OREANDA-NEWS. Fitch Ratings has affirmed the Agua Caliente Band of Cahuilla Indians' (Agua) Issuer Default Rating (IDR) at 'BB'. Fitch has also affirmed Agua Caliente's gaming revenue bonds at 'BB+/RR2'. The Rating Outlook has been revised to Positive from Stable. A full list of rating actions follows at the end of this press release.

KEY RATING DRIVERS

The Positive Outlook reflects Agua's strong credit metrics for the 'BB' IDR level, but recognizes the uncertainty surrounding potential expansion.

Agua has de-levered over the last five years primarily through amortization. Agua's leverage and debt service coverage are 1.3x and 3.2x, respectively, for the LTM period ending March 31, 2016. For fiscal year 2017 (ending Sept. 30), Fitch forecasts leverage to improve towards 1x and debt service coverage to rise above 4x.

Potential expansion remains a credit risk as the tribe is interested in developing the site where the Spa Resort Hotel was torn down, although the size and timing of any project remains unknown. The tribe's compact also permits a third casino. A large-scale, debt-funded expansion could slow the upward rating momentum to the extent Agua's credit profile materially worsens. Fitch will be more comfortable considering an upgrade of Agua's IDR to 'BB+' when there is more clarity that any future development would not materially impact Agua's credit profile.

Operating fundamentals continue to be healthy and the impact from the Spa Resort Hotel closure in 2014 has stabilized. Fitch expects Agua Caliente's operating performance to remain stable, supported by continued improvement in the employment and real estate markets in its primary Inland Empire market. The unemployment rate in the Riverside-San Bernardino metro area has recovered since the recession, declining to 5.3% as of May 2016 from the peak level of around 14% reached in 2010.

The rating reflects Fitch's comfort with the tribe's commitment towards prudent tribal financial policies. Management has been able to maintain and grow reserves since 2011 thanks to prior reductions in per capita payments and the recent declines in annual debt service. Fitch is unable to verify the tribal reserves since the tribe does not share its governmental financials and Fitch views this lack of disclosure as a credit negative.

KEY ASSUMPTIONS

Fitch's expectations are based on the agency's internally produced, conservative rating case forecasts. They do not represent the forecasts of rated issuers individually or in aggregate. Key Fitch forecast assumptions include:

--Low single digit revenue growth and steady EBITDA margins for the forecast period due to continued recovery and strength in the local area economy.

--Tribal distribution and casino maintenance capital expenditure levels consistent with the past few years.

--Debt paydown follows the enterprise notes' amortization schedule. Fitch assumes additional debt for a new hotel at Spa Resort Casino.

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

--Increased clarity around future expansion projects such that Fitch gains more confidence that credit metrics will not materially deteriorate;

--Maximum annual debt service (MADS) coverage remaining adequate to allow the tribe to maintain or grow cash reserves;

--Debt/EBITDA levels remaining below 1.5x;

--Increased disclosure of the tribe's financials;

--Continued improvement in the operating environment.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

--MADS coverage falling below the 2.5x or debt/EBITDA levels moving towards 3.0x;

--Undertaking of a large scale project or sharp operating declines leading to sizable deterioration in the credit metrics;

--Tribe straying away from prudent fiscal practices (i. e. depleting reserves).

LIQUIDITY AND DEBT STRUCTURE

Cash at the casinos just meets cage cash and day-to-day operating needs with the bulk of the tribe's cash kept at the governmental level. Fitch believes that the tribe's reserves remain sizable but is not able to verify. The tribe does not have access to external liquidity, such as a revolving credit facility.

All of Agua Caliente's debt is pari passu with respect to bondholders' security interest in the cash flows of the tribe's casino gaming operations. The 2003 bonds have the benefit of a fully funded trustee held debt service reserve fund. There are also reserve accounts established for the 2006 and 2007 notes, but the tribe can access these funds between quarterly deficiency test dates. Notable covenants include a financial maintenance coverage covenant of 2.0x MADS and an additional debt test limiting debt issuance if pro forma MADS coverage is less than 2.25x or leverage exceeds 3.0x.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings:

Agua Caliente Band of Cahuilla Indians

--Long-term IDR at 'BB'; Outlook revised to Positive from Stable;

--Senior secured notes due 2016 and 2021 at 'BB+/RR2';

--Revenue bonds due 2018 at 'BB+/RR2'.