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

KEY RATING DRIVERS

The affirmation of Agua Caliente's IDR at 'BB' reflects the tribe's strong balance sheet, stable operating profile, prudent fiscal management, and a level of diversification relative to other Native American gaming issuers.

Agua Caliente's credit metrics are strong and continue to improve due to debt paydown from significant amortization. Debt/EBITDA for the last-12-month (LTM) period ending March 31, 2015 was 1.5x, down from 1.8x during the LTM period ending March 31, 2014. EBITDA/debt service has also improved to 3.1x from 2.9x during the same period, respectively. Fitch forecasts Agua Caliente's debt/EBITDA to decline below 1.3x by the end of fiscal 2016 (fiscal year ends Sept. 30). Debt service coverage is forecasted to rise above 4x after a tranche of notes mature in October 2016 and there is a meaningful step down in debt service. At that time, Agua Caliente's credit metrics will be more in line with the higher end of 'BB' rated gaming issuers.

Potential expansion has been a consistent longer-term credit risk related to Agua Caliente. The tribe is interested in developing the site where the Spa Resort Hotel is being torn down, although the size and timing of any project is unknown at this point. The tribe's compact also permits a third casino. There is some headroom at the current rating level for leverage to increase, but a larger-scale expansion could pressure the rating if leverage approaches 3.0x. The decrease in debt service after the October 2016 maturity will provide additional financial flexibility for an expansion project.

Agua Caliente's revenue trends have been steadily recovering since bottoming in 2011. Underlying fundamentals continue to be strong in spite of the Spa Resort Hotel closure. 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 consistently improved since 2009 and is approaching pre-recession levels of below 6%.

The rating reflects Fitch's comfort with the tribe's commitment towards prudent tribal financial policies. Starting in 2011, the tribe reduced the per capita payments in an effort to stabilize the reserves and according to management has maintained or grown reserves since then. Fitch is unable to verify the tribal reserves since the tribe does not share its governmental financials, and the management is somewhat opaque when discussing the tribe's financial health. 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 decline in 2015 due to closure of the Spa Resort Hotel. Low single digit revenue growth returns for the remainder of the forecast period.
--EBITDA margins expand slightly from historical levels driven by steady casino performance and the hotel closure.
--Tribal distribution and casino maintenance capital expenditure levels consistent with the past few years.
--Debt paydown follows the enterprise notes' amortization schedule, which eases after the 2016 notes mature. 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:

--Maximum annual debt service (MADS) coverage exceeding 4.0x;
--Debt/EBITDA levels falling below 1.5x;
--Increased disclosure of the tribe's financials;
--Increased clarity around future expansion projects;
--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 its more prudent fiscal practices (i.e. depleting reserves).

LIQUIDITY AND DEBT STRUCTURE

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.

There is a financial maintenance coverage covenant of 2.0x MADS and a breach of the covenant would be an event of default. There is also an additional debt test limiting debt issuance if pro forma MADS coverage is less than 2.25x or leverage exceeds 3.0x. There is a $20 million carveout for additional debt. The tribe's limited capacity to issue pari passu debt supports strong recovery prospects for the bonds in an event of default and the one notch positive differentiation from the IDR.

The tribe is required to make mandatory sinking fund payments with respect to the debt outstanding, so there is low refinancing risk. 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.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings:

Agua Caliente Band of Cahuilla Indians
--IDR at 'BB'; Outlook Stable
--Senior secured notes due 2015, 2016 and 2021 at 'BB+/RR2';
--Revenue bonds due 2018 at 'BB+/RR2'.