More tribes may tap bond market for debt

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NEW YORK - Despite the uncertain economy, more tribes can be expected to tap the capital markets by issuing bonds, says one of the three national agencies that rates them.

But there will be a price tag attached if tribes want to get bond ratings - they will have to grant a limited waiver of sovereign immunity, something many tribes are reluctant to do.

Fitch IBCA, Duff & Phelps here is encouraging tribes "to open dialogues" on getting bonds rated, regardless of the size of the tribe or the enterprise to be funded. It is one of the "big three" of ratings agencies (the others being Moody's Investors Service and Standard & Poor's Corp.)

The agency said it "expects more tribal governments to bring bond issues to market as their financial resources and capital needs change."

Fitch includes smaller and non-gaming tribes in its expectations. "Too often, tribes with smaller populations and/or without lucrative casinos assume they are not appropriate candidates for the debt rating process," mistakenly, in Fitch's view.

Tribes would benefit from getting bonds rated because it would lower interest costs they incur from unrated debt or bonds rated less than "A," which is the lowest "investment-grade" rating. (Fitch's ratings range from AAA, the best, to DDD, the worst.)

Fitch noted in a recent report on "Tribal Governments in the Bond Market" that "unlike state and local governments, tribal governments for the most part have been limited to borrowing money through commercial bank loans or privately placed debt offerings."

It ascribed the inability of tribes to tap the capital markets "partly to credit issues and partly to legal issues," but said "this historical pattern is changing."

Fitch noted the difficulty of rating tribal debt, which mixes aspects of several different market sectors, including corporate, municipal, structured finance and sovereign. It also noted that only a limited number of tribes have rated debt so far.

The ones that have mostly have used the tax-exempt bond market, and have financed both governmental needs such as infrastructure and housing, and economic development activities such as casinos.

"Security for such debt has typically included revenues from various commercial enterprises, but occasionally tax receipts, pledges of particular assets, and federal grant moneys have been pledged," Fitch said.

"A higher credit rating ordinarily requires a history of balanced or improving fiscal operations, conservative fund management, stable government, legal enforceability of the debt obligations, and a borrowing structure that emphasizes timely repayment."

Important factors Fitch will use to analyze tribal bond issues include "legal security, tribal governance, tribal finance, project fundamentals, cash flow analysis, and sovereignty."

While acknowledging the sovereign status of tribes, Fitch said "investors ordinarily expect limited waivers of sovereign immunity to permit enforcement of contractual obligations; such limited waivers are considered necessary credit factors by Fitch."

To date, the largest bond offering in Indian country was half a billion dollars in 1999 to finance an expansion of the Mohegan Sun casino in Connecticut. The unrated deal is costing the tribe more than 8 percent.

In comparison, the Quinault Nation of Washington got an "A" rating on $27 million of bonds to finance a casino/hotel in 1999, and the interest rate on the tax-exempt portion was just 5.7 percent.

That deal was done through American Capital Access here. ACA offers tribes another way to get an investment grade rating of "A" if they can't get one on their own - credit enhancement. The firm will cosign with the tribe, pledging its own financial strength to assure investors they will be repaid.