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Fitch Upgrades Chickasaw Health System (OK) Rev Bonds to 'BBB'; Outlook StableAUSTIN, Texas --(Business Wire)-- Fitch Ratings takes the following rating action on Chickasaw Nation, OK (the Nation) bonds: --$14.5 million health system bonds, series 2007 upgraded to 'BBB' from 'BBB-'. The Rating Outlook is Stable. SECURITY The bonds are secured by a pledge of the Nation's full faith and credit, limited to the net available assets of the government, and pledged health system revenues (Medicare, Medicaid, and private insurance). The Nation granted a limited waiver of sovereign immunity in conjunction with the bonds. The Nation has agreed to submit to jurisdiction of federal and state courts and that any claim or controversy related to the series 2007 bonds documents may be resolved by arbitration. KEY RATING DRIVERS CONTINUED STRONG FINANCIAL OPERATIONS: The upgrade reflects the continued strong performance of the Nation's financial operations, including both its casino gaming enterprise and health system. SOLID ENTERPRISE POSITION: The gaming enterprise enjoys a solid position in the competitive Oklahoma market and financial performance remains strong. Risks to gaming operations include the ongoing threat of gaming legalization in TX, which Fitch continues to monitor but views as a remote risk over the coming review cycle. AMPLE DEBT SERVICE COVERAGE; HEALTHCARE ESSENTIALITY: Debt service coverage has climbed significantly from the time of initial issuance due to growth in the pledged third-party health revenues and aggressive early debt retirement. Operating performance of this essential service has been stable due to continued increases in Indian Health Services' (IHS (News - Alert)) funding and the pledged revenues. ROBUST GOVERNMENTAL BALANCES: The Nation's general fund has accumulated very high fund and cash balances over the past few years due to the increased amount of gaming fund transfers. The Nation has a practice of maintaining general fund cash balances equal to at least one-year of budgeted spending. TIGHT LEGAL SAFEGUARDS/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. RATING SENSITIVITIES SHIFT IN HEALTH SYSTEM PERFORMANCE: A shift in the currently strong performance of the health system and/or declines in the pledged third-party revenues could influence the rating. 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. CREDIT PROFILE The Chickasaw Nation is the 12th largest federally recognized tribe in the U.S. The majority of its more than 55,000 citizens live within the 13 counties 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 seventh consecutive term and is not term limited. STRONG GAMING REVENUE GROWTH; TX LEGALIZATION OVERHANG REMAINS Gaming revenues are the Nation's largest revenue source. The majority are derived from the Nation's flagship casino facility, the WinStar World Casino, which is located on the Oklahoma-Texas border and serves the Dallas-Fort Worth (DFW) and Oklahoma City markets. It has about 6,700 slot machines and is one of the largest casinos in the U.S. The Nation's gaming enterprise operating trends are strong, with stable EBITDA margins at between 40%-45% from fiscal years 2010 to 2013. The stability is partly supported by the Nation's considerable reinvestment in its facilities and improved operations of its 16 different gaming facilities. Liquidity of the gaming operations is also strong, with $93 million of cash-on-hand at the close of fiscal 2013, up from $83 million the year prior. Fitch expects that liquidity will remain ample under its base-case scenario, even if transfers to the Nation's governmental activities increase. An ongoing risk to operations is the possibility of gaming legalization in TX, given the location of the Nation's WinStar World Casino (which represented about 47% of the Nation's fiscal 2013 gaming EBITDA) near the DFW market. Previous legislative proposals in Texas to legalize gaming would have allowed slot machines at racetracks. The Nation partially hedged this risk through its acquisition of Lone Star Park in the DFW area in May 2011 via its Global Gaming Solutions, LLC (GGS). The Texas legislature meets biannually and the next session will commence in Jan. 2015. Fitch believes the risk of passage remains small but will monitor any developments. The Nation continues its diversification efforts by investing in its smaller facilities and by seeking gaming opportunities outside the Nation's boundaries through GGS, which also owns Remington Park racetrack and casino in Oklahoma City. ESSENTIAL SERVICE AND STABLE PERFORMANCE OF HEALTH SERVICES The Nation's IHS user population totaled approximately 36,000 in 2013 and the health system also serves a large number of non-Chickasaw Native Americans from other areas. To accommodate the growng population the Nation opened its $148.5 million replacement hospital in August 2010, funded by the series 2007 bond proceeds and equity. The replacement facility provides significantly expanded inpatient, outpatient, and ancillary capacity to accommodate the expanding utilization levels. Ambulatory visits increased to 597,392 in 2013 from 533,074 in 2012, while the number of pharmacy prescriptions issued increased to 1.2 million from 1 million over the same period. Healthcare operations exhibited continued stability in 2013, due mainly to significant growth in the third-party health revenues, which include Medicare, Medicaid, and private insurance payments. These revenues increased to $62.8 million from $53.2 million in 2012. IHS funding for the Nation was most affected by sequestration reductions in 2013 and totaled $110.3 million compared to $101.6 million in 2012, indicating that user-growth mitigated the reductions. The total appropriation for 2014 is expected to be $107.5 million, according to a final funding bill signed on Jan. 17, 2014. The Nation's health care operations produced an operating surplus of $28.7 million (unaudited) in 2013, an increase from the $25.4 million surplus in 2012 (prior to transfers from the gaming enterprise but includes debt service payments). The Nation covenants to transfer 1.25x maximum annual debt service (MADS) from gaming to the Department of Health for debt service; however, because of the strong gains in third-party revenues, these transfers are not relied on for debt service and have enabled early paydown of debt: $27 million in fiscal 2011 and $28 million in fiscal 2013. Currently there are no further plans for early debt redemption and all debt will retire by 2019. Total governmental debt outstanding is low relative to the significant amount of general fund resources on-hand. SWEEP OF PLEDGED REVENUES; EXCESS COVENANT RESERVES Pledged health system revenues are swept daily, or when first received, to the trustee-held bond fund account. The bonds are secured both by the Nation's full faith and credit and the third-party revenues, which have experienced good growth. Third-party revenues increased to $62.7 million in fiscal 2013 from $37.2 million in fiscal 2010. The gross pledged revenues provided robust 19.6x coverage of MADS in fiscal 2013. The Nation's only other long-term obligations are roughly $90 million in property development loans that are repaid by revenues from specific gaming facilities. Additional legal provisions include a liquidity covenant whereby the Nation must maintain $40 million of its governmental net assets in cash and minimum fund equity for the health system of $20 million, including 60 days cash on hand. The Nation comfortably exceeds the liquidity covenants. GOVERNMENTAL OPERATIONS REMAIN STRONG Transfers from the gaming enterprise represent an extremely concentrated 90% of general fund revenues. The amount of the annual gaming transfers is determined annually by the legislature as part of the Nation's budget process rather than by a set, formal transfer rate. The gaming transfers increased by a 10.8% compounded annual average from fiscal years 2009-2012 and increased another 6% in fiscal 2013 (unaudited). The Nation has increased governmental spending in conjunction with the higher gaming transfers to support enhanced services for health, education, family, and housing. Even with the increased spending the Nation has posted very large operating margins in four of the past five fiscal years, with a net deficit in fiscal 2010 corresponding with costs associated with capital investments. The Nation has a prudent policy of maintaining at least 100% of the upcoming budget in cash, which provides for a robust fiscal cushion against potential swings in gaming revenue and federal budget actions affecting grant income. The general fund concluded fiscal 2012 with a very large unrestricted fund balance of $185.5 million (1.7x annual spending). Total fund balance has doubled since fiscal 2009. The general fund's liquidity position is also very strong: cash, equivalents, and investments provide nearly 700 days of cash-on-hand. The fiscal 2013 audit is in progress (Sept. 30 fiscal year) and, consistent with prior-year reporting, will be completed by the nine-month federal reporting deadline in June. Unaudited results show an estimated $32.8 million general fund surplus (26% of spending) after gaming transfers, and a corresponding increase in fund balance. The fiscal 2014 budget increased spending by 10.8% ($14.9 million) as part of an executive branch department re-organization that increased governmental headcount by 9% and appropriated additional funds for program and service enhancements. The Nation budgeted a $141 million gaming dividend, lower than the $143 million transfer last year, though the Nation has ample carry-forward reserves to support the recurring costs for the near term. Fitch believes that the general fund's ample fiscal cushion and the discretionary nature of the spending increases indicate a good degree of budget flexibility in the event of unforeseen revenue declines from weakened gaming performance. Additional information is available at 'www.fitchratings.com'. In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, National Association of Realtors. Applicable Criteria and Related Research: --'Tax-Supported Rating Criteria' (Aug. 14, 2012); --'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012); --Corporate Rating Methodology (Aug. 8 2013); --U.S. Nonprofit Hospitals and Health Systems Rating Criteria (Aug. 8, 2013). Applicable Criteria and Related Research: U.S. Nonprofit Hospitals and Health Systems Rating Criteria http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708361 Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139 Tax-Supported Rating Criteria http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015 U.S. Local Government Tax-Supported Rating Criteria http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314 Additional Disclosure Solicitation Status http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=820558 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 (News - Alert) 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. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. |
