Fitch Ratings-New York-16 April 2013: Fitch Ratings affirms Laguna Development Corporation’s (LDC) enterprise revenue bonds (the bonds) at ‘BB+’. Fitch also affirms LDC’s ‘BB’ Issuer Default Rating (IDR) at ‘BB’.

The Rating Outlook is Stable.

The affirmation of the ratings reflects LDC’s strong financial flexibility, which is enhanced by the regular amortization of the debt and the cash flow sharing agreement with the Pueblo of Laguna (Pueblo). The cash flow sharing agreement helps to ensure that liquidity remains adequate at the
enterprise level and that the capital reinvestment remains robust. LDC’s operating diversification relative to other Native American gaming issuers and the Pueblo’s conservative financial policies are also factored into the ratings.

LDC operates three casinos located along I-40 west of Albuquerque. These include Route 66 Casino (about 15 miles from Albuquerque) with approximately 1,630 slot machines and a 154-room hotel. There is also the Dancing Eagle Casino with about 600 slot machines 30 miles further west
catering more to the I-40 passerby traffic. Finally, Casino Xpress has an additional 130 slot machines in a rest area across the Route 66. The bonds benefit from a first-priority revenue pledge in these and certain other ancillary assets.

LDC’s leverage as measured by debt/EBITDA is low at just under 2x as of Dec. 31, 2012. Fitch expects the ratio to improve over the next two to three years as LDC’s debt amortizes. LDC is contemplating a refinancing of its bonds, which amortize fully by 2021. However, Fitch expects
LDC’s new debt to have some level of amortization and the company to continue reducing debt as Fitch does not expect it to take on more debt in the foreseeable future. Coverage of interest and principal by EBITDA is expected to remain well above 3x. In 2012 LDC was able to regain approximately 2% market share lost in 2011 to some of the competitors in the Albuquerque market. However, the gain came at the expense of margins, resulting in an EBITDA decline. Fitch expects EBITDA and EBITDA margins to stabilize in 2013 reflecting a more rational promotional environment heading into 2013. Fitch projects flat top-line growth for LDC, in line with the aggregate growth of the mature Albuquerque market.

LDC and the Pueblo of Laguna entered into a cash flow-sharing agreement, which establishes minimum operating and capital expenditure cash reserves to be maintained at LDC. The bulk of the transfers to Pueblo are made annually based on a percentage of cash remaining after the reserves are established. There is also a fixed amount, comprising a small portion of total transfers that the tribe receives in monthly increments.
Fitch views this agreement favorably as it enhances liquidity at LDC, helps ensure proper levels of capital reinvestment and sets tribal transfers at levels that are commensurate with the cashflow-generating ability of the enterprise. The agreement is part of the bond covenants. The Pueblo maintains conservative financial policies on the tribal side and does not rely heavily on transfers from the gaming enterprises.

The 2006 bonds are secured by a lien on the cash flows of LDC. The one-notch positive differentiation from the IDR reflects additional debt covenants on the bonds, which limit pari passu ?debt, improving recovery prospects in an event of default. The covenants prohibit additional debt if pro forma leverage would exceed 3.0x and debt service coverage falls below 2.5x.

The bonds also benefit from a trustee controlled flow of funds and a springing debt service reserve fund (DSRF). The controlled flow of funds and the funding of the DSRF are activated if debt service coverage by EBITDA declines below 2x. A coverage level of less than 1.5x would trigger an event of default.

Positive: Future developments that may, individually or collectively, lead to positive rating action include:
–Leverage as measured by debt/EBITDA trending closer to 1x;
–Promotional environment remaining benign for an extended period;
–The Pueblo providing more regular tribal level financial disclosure.
LDC’s IDR is largely constrained within the ‘BB’ category reflecting LDC’s limited operating
diversification relative to Fitch’s broader rated gaming universe. The competitive and saturated
nature of the Albuquerque market also pressures the potential for positive rating movement.

Future developments that may, individually or collectively, lead to a negative rating action include:
–Leverage as measured by debt/EBITDA approaching 2.5x;
–Ramp-up of promotional activity in the market leading to significant operating pressure.
LDC’s healthy liquidity and reinvestment in the properties as a result of the cash flow agreement
with the Pueblo plus solid credit metrics provide ample rating cushion; therefore, Fitch does not
anticipate negative rating pressure in the near-to-medium term.

Fitch affirms Laguna Development Corporation as follows:
–IDR at ‘BB’;
–Enterprise Revenue Bonds, series 2006 at ‘BB+’.

Primary Analyst
Adam Dolkart
Associate Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
Secondary Analyst
Alex Bumazhny, CFA

Committee Chairperson
Mark Sadeghian, CFA
Senior Director