Fitch Rates Agua Caliente Band of Cahuilla Indians, California Revs 'A-'; Lowers Existing to 'A-'.

NEW YORK -- Fitch Ratings assigns an 'A-' rating to the Agua Caliente Band of Cahuilla Indians, CA's (the Tribe) $230 million senior secured notes, series 2006 and downgrades to 'A-' from 'A' the rating on the Tribe's outstanding $19.5 million of revenue bonds, series 2003, which are on parity with the notes. The Rating Outlook is Stable.

The downgrade of the 2003 bonds is primarily based on the potential that already stiff competitive pressures of the southern California gaming market will continue to increase going forward as many Tribes, including Agua Caliente, are seeking approval to increase the number of permitted gaming devices under their state compacts. Partially offsetting this concern is Fitch's belief that the Tribe is well positioned to maintain strong operating results in the face of these increasing competitive pressures.

The 2006 notes are scheduled for negotiated sale with JP Morgan the week of Oct. 31, 2006. The notes mature serially on Oct. 1, 2008-2021. Semi-annual interest payments commence April 1, 2007. Bond proceeds will fund construction of a hotel facility adjacent to the Tribe's Agua Caliente Casino and refinance $48 million outstanding on a construction loan credit facility. The bonds are taxable.

The 'A-' rating reflects a long history of stable operations of two casino facilities with sound financial margins, ample coverage of maximum annual debt service (MADS) from pledged revenues, and tribal governance stability. Credit concerns include a competitive operating environment and the limited liquidity of the casino enterprise operations. The Tribe is dependent on casino operations to fund debt service requirements and general governmental functions, including per capita distributions to members. The notes mature prior to the expiration of the Tribe's gaming compact with the state, which is currently the subject of negotiations, with the Tribe seeking approval to increase the limit on gaming devices and potentially open a third casino facility. If the changes to the compact are approved, the Tribe plans to further leverage the pledged revenues to fund the expansion of its existing casino facilities. However, Fitch expects the additional leverage to be manageable, and debt service coverage levels should remain high.

Due to the unique checkerboard nature of its reservation, Agua Caliente is the sole Tribe in the state of California operating two casinos, with the potential to open a third facility should the terms of a re-negotiated gaming compact with the state permit, giving it a unique advantage in the very competitive southern California gaming market. The Tribe's Spa Resort Casino (SRC) opened in 1995 and is located near Palm Springs, CA, the Agua Caliente Casino (ACC) opened in 2001 and is located near Rancho Mirage, CA. Net gaming revenues of both facilities are pledged to bond holders, providing some level of diversification in the revenue stream. The casinos are located in Riverside County, making the primary gaming market the Coachella Valley, including Palm Springs and seven nearby cities. Primary competition for the Tribe's casinos is the six Native American gaming operations located within 60 miles of the SRC and ACC facilities. Several other Tribes with facilities in the primary market area are currently re-negotiating their gaming compacts with the state to permit for additional gaming devices, the resulting expansion of any competitor facilities would add to the already significant competitive pressures faced by the Tribe.

Stable and experienced management of gaming operations is demonstrated by the SRC and ACC's strong financial margins and ample debt service coverage from pledged revenues. About 50% of pledged revenue is derived from each facility. Earnings before interest, taxes, depreciation, and amortization (EBITDA) over the past four fiscal years grew a strong 9.4% on a compound annual basis. Management reports that 2006 results will be in-line with the 13% growth in EBITDA that was budgeted. Construction of the ACC hotel will be funded through 2006 note proceeds as well as a $25.9 million equity contribution from the Tribe. The hotel, which is scheduled to open the first quarter of fiscal 2008, will enhance ACC's amenities and appeal to its customer base in the Coachella Valley, which is anticipated to boost gaming revenues in fiscal 2008 and 2009.

Debt service coverage levels are strong, with coverage of MADS by fiscal 2006 EBITDA equal to 6.9 times (x). The additional bonds test requires 2.25x coverage of MADS and a leverage ratio (total debt to EBITDA) of less than 3.0x, including outstanding and proposed debt. Should a re-negotiated compact allow the addition of gaming devices, the Tribe plans to issue $100 million in parity debt to fund expansions to the ACC facility. In addition, the Tribe may issue up to $50 million in parity bonds to fund construction of a tribal museum. A conservative financial stress case scenario contemplates the issuance of $100 million in parity debt with no addition of gaming machines and the associated growth in EBITDA; under this scenario MADS coverage would remain strong, at 4.6x in fiscal 2006 and rising to 6.4x by fiscal 2010. The indenture provides for a cash trap below 2.0x MADS coverage, which provides additional security for bondholders, although other Fitch rated tribal gaming credits typically begin trapping cash at somewhat higher coverage levels.

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.