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Rating Action:

MOODY'S ASSIGNS B1 TO SENIOR NOTES OF CHOCTAW RESORT DEVELOPMENT ENTERPRISE

20 Mar 2001
MOODY'S ASSIGNS B1 TO SENIOR NOTES OF CHOCTAW RESORT DEVELOPMENT ENTERPRISE

Approximately US$ 150 Million of Debt Securities Affected.

New York, March 20, 2001 -- Moody's Investors Service assigned a B1 rating to Choctaw Resort Development Enterprise's proposed $150 million senior notes due 2009. A Ba3 senior implied rating and a B1 senior unsecured issuer rating was also assigned. Proceeds from the senior note offering along with a $34 million equity contribution from the Choctaw Tribe and draws on the $125 million senior secured reducing revolver will fund the Golden Moon project, improvements to the existing Silver Star Casino, and pay transaction costs. Total project costs including capitalized interest, pre-opening expenses, working capital and transaction costs are estimated to be about $291 million. The Golden Moon project is expected to open in the second half of 2002. The rating outlook is stable.

To accommodate growing demand, the Choctaw Tribe is developing the Golden Moon, an 84 thousand square foot hotel and casino that will be located directly across the highway from the Tribe's existing casino, the Silver Star which is located in Philadelphia, Mississippi. The Golden Moon will be connected to the Silver Star by an enclosed pedestrian bridge spanning the highway. Currently, the Silver Star is operating at near capacity during the weekends. It is currently the only major entertainment venue within a 150-mile radius. Weekend hotel utilization is at 98% and the overall hotel occupancy rate has increased to almost 89% in fiscal year 2000 from about 81% in 1998. As a result of the expansion, the Tribe's casino assets will increase significantly. The amount of gaming space and hotel rooms available will effectively double.

The ratings reflect the strong operating performance of the Silver Star Casino, lack of competition in the immediate market area, and Moody's expectation that a significant portion of the expanded capacity in the market will be absorbed given the current capacity constraints on the Silver Star. At this point, the Tribe is the only legal entity authorized to operate land-based casinos in the State of Mississippi. The Tribe's resort is surrounded by "dry" counties and is about 125 miles from the nearest casino competitor.

The rating also considers that leverage will be reduced once the construction period is over. Leverage is expected to peak in the middle of fiscal year 2002 as the $125 million revolver is drawn upon for construction purposes. Leverage, defined as debt-to-EBITDA is expected to reach 2.0 times. The Tribe is allowed to take out an annual service payment equal to $55 million in fiscal year 2001, increasing 5% each year after that. Reducing EBITDA to account for the annual service payment to the Tribe results in a peak debt-to-EBITDA of about 3.5 times. Fixed charge coverage, also accounting for the annual service payments, will be about 5.0 times once the full effect of the borrowing takes place. While the annual service payment is not considered a fixed charge for covenant purposes, and is not defined as an operating expense in the Enterprise's income statement, Moody's considers the payment to effectively be a committed operating expense similar to a management fee. Although there is currently no contractual relationship governing the annual service payment, in the event of default, there is nothing to prevent the Tribe from continuing to receive the annual service payment. In addition to the annual service payment, the Tribe can receive additional distributions subject to a restricted payment covenant in the senior note indenture. Moody's expect that the Tribe will take a significant portion of the distributions available to them.

The rating also takes into account the construction and expansion risks, the dependence on a single market, the Tribe's limited experience managing its casino operation, and the likely difficulty senior unsecured bondholders would face in recovering their investment in a liquidation scenario. The bank facility is secured by substantially all of the assets of the Enterprise (other than real property and improvements). The notes rank behind the bank facility as well as all of the Enterprise's future senior secured debt. The land that the casino is located on is held in trust by the U.S. government and is not available to satisfy claims. Additionally, bondholders do not have recourse to Tribe assets, sovereign immunity has not yet been tested, and only the Tribe can run the casino. During the construction period, however, the senior secured bank lenders do not have a lien on note proceeds.

The Tribe expects to establish the Silver Star and Golden Moon, collectively referred to as the Pearl River Resort, as a more of a regional destination resort. As a result, the Pearl River Resort will begin to compete more directly in the near-term with casinos outside of its 150-mile radius market area as it attempts to attract a higher percentage of overnight customers. There are currently 30 casinos concentrated in Mississippi's gaming markets along the Mississippi River and the Mississippi Gulf Coast. Longer-term, any extension of gaming allowed in other parts of the Mississippi and/or the legalization of gaming in Alabama or Georgia could have a material negative impact on the Pearl River Resort concept.

Like similar projects, the construction of the Golden Moon is vulnerable to development and construction risks including weather and interference delays, as well as engineering problems. With respect to the Golden Moon project, the anticipated construction costs and completion dates are estimated based on construction drawings that are about 85% complete. Approximately 66% of the building related project costs are fixed and covered by a $146.8 million guaranteed maximum price contract with the remainder subject to completion allowances. Hard costs total about 80% of the total project costs. No additional debt financing is anticipated to complete this project.

The Tribe has limited experience in independently managing the Silver Star casino. From June 1994 through January 2000, Boyd Gaming managed the operations of the Silver Star pursuant to a seven-year management agreement due to expire in July 2001. In February 2000, the Tribe bought out the last two years of the contract and has independently managed the Silver Star since then. Although the new General Manager hired by the Tribe and the existing employees have successfully managed the Silver Star over the past year, they will have the added challenge of managing a much larger facility designed to attract customers from a broader market subject to competition.

The stable outlook considers that the casinos have a strong hold on the local market and any serious threat of direct competition in that market will not happen in the foreseeable future. Additionally, the stable outlook considers that some debt reduction will take place once construction of the Golden Moon is complete.

The Mississippi Band of Choctaw Indians established the Choctaw Resort Development Enterprise to operate the Silver Star Hotel and Casino and to develop and operate the Golden Moon Hotel and Casino. The Tribe is a federally recognized, self-governing Indian Tribe with a 29 thousand acre reservation in east central Mississippi. The Choctaw Tribe is the only federally recognized tribe in Mississippi and the only authorized Indian casino in the state. The Tribe and the State of Mississippi entered into a compact in 1992 that fully authorizes Class III gaming activities. The compact is not subject to a specific term and will continue unless mutually terminated. Additionally, the compact does not require payments to the State of Mississippi.

New York
Tom Marshella
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653

New York
Keith Foley
VP - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653

No Related Data.
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