Fitch: Quechan Tribe's Ratings Remain on Watch Negative Following Receipt of Loan Proceeds.

NEW YORK -- The ratings assigned to the Quechan Tribe of the Fort Yuma Indian Reservation (Quechan, or the tribe) remain on Watch Negative following the tribe's securing of external financing in the form of a $13.5 million loan from another Native American government. Management indicates that the proceeds of the loan are sufficient to provide the remainder of the $208 million in total project costs for construction and equipping of a replacement facility for its current California casino operation.

Quechan's ratings are as follows:

--Issuer rating 'CCC';

--$110 million gaming enterprise revenue bonds series 2008 'CCC+';

--$45 million governmental project bonds series 2007 (tax-exempt) 'CCC'.

Quechan's ratings were downgraded and placed on Watch Negative on Oct. 3, 2008 due to Fitch's concerns that a liquidity crisis was developing as a result of the Tribe's inability to secure external financing to complete construction of the California casino project. The inability to secure the external financing triggered a project fund funding event under the gaming enterprise bond indenture, requiring the Tribe to fund a deficiency amount of $25 million in six equal monthly installments. The Tribe made two such monthly deposits into the project fund, in September and October 2008, utilizing cash on hand at the tribal government. As such, an additional factor contributing to the downgrade and placement of the ratings on Watch Negative was the erosion of the tribal government balance sheet caused by the need to inject equity into the project.

Erosion of the tribal government balance sheet raised concern related to an increased potential for the occurrence of bond covenant violations. Specifically, the governmental project bond indenture requires the maintenance of an unrestricted net asset balance at the tribal government equal to at least 125% of the principal amount of long-term indebtedness outstanding that does not have a security interest in the cash flows of the casino operation (only the series 2007 governmental project bonds at this time). The unrestricted net asset balance covenant compliance certificate is required to be provided to the governmental project bond trustee by the Tribe within 45 days after the end of each fiscal quarter. If this covenant is violated, the Tribe will be required to fund the contingent reserve account in an amount equal to 100% of the outstanding par amount of the 2007 bonds. Failure to fund the contingent reserve within 90 days after violation of the unrestricted net asset test will result in an event of default on both series of bonds, as cross default provisions exist. In an event of default, bondholders would have the ability to declare all outstanding principal immediately due and payable.

The ability to secure $13.5 million in loan proceeds mitigates concern related to the potential for project construction delays due to insufficient funding. However, the ratings remain on Watch Negative at this time as management is unable to provide confirmation of compliance with the 125% unrestricted net asset test as of the Dec. 31, 2008 test date. The Tribe has until Feb. 14, 2009 to provide the compliance certificate to the governmental project bond trustee. The Tribe is currently seeking to secure additional external financing in the form of another loan to the casino or an equipment financing, the proceeds of which could be used to reimburse a portion of the tribal government's equity contribution for the project, thereby bolstering the tribal government balance sheet. In the event that additional external financing cannot be secured, Fitch believes that the threat of covenant violation will nevertheless be greatly diminished as of the March 31, 2009 test date, assuming a successful opening of the project that results in the release of cash of the tribal government which is currently held in escrow for the benefit of the general contractor.

Since the time of the downgrade in October, the size of the California casino project budget has been reduced to $208 million from $214 million. Debt funding for the project includes:

--The gaming enterprise bonds ($110 million);

--A portion of the governmental project bonds ($21.9 million);

--An interfund loan from the Quechan tribal government ($30 million);

--A loan from another tribal government ($13.5 million).

The balance of the project cost has been funded through equity contributions of the Quechan tribal government. The proceeds of the $13.5 million loan, which ranks on parity with the gaming enterprise bonds with respect to the lender's security interest in the cash flows of the casino operations, represent sufficient funds to complete project construction, fulfilling the Tribe's obligation to secure completion financing per the gaming enterprise bond indenture. The loan proceeds were deposited into the project fund in mid-November, so the Tribe was able to cease making monthly deposits to the project fund to cure the deficiency after the September and October deposits. Management indicates the grand opening of the casino is currently planned to occur in mid-February 2009.

As is the case in many regional gaming markets, the operating trend of the existing casinos was poor in 2008. Year-to-date revenue through Nov. 30, 2008 was down 5.9%, while EBITDA was down 15%. However, the Tribe remains able to comfortably cover debt service carrying charges. Based on latest-12-month EBITDA as of Nov. 30 2008, coverage of all debt service equaled 3.92 times (x). Principal amortization on the governmental project and gaming enterprise bonds does not begin until 2012 and 2013, respectively, providing ample time for ramp up of the California casino project before debt service carrying charges increase.

Fitch is likely to consider removal of the ratings from Watch Negative following:

--The successful opening of the casino project in February 2009;

--The submission of a governmental project bond covenant compliance certificate for the Dec. 31, 2008 test date indicating that the 125% unrestricted net asset test was satisfied;

--Expectation that relief to the tribal government balance sheet will mitigate concern regarding the potential for covenant violation for the March 31, 2009 test date and beyond.

For additional information on Quechan's credit profile refer to the following reports available on the Fitch web site at www.fitchratings.com:

--'Fitch Downgrades & Places Quechan Tribe (CA) Rtg on Watch Negative', dated Oct. 3, 2008;

--'Credit Analysis: The Quechan Tribe of the Fort Yuma Indian Reservation', dated May. 15, 2008;

--'Fitch Downgrades Quechan Tribe's Issuer Rating to 'B+", dated April 22, 2008.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.