDA test of 3.0x. The new term loan is expected to be more stringent with a 2.5x maximum net leverage maintenance test; --The gaming division 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 carveouts 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 Available Revenues. Fitch affirms the following ratings: Seminole Tribe of Florida --IDR at 'BB+'; Outlook to Positive from Stable); --$367 million gaming division bonds, series 2010A&B at 'BBB-'; --$412 million gaming division bonds, series 2005A&B at 'BBB-'; --$889 million term loan at 'BBB-'; --$435 million special obligation bonds, series at 'BB+'; --$94 million special obligation bonds, series 2008A at 'BB+'. Contact: Primary Analyst Alex Bumazhny, CFA Associate Director +1-212-908-9179 Fitch Ratings, Inc. One State Street Plaza New York, NY 10004 Secondary Analyst Adam Dolkart Associate Director +1- 1 312-368-2095 Committee Chairperson Michael Paladino, CFA Senior Director +1-212-908-9113 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: Additional information is available at ''. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Applicable Criteria and Related Research: --'Corporate Rating Methodology' (Aug. 8, 2012); --'Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers' (Nov. 13, 2012); --'Fitch Upgrades Seminole's Gaming Bonds to 'BBB-'; Special Obligation Bonds to 'BB+'; Outlook Stable' (June 25, 2012); --'2013 Outlook: U.S. Gaming' (Dec. 17, 2012). The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Applicable Criteria and Related Research Corporate Rating Methodology here Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers here 2013 Outlook: U.S. Gaming (Return Generation in Full Swing) here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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