Fitch Ratings takes the following action on Cherokee Nation, OK
(the Nation) debt:
--$20.3 million Cherokee Nation, OK Health Care System bonds,
series 2006 affirmed at 'BBB-'.
The Rating Outlook is Stable.
KEY RATING DRIVERS:
GAMING SUPPORTS STRONG GOVERNMENTAL OPERATIONS: The Nation is
dependent upon the cash flows of the gaming operation to fund debt
service and approximately half of general fund operations. General
fund cushion declined but remained ample in three of the last four
years. The Nation expects increased gaming revenues in fiscal 2011
to support a general fund operating surplus and addition to fund
balance.
EXPANSION DRIVES GAMING REVENUE GROWTH: Cherokee Nation
Businesses, LLC (CNB), a component unit of the Nation, continues to
expand its gaming operations in the competitive northeast Oklahoma
market. The Nation's gaming well-dispersed expansions have offset
the effects of adverse events as well as continued increase in
competition. In fiscal 2011 (ending Sept. 30), the gaming
operations' revenues and EBITDA increased by 5.7% and 7.5%
respectively.
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 more than half of governmental spending.
TIGHT LEGAL STRUCTURE: Solid legal protections including a daily
sweep of pledged revenues to a trustee-held lock box.
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 strong debt service
coverage.
WHAT COULD TRIGGER A RATING ACTION
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.
SHIFT IN FISCAL MANAGEMENT: With a new Principal Chief and
changes to top management positions, Fitch will monitor
developments of the fiscal 2013 budget and other key management
decisions with an eye to stability in the Nation's conservative
financial management approach.
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.
CREDIT PROFILE:
STRONG GAMING PERFORMANCE CONTINUES
Gaming revenues are the largest source of 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.
Following major expansions in fiscal 2010 and 2011, the Nation
is adding another hotel tower at its flagship Catoosa facility and
replacing two smaller casino temporary structures with permanent
ones in Ramona and Ft. Gibson. These projects, with a budgeted cost
of roughly $70 million, are being funded through cash flow. CNB has
no material debt on its balance sheet as of Sept. 30, 2011.
The market may face additional competition with Kialegee Tribal
Town planning to open a gaming facility in Broken Arrow, which is
conveniently located relative to Tulsa. The Broken Arrow casino was
planed for a 2012 opening but according to news sources the project
is being held up by local opposition.
Another tribe (Choctaw) is planning to expand gaming positions
at its existing facility near the Nation's third largest facility
(Roland). Taken together the above expansions are expected to have
a moderate impact on the Nation's gaming revenues with the Nation's
own expansions providing meaningful offset.
STABLE HEALTHCARE OPERATIONS; ESSENTIAL SERVICE
The Nation's health care system serves an eligible patient
population of approximately 127,000 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 totaled about 414,000 in fiscal 2011 up from approximately
345,000 in 2009.
Given the growth in demand, the Nation is currently building 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 stable at $139 million in fiscal 2010 and $137
million in fiscal 2011. The fiscal 2012 appropriation is expected
to be at least $137 million.
The bonds are secured 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 $67.5
million in fiscal 2011 from $58.6 million in fiscal 2010 and $52.4
million in fiscal 2009. Pledged revenue coverage of maximum annual
debt service (MADS) is high and estimated at over 16 times (x) in
fiscal 2011. Coverage is higher than originally projected based on
lower debt service due to the early debt retirement and to higher
pledged revenues noted above.
GOVERNMENTAL FINANCIAL OPERATIONS SUPPORTED BY GAMING AND OTHER
ENTERPRISES
The Nation's primary revenue source is derived from its gaming
operations. In fiscal 2010 the dividend paid by Cherokee Nation
Enterprises, LLC (CNE), which operates its gaming facilities,
stayed at a consistent 44% of general fund revenues. According to
tribal policy, CNE transfers 35% of its net income to the tribe
annually. Gaming revenues did decline slightly in 2009 due to the
recession but appear to have rebounded. The Nation reports that for
fiscal 2011, on an unaudited basis, the transfer to the general
fund will increase by 13.6% over fiscal 2010 with a slight uptick
to 45% of unaudited revenues.
Diversification of the revenue stream supporting general
government services is provided by the collection of motor fuel,
tobacco and motor vehicle taxes. The declines in unreserved general
fund balances in fiscals 2009 and 2010 were due to capital
expenditures and temporarily increased contributions to certain
programs. The Nation closely monitors its budget performance and as
the Nation projected at the time of Fitch's last review, unaudited
fiscal 2011 results show surplus operations.
After falling to 22% of spending in fiscal 2010 from 28% in
fiscal 2009, the Nation's unaudited fiscal 2011 results show an
increase in general fund reserves. The unaudited unrestricted
fiscal 2011 balance (pursuant to GASB 54, the sum of committed,
assigned and unassigned) totals a strong 37% of spending. Total
fund balance is much higher, close to 100%, with a large portion of
reserves available for spending on the Nation's major programs:
highway, health care and education.
The Nation expects to publish the fiscal 2011 audit next month.
The Nation's fiscal 2012 budget prudently included a lower amount
of fund balance budgeted as revenue as well as conservative
assumptions regarding growth in gaming revenues. The Nation reports
that fiscal 2012 year-to-date performance is ahead of budget and
expects to grow the unassigned general
fund balance again.
NEW LEADERSHIP; CONTINUED STRONG FINANCIAL MANAGEMENT
EXPECTED
The Nation is the second largest federally recognized tribe,
with approximately 305,000 enrolled members and a tribal
jurisdictional area consisting of 9,234 square miles of trust land
located over 14 counties in northeastern Oklahoma. 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.
Following a controversial election in June 2011 followed by a
special election in September 2011, a new Principal Chief was
elected and replaced people in key financial management roles. The
fiscal 2013 budget will be the first under the new administration
and Fitch will monitor developments under the new management team
to evaluate consistency in the Nation's conservative financial
management approach - a key credit strength highlighted by
Fitch.
Additional information is available at 'www.fitchratings.com'.
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:
--'Tax-Supported Rating Criteria' (Aug. 15, 2011);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug.
15, 2011);
-'Native American Gaming: Rating Methodology' (March 18,
2011)..
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648898
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648842
Native American Gaming: Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=612565
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND
DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY
FOLLOWING THIS LINK:
HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. 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.