Fitch Rates Seminole's $750MM Term Loan 'BBB-'; Affirms IDR at 'BB+';
Outlook to Positive
NEW YORK -- April 1, 2013
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
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.
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,
--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
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.
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.
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
--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
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
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+'.
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:
--'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
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
2013 Outlook: U.S. Gaming (Return Generation in Full Swing)
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