NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed and removed from Rating Watch Negative the ratings assigned to The Quechan Tribe of the Fort Yuma Indian Reservation (Quechan or the tribe) as follows:

--Issuer rating at 'CCC';

--$45 million governmental project bonds series 2007 (tax-exempt) at 'CCC';

--$110 million gaming enterprise revenue bonds series 2008 revised to 'B-' from 'CCC+';

The Rating Outlook is Stable.

Quechan's ratings were downgraded and placed on Watch Negative on Oct. 3, 2008 due to Fitch's concern that a liquidity crisis was developing as a result of the tribe's inability to secure external financing to complete construction of the Quechan Casino Resort (QCR) project. There was the potential for project construction disruption or delay, requiring Quechan to fund a portion of the remaining project cost through cash on hand at the tribal government. The need to contribute this additional equity to the project led to erosion of the Quechan tribal government balance sheet, raising concern related to an increased potential for the occurrence of bond covenant violations. Specifically, the governmental project bond indenture requires the maintenance of an unrestricted net asset balance at the tribal government equal to at least 125% of the principal amount of long-term indebtedness outstanding that does not have a security interest in the cash flows of the casino operation (only the governmental project bonds series 2007 apply to this test at this time).

The removal of the ratings from Watch Negative is the result of the following:

Opening of QCR alleviates liquidity concerns: After additional funding, in the form of Quechan tribal government equity and a $13.5 million loan from another Native American tribe (the tribal loan), was contributed to the project fund, construction of the QCR was completed. The project opened on schedule and slightly below budget on Feb. 14, 2009. Completion of the project greatly reduces the possibility of Quechan facing a liquidity crisis, which could have led to cuts to governmental services for the tribal membership and a delay or stoppage of the QCR project construction;

Potential for breach of bond covenants is reduced: The governmental project bond indenture allows the tribal government to include receivables from the casino as part of the unrestricted net asset balance, which must equal 125% of the outstanding par amount of the governmental project bonds, tested on a quarterly basis. Since the beginning of construction of the QCR, the portion of the balance that is comprised of casino receivables has risen as the tribal government has contributed equity to the project, to 58% of the unrestricted asset balance as of Dec. 31, 2008, from only 6.6% one year prior. While Quechan was narrowly in compliance with the test of as Dec. 31, 2008, Fitch notes that the quality of the unrestricted assets used to demonstrate compliance has clearly deteriorated as the amount of casino receivables has increased. However, the ability to include casino receivables in the balance, coupled with the elimination of the need to contribute any further equity to the QCR project, greatly reduces the likelihood of the Tribe tripping the 125% covenant at the March 31, 2009 test date and beyond.

First quarter 2009 (Q1'09) results positive: Boosted by the Feb. 14, 2009 opening of the QCR, revenues and EBITDA for the quarter ended March 31, 2009 rose by 24.5% and 29.7%, respectively, versus the prior year period. Upon opening of the QCR, Quechan's former California casino property was closed, while the Arizona casino property remains in operation. During February and March, the casinos produced a significant amount of free cash flow after debt service carrying charges, which will provide relief to the tribal government balance sheet.

Fitch notes that despite these positive developments, significant credit concern remains, supporting a 'CCC' issuer rating. Most importantly, risk remains during the operational ramp up period of the QCR property. Performance of the Yuma, AZ regional gaming market was weak in 2008; Quechan's two casino properties posted full year revenue and EBITDA declines of 7.4% and 17.5%. Regional economic conditions are strained, and Fitch believes this will negatively impact consumer discretionary spending in this gaming market throughout the rest of 2009 and likely into 2010. Furthermore, in a market that exhibits a great degree of operational seasonality, initial results at QCR benefited from opening during the high season.

In addition to recent poor market performance, Fitch notes that there is risk associated with the opening of a new casino facility that is a much more elaborate and sophisticated operation than the tribe's previously existing casinos. It will be a significant challenge for the several new members that have recently joined the gaming operation's senior management team to successfully manage the operational ramp up of a new property in a regional gaming market that has been exhibiting poor operating trends.

There is the potential for positive rating action if the QCR property is able to sustain its initial operating trend during the upcoming summer months, which is typically the slow season in the Yuma, AZ gaming market. Specifically, positive rating action will depend upon the casino operation generating free cash flow after debt service that can be transferred to the tribal government to improve its liquidity position, restoring cash and reducing the casino receivables balance. While Quechan potentially could restore liquidity by issuing additional debt to reimburse the tribal government's equity contribution, further leveraging the casino cash flows would likely have a negative impact on the credit profile.

The operating margin for the quarter ended March 31, 2009 improved to 60.3% from 57.9%. Fitch does expect however, that margins may be pressured over the upcoming year due to the higher expense base at the QCR property relative to former California casino. Quechan is required to make monthly sinking fund payments of principal and interest on the bonds and the tribal loan. Debt service charges are level through 2012. The first significant debt maturity occurs in 2013, when the casino is required to re-pay the Quechan government $30 million of contributed equity that was structured as a loan to the casino operation. This piece of debt is subordinate in right of payment to the bonds and the $13.5 million tribal loan. Fitch expects that the Quechan government will extend the maturity if the casino cannot refinance or cash fund the principal payment.

Based on March 31, 2009 latest 12 months (LTM) EBITDA, debt service coverage as calculated per the gaming enterprise bond indenture was 2.09 times (x). Remedies for bondholders include a springing debt service reserve fund and a trustee controlled flow of funds whenever the debt service coverage falls below 1.75x. An event of default occurs at 1.25x. The debt service coverage ratio is tested on a rolling four quarter basis.

The rating revision on the gaming enterprise bonds to 'B-' from 'CCC+' reflects adjustment to Fitch's rating definitions, which eliminated '+'/'-' modifiers in the 'CCC' category (see Fitch Report 'Revisions to Ratings Definition' dated March 3, 2009 available at www.fitchratings.com). The gaming enterprise bonds are rated one notch above the issuer rating due to security provisions included in the bond indenture, in accordance with Fitch's published criteria for Native American gaming issuers. The governmental project bonds are rated on par with the issuer rating, because they are unsecured relative to the gaming bonds. The gaming enterprise bondholders have a security interest in the casino cash flows, while the governmental project bonds are non-recourse to the casino assets, including the cash flows.

For additional information on Quechan's credit profile refer to the following reports available at www.fitchratings.com:

--'Fitch Quechan Tribe's Ratings Remain on Watch Negative Following Receipt of Loan Proceeds, dated Jan. 8, 2009;

--'Fitch Downgrades & Places Quechan Tribe (CA) Rtg of Watch Negative', dated Oct. 3, 2008;

--'Credit Analysis: The Quechan Tribe of the Fort Yuma Indian Reservation', dated May 15, 2008;

--'Fitch Downgrades Quechan Tribe's Issuer Rating to 'B+'', dated April 22, 2008.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 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.

Contacts

Fitch Ratings
Megan Neuburger, +1-212-908-0501
Michael Paladino, CFA +1-212-908-9113 (New York)
Media Relations:
Cindy Stoller, +1-212-908-0526 (New York)
cindy.stoller@fitchratings.com.

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