Fitch Rates Cherokee Nation, OK, Health Care Revs 'BBB-'; Stable Outlook.

NEW YORK -- Fitch Ratings assigns a 'BBB-' rating to The Cherokee Nation, OK's (the Nation) $30 million health care system bonds (health care projects), series 2006. The bonds are expected to price via negotiation with BOSC, Inc. on Dec. 14, 2006. The bonds will mature Dec. 1 2011, 2016, 2021. The Nation will make level sinking fund payments of $2.9 million annually to the bond fund through final maturity of the debt. The bonds are expected to be insured at closing by ACA Capital. Proceeds will be used to fund the construction of three health care clinics. The Rating Outlook is Stable.

The 'BBB-' rating on the health care system bonds, which also benefit from a pledge of the full faith and credit of the Nation, is based on the Nation's strong financial flexibility as reflected in ample reserve levels; strong performance of its gaming operations, which provides approximately 37% of general fund revenues; and strong coverage of debt service by a gross pledge of third party payor revenues of the healthcare system. The primary credit concerns include the limited diversity of the Nation's revenue base, which is dependent upon gaming revenues. However, the Nation exhibits a good level of revenue diversity relative to other gaming tribes. Also considered a risk is the possibility for construction delays of the health care clinics, however, debt service coverage should remain strong if delays do occur.

The Nation is the second largest federally recognized tribe with approximately 260,000 enrolled members and a jurisdictional area comprising all or parts of 14 counties in northeastern Oklahoma. The Nation has a tripartite government operated pursuant to a tribal constitution. The executive branch of the Nation is lead by the Principal Chief, who is elected at large for a four year term.

The series 2006 bonds are being issued to provide funding for the construction of two health care clinics, and to build an annex to an existing clinic. The Nation's health care system services an eligible patient population of approximately 115,000 with in its 14-county jurisdictional area. Current facilities include six tribal outpatient clinics and two satellite clinics. Patient visits totaled about 305,000 in fiscal 2005. The bonds are secured by a gross pledge on the third party payor revenues of the health care system, including Medicaid, Medicare and private insurance company payments. Coverage of pro forma maximum annual debt service (MADS) on the 2006 bonds is strong at 4.1x in fiscal 2005. Between fiscal 2001 and 2005, growth in pledged revenues has equaled a strong 8.4% annually on a compounded basis. Based on unaudited results, pledged revenues grew by 6.3% in fiscal 2006. In order to reduce MADS coverage to 1x, pledged revenues received in fiscal 2006 would have to decline by 77%.

Security provisions are strong and include the requirement that the Nation comply with a rate covenant that requires that health care system revenues net of operations and maintenance (including revenues from the federal government under grant programs, which are not pledged to bondholders) equal 1.25x MADS, commencing with the fiscal year following the completion of the projects, which is anticipated in fiscal 2009. Issuance of parity bonds requires that net revenues for the two fiscal years immediately proceeding issuance of the bonds equal at least 1.25x MADS on the series 2006 and proposed debt issuance.

The Nation's primary revenue source is derived from its gaming operations. In fiscal 2005 the dividend paid by Cherokee Nation Enterprises, LLC (CNE), which operates its gaming facilities, comprised 37% of general fund revenues. According to tribal policy, CNE transfers 30% of its net income to the tribe annually. Diversification of the revenue stream supporting general government services is provided by the collection of motor fuel, tobacco and motor vehicle taxes.

The Nation maintains ample general fund reserves, equal to 66% of expenditures and transfers out based on audited fiscal 2005 results. Unaudited results for fiscal 2006 project an operating surplus that will increase the general fund balance to 86% of spending and transfers out. Positive results for fiscal 2006 are mainly due to above budget dividend payments from CNE. Officials expect that the general fund's reliance on CNE dividend payments will continue given plans to expand gaming operations.

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