Indian nations enter the public debt markets

NEW YORK - A recent report written by analysts at a prominent global credit rating agency should catch the interest of tribal leaders, financial officers and businessmen throughout Indian country. According to Fitch Ratings, tribal governments are capable of issuing bonds bearing investment grade ratings by following sound fiscal management and planning practices.

In its report "Tribal Governments in the Bond Market," released in early February, Fitch revealed its interdisciplinary approach to evaluating the creditworthiness of individual tribal governments. While its method is tailored to consider circumstances unique to Indian country, the rating agency's approach is quite similar to the way it evaluates the credit of non-Indian governments.

"Tribal bond issuance is unique within the United States - indeed an emerging market," said William J. Streeter, Fitch's managing director of public finance. "The diversity of assets and of income streams make these credits both interesting and challenging and certainly a market primed for ratings distinctions."

Founded in 1913, Fitch Ratings is a global rating agency that provides fixed-income credit markets around the world with credit opinions. The company has dual headquarters in New York and London and is a wholly owned subsidiary of Fimalac S.A., a Paris-based international business support services group.

During a Feb. 23 teleconference, a group of Fitch analysts, including H. Fabian Ramirez, provided insight as to what they look for when analyzing a tribe's financial situation and evaluating its credit.

"Our analysis focuses on the sovereign entity of the issuer," Ramirez explained. "We review the entity's financial and legal documentation. While finances are an important component of the rating, meeting with the tribal leadership and understanding their philosophy and goals is also valuable.

"Tribal governments, similar to local and state governments, provide services to their citizenry," Ramirez continued. "Instead of having a tax base, most tribes have an enterprise or group of enterprises to generate revenue to fund governmental operations."

This unique characteristic of Indian nation governments forces Fitch to examine tribal finances not only from a public finance standpoint, but also from a perspective that incorporates analysis techniques from the corporate, higher education, health care and structured finance sectors.

"It's difficult to generalize about tribal characteristics - their differences in population, taxable resources, capital needs and debt obligations," said Streeter. "Some debt will be secured through a general obligation pledge while other debt will be secured by income from enterprises. Some transactions will actually carry a multiple pledge of securities."

In the past, sovereignty issues and the general lack of sophisticated financial structures and controls made it difficult for tribes to find financial backing. Options available to tribal governments in the past have been limited largely to either borrowing from commercial banks or privately placed debt offerings.

Indian nations with gaming and other large enterprises are beginning to adopt the more sophisticated financial structures required to assuage investor confidence in their ability to repay any debt incurred.

A bond is an interest-bearing certificate of debt. In return for a cash investment, the investor is guaranteed a return on his money when the bond matures. Bonds issued by governmental entities are generally secured by fixed property, an income stream or some other asset or collection of assets. Investors put money into this market to create for themselves a source of fixed-income revenue.

In the United States, all levels of government - federal, state, county and municipal - offer bonds in the public markets as a means to finance all kinds of public works projects. Bonds are rated (the job of Fitch and similar companies) based upon an analysis of the issuer's finances. These ratings help investors differentiate the level of risk involved with bonds issued by various entities.

Tribal governments have issued bonded debt to fund governmental needs - buildings, roads, water and sewer systems, clinics and housing - as well as for economic enterprises, like casinos, hotels and factories. Securities backing such debt usually include casino revenues and royalties from oil and gas leases, but tribes have also put up other collateral, such as tax receipts, federal grants, and liens on off-rez non-trust land.

One thing completely unique to Indian nations that does not concern other governmental entities (except perhaps from a defensive standpoint) is land claims. Fitch's Ramirez told Indian Country Today after the teleconference that if economic activity on already existing tribal land is stable and provides ample coverage of debt service payments, land claims against other governmental entities will not likely influence the credit rating.

"However, it would be favorable if the tribe had a specific plan for the land use and a contingency plan in response to the potential victory or defeat of a land claim litigation," Ramirez said.

While not all of Indian country has shared in the prosperity and promise gaming has brought to some tribes, the fact that investors looking for a solid fixed-income return have accepted and invested in tribally issued bonds can only bode well for the future. In a wider context, the fact that tribes issuing bonds are so thoroughly scrutinized and that investors are buying them is de facto recognition of tribal sovereignty.

The Fitch report, which lists a number of specific criteria tribes must meet to secure a high credit rating, may be downloaded from the company's Web site, www.fitchratings.com.