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Guaranty firm enhances Indian bonds to investment level

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NEW YORK - A financial guaranty firm is targeting the American Indian bond market, insuring investment grade ratings for more than $100 million in Indian bonds last year and looking to increase its volume of deals this year.

New York-based ACA Capital has provided credit enhancement to bonds issued by the Cherokee Nation of Oklahoma, the Cow Creek Band of Umpqua Indians, the Aleutian Pribilof Islands Association and others that has allowed them to attain single-A ratings from Standard and Poor's Corp. for their debt.

Attaining the investment-grade rating allows tribal nations to raise money at cheaper costs than unrated (junk bond) transactions, and for longer periods of time than they could get from commercial banks. ACA representatives said they felt that there is a potential for billions of dollars to be raised for tribes through this mechanism.

Many Indian casinos have been financed by junk bond deals, and relatively few have been investment grade, with or without insurance. The Southern Ute Tribe of Colorado made history in 2001 by achieving the highest rating, AAA, without enhancement, on $69 million in bonds.

The three tranches or maturities of the Cherokee deal, for instance, mature out to 15 years and have yields to investors of 4.1 percent, 4.3 percent and 4.6 percent. Just as with bank certificates, the nation must pay investors more for taking out notes for longer periods. From a total of $30 million, $8.05 million matures in five years, $9.79 million matures in 10 years and $12.16 million matures 15 years down the road, in December 2021.

The firm's tribal transactions have included money for a casino, a cultural center, a golf resort, convention center and medical clinics. Most have been tax-exempt bonds, although some include taxable revenue bond as well.

Jennifer Lerch, director of western regional public finance at the firm, noted that ACA started into this business around the turn of the century with deals for the Quinault, White Earth and Las Vegas Paiute tribes but temporarily halted due to an adverse ruling from S&P that these kinds of deals are classified ''corporate,'' which can't be enhanced by this type of insurance, instead of municipal, which can. Since getting this reversed, ACA has re-entered the market and wants to do even more.

Jeffrey Heckman, managing director at ACA, said ''we would like to keep growing that portfolio. If we could double it, that would be great.''

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ACA's biggest deal recently has been $34 million for the Cow Creek Band for a variety of purposes. This is a taxable bond that was combined with a $16.7 million credit default swap. The next largest has been to the Cherokee, for $30 million. A deal for $18.6 million in tax-exempt bonds for the Aleutian Pribilof Islands Association recently was honored as deal of the year in its category by the Bond Buyer newspaper.

The Cherokee Nation plans to use the proceeds to build three health care facilities: a 94,830-square-foot medical clinic in Muscogee, Okla.; a 25,000-square-foot clinic in Nowata, Okla.; and a 12,000-square-foot annex to the existing Redbird Smith Health Center in Sallisaw, Okla.

The Muscogee clinic will be constructed and operated jointly with the IHS and will cost a total of $25.4 million. The Nowata clinic will replace an existing clinic housed in modular buildings at a cost of $6.3 million. The Annex construction will cost about $2.7 million.

Commented Lerch, ''Cherokee Nation is the first tribal bond deal backed by the GO [general obligations] of the Cherokee Nation, payable from dedicated third-party [health care] reimbursements of the [Cherokee Nation's] health care system. The deal represents the first time that a public insured bond deal has been issued by a tribal nation and secured by its health care system with a GO wrap of the nation as ultimate and underlying credit support. There are no links, pledge or references to gaming as a credit support.''

The Aleutians deal has yields that range from 4 percent to 5.05 percent and maturity dates out as far as 2036. The money will be used to build a 40,762-square-foot headquarters and cultural center in Anchorage, Alaska.

''APIA is the first tribal cooperative [association of member tribes] financing whereby the bonds are ultimately secured by the GO of the association, payable from the collective of federal funding sources,'' Lerch said.

According to the Bond Buyer, using bonds instead of a bank loan allowed for a higher amount of financing, meaning the cultural center could be financed as well as the new headquarters. It said the building is expected to open late this year.

''The cultural center portion was not only the vehicle by which Aleut artifacts would be returned (and displayed) from various museums in the United States [certain federal repatriation funds would be lost without a center/building to bring things back to], but also the only central gathering place for member tribes to share current art, language, dance, stories and other culturally significant activities, at least annually. Further, this center was to house the language preservation by way of a [small] recording studio and mini-theater - a space which would all them to preserve the nearly lost Aleut and Unungan language and stories passed down from previous generations,'' according to Lerch.

Other recent ACA deals include a big convention center and hotel project for the Seminole Tribe of Florida. The Seminole deal included a $29.4 million tax-exempt bond and a $65.2 million credit default swap.