Fitch Ratings takes the following rating action on Chickasaw
Nation, OK (the Nation) bonds:
--$46.6 million outstanding Chickasaw Nation Health System
bonds, series 2007 affirmed at 'BBB-'.
The Rating Outlook is Stable.
KEY RATING DRIVERS:
GAMING SUPPORTS GOVERNMENTAL OPERATIONS: The Nation is dependent
upon the cash flows of the gaming operation to fund debt service
and governmental services and to subsidize other enterprise
operations. Financial performance at the gaming enterprise remains
strong although Fitch is monitoring potential legalization of
gaming in Texas which could affect Chickasaw gaming operations in
the future.
STABLE HEALTHCARE OPERATIONS: Operating performance of this
essential service has been stable due to continued increases in
Indian Health Services' (IHS) funding as well as third-party
revenues. Solid performance in fiscal 2011 allowed for continued
early retirement of outstanding debt. Debt service coverage
continues to grow as a result of strong performance of pledged
revenues and prudent management practices including aggressive
early debt retirement.
TIGHT LEGALS AND EXCESS COVENANT RESERVES: Solid legal
protections include a daily sweep of pledged revenues to a
trustee-held lock-box and multiple liquidity reserve requirements,
all of which the Nation exceeds.
STRONG GOVERNMENTAL OPERATIONS: Strong financial management of
governmental operations continues to produce a healthy budget
surplus. Unassigned fund balances are high and the Nation has a
practice of maintaining cash equal to at least 100% of the
following year's general fund budget.
WHAT COULD TRIGGER A RATING ACTION
REVENUE CONCENTRATION: As the gaming enterprise fully supports
the Nation's services, any material decline in enterprise
performance would have an adverse effect on the rating.
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 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 REVENUE GROWTH; TEXAS LEGALIZATION OVERHANG
REMAINS
Gaming revenues are the Nation's largest revenue source led by
its WinStar World Casino which, with about 6,700 slot machines, is
one of the largest in the U.S. However, situated near the
Dallas-Ft. Worth market, Winstar (which represents about 40% of the
Nation's gaming EBITDA) would be susceptible to revenue declines if
Texas were to legalize gaming. The Nation partially hedged this
risk by acquiring Lone Star Park the in Dallas - Ft. Worth area in
May 2011 through its Global Gaming Solutions, LLC (GGS).
Previous legislative proposals in Texas to legalize gaming would
have allowed slot machines at racetracks. In the event of
legalization the Nation could still be susceptible to revenue
declines if larger casino resorts were permitted in the Dallas -
Ft. Worth market. The Texas legislature meets biannually with the
next session starting in early 2013. The risk of passage remains
small but Fitch will monitor the situation.
The Nation is making efforts to diversify by investing in its
smaller facilities and by seeking gaming opportunities outside the
Nation's boundaries through GGS, which also owns Remington Park in
Oklahoma and is looking for other gaming-related opportunities. The
Nation's gaming enterprise operating trends are strong with EBITDA
growing about 5% in the Sept. 30 ending fiscal year 2011. The
growth is in part supported the Nation's considerable reinvestment
in its facilities and improved operations.
ESSENTIAL SERVICE AND STABLE PERFORMANCE
The scope and longevity of the Nation's health services is a
credit strength. The Nation opened its $148.5 million replacement
facility in August 2010, which was funded by the series 2007 bond
proceeds and equity. The replacement facility provides
significantly expanded inpatient, outpatient, and ancillary
capacity to accommodate current and expected utilization.
Ambulatory visits increased to 475,954 in fiscal 2011 from 429,970
the prior year. Healthcare operations have remained solid due to
continued growth in Indian Health Services funding and increased
third-party reimbursement. IHS funding totaled $81 million in
fiscal 2010 and $89.6 million in fiscal 2011, and the fiscal 2012
appropriation is expected to be $91 million.
The Division of Health produced net income of $17.6 million in
fiscal 2011 compared to $25.5 million in fiscal 2010 (prior to
transfers). The Nation has historically transferred gaming revenue
to the Division of Health for debt service so that health care
funds can be used to cover operations. Due to the strong
performance of the health care operations, the Division of Health
transferred $32.7 million to debt service, of which $27 million was
used to redeem bonds early.
DAILY SWEEP OF PLEDGED REVENUES; EXCESS COVENANT RESERVES
Pledged revenues are swept daily, or when first received, to the
trustee-held bond fund account. The bonds are secured by the
Nation's full faith and credit and by third-party revenues, which
have experienced good growth. Third-party revenue increased to
$40.5 million in fiscal 2011 from $37.2 million in fiscal 2010,
providing a strong 9.9 times (x) coverage of maximum annual debt
service (MADS).
As a matter of policy, the Nation manages the health system to
maximize services provided to members and, per the bond documents,
the Nation is required to annually transfer to the health system an
amount equal to 1.25x MADS. In fiscal 2011, the transfers exceeded
2x MADS as the nation continues to successfully execute its policy
of retiring bonds early, lowering its debt levels but maintaining
the fixed transfer level set at 1.25x MADS at the time of the bond
sale. To date, the Nation has retired $35.7 million in bonds early
and MADS now stands at $4.9 million.
Additional legal provisions include a liquidity covenant whereby
the Nation must maintain $40 million of its governmental net assets
in cash and a minimum fund equity for the health system of $20
million, including 60 days cash on hand. The Nation comfortably
exceeds the liquidity covenant and maintains balances almost double
those required in fund equity and cash on hand.
GOVERNMENTAL OPERATIONS REMAIN STRONG
The Nation is the 13th largest federally recognized tribe in the
United States, with approximately 35,000 citizens. The majority of
the Nation's citizens live within the 13-county boundary in
southern and central Oklahoma or other parts of the state. The
Nation is governed by a tri-partite constitutional governmental
structure. The current governor is in his fifth consecutive term
and is not term limited.
Transfers from the gaming enterprise provided over 90% of
general fund resources in fiscal 2010. The Nation increased
governmental spending over the last few years in conjunction with
higher dividends from the gaming enterprise to the general
fund.
The nation has a prudent policy of maintaining at least 100% of
the upcoming budget in cash which provides for ample flexibility
against potential swings in gaming revenue, as well as against a
potential federal budget stalemate affecting grant income. The
fiscal 2010 unreserved general fund balance was down from fiscal
2011 due to an interfund loan but remained strong at 87% of
spending. Unaudited statements for fiscal 2011 show an unrestricted
balance in excess of spending. The Nation plans to publish the
fiscal 2011 audit no later than June 2012 and reports that fiscal
2012 is performing better than budget.
Additional information is available at
'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 15, 2011);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug.
15, 2011);
--'Corporate Rating Methodology' (Aug. 12, 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
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229
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