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Rating Action:

MOODY'S ASSIGNS B3 TO LITTLE TRAVERSE BAY'S $195 MIL. SR. NOTES DUE 2013; STABLE RATINGS OUTLOOK

24 Oct 2005
MOODY'S ASSIGNS B3 TO LITTLE TRAVERSE BAY'S $195 MIL. SR. NOTES DUE 2013; STABLE RATINGS OUTLOOK

Approximately $195 Million in Rated Debt Securities Affected.

New York, October 24, 2005 -- Moody's Investors Service assigned a B3 rating to the Little Traverse Bay Band of Odawa Indians' ("LTB") $195 million senior notes due 2013. A B3 corporate family rating and stable ratings outlook were also assigned. Net proceeds from the new bonds along with approximately $35 million of future operating cash flow and $20 million of planned furniture, fixture and equipment financing will be used primarily to fund a $196 million casino development, an interest reserve, and current and future distributions to the tribe.

The ratings consider LTB's small revenue and cash flow base, dependence on a single gaming market, limited experience developing and operating a significantly larger casino facility, and peak debt/EBITDA of close to 8.0 times (x) times during construction, although debt/EBITDA is expected to drop to below 5.0x by the end of fiscal 2008. The development project includes a new casino scheduled to open in the second quarter of 2007 and a hotel that is scheduled to open late in the second quarter of 2007. Also considered are several risks typical of Native American gaming financings including the likely difficulty senior unsecured bondholders would face in recovering their investment in a liquidation scenario. Currently, there is uncertainty regarding whether an Indian Tribe can be a debtor under U.S. bankruptcy law, and whether a creditor would be protected under that same law.

The ratings also take into account pending litigation regarding the payment of compact fees by LTB to the State of Michigan. In August 2004, LTB ceased making the 8% payments to the State because LTB felt the exclusivity granted to it under the compact in exchange for the 8% fee had been violated. The State disagrees with LTB's position. Prior to August 2004, LTB was making the required payments to the State. LTB did adopt a formal resolution waiving its sovereign immunity in federal court and agreed to be bound by a federal court decision. The State filed suit in June 2005. The case has yet to be briefed or argued by the parties, and the timing of a district court decision is unknown. Although LTB has been putting the compact fee in a separate cash account while the litigation is underway, it is not being held in escrow by a third party. The senior note indenture contains a covenant that requires LTB to segregate this cash account.

Positive ratings consideration is given to the successful track record and stable operating results of LTB's existing gaming facility that opened in 1999, as well as Moody's expectation that a larger and higher quality product offering will increase the penetration of both local residents and tourists. The planned casino development will include a new fifty thousand square foot gaming space and non-gaming amenities including a 227-room hotel, an events center, convention space, and parking structure. The casino development will more than double the size of the existing casino facility which will remain open during construction. The existing gaming facility will close once the new facility opens.

The similarity between the B3 corporate family rating and B3 senior note rating considers that allowable senior secured debt ($50 million total carve-outs) would represent only about 20% of total debt on a fully drawn basis. While LTB is expected to use most of its allowable $25 million FF&E carve-out to fund its development project, Moody's does not expect that LTB will utilize its $25 million secured credit facility carve-out in any significant manner given that no additional debt financing is anticipated to complete this project. Additionally, LTB can only access the credit facility carve-out once the development project has been open for 180 days and pro forma leverage (including any secured credit facility debt) does not exceed 4.5x

The stable outlook considers that there will be an interest reserve account that will cover interest obligations beyond the planned construction period, and that construction disruption will be minimal as the new casino and hotel facility will be constructed on a separate site from LTB's existing gaming facility. There will be a guaranteed maximum price construction contract in place as well as sufficient liquidity for the project including $22 million of total contingencies and approximately $7 million of additional cash available for construction purposes.

The stable outlook also acknowledges that while distributions will be limited by a restricted payments test included in the note indenture, annual service payments totaling $12.5 million per year (increasing 3% annually) will not be subject to the restricted payments test and along with allowable payments to LTB for actual services provided, can be paid in default.

Ratings improvement is limited by the significant construction and development activity that will take place over the next 18-months as well as LTB's high peak leverage during construction. Material scope changes, construction disruptions, delays and/or slower than expected ramp-up could have a negative ratings impact. Ratings could also be negatively impacted by an unfavorable decision regarding the compact fee litigation; to the extent the decision has a material negative impact on LTB. Longer-term ratings improvement will likely requires favorable resolution regarding the compact fee litigation, on-time and on-budget completion of the new development project, and indications that post development ramp-up is occurring as planned.

The new notes will not have a specific pledge of casino revenues, but will be secured by a first priority interest in the interest reserve, construction disbursement account, and operating accounts of the casino until the end of the construction period. The new notes will be issued directly by LTB but will not have recourse to LTB's non-gaming assets. Cash flow from casino operations will provide the only source of repayment for the new notes. Although LTB's gaming entity is not a separate legal entity from its government, and non-gaming claims may be enforceable against gaming assets as a result, LTB will covenant not to waive its sovereign immunity to permit the enforcement of claims against gaming assets except for waivers directly related to the operation of the gaming business.

The following new ratings were assigned:

- $195 million senior unsecured notes due 2013 -- B3; and

- Corporate family rating -- B3.

The Little Traverse Band of Odawa Indians is a federally-recognized Indian tribe with approximately 4,000 enrolled members. LTB owns the Victories Casino and the Victories Hotel in Petoskey, Michigan. LTB executed its gaming compact with State of Michigan in 1999 which allows the tribe to operate Class III slot machines.

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 Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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