Overview -- Graton Economic Development Authority (the Authority) issued a $375 million senior secured term loan and $450 million in senior secured notes, which it will primarily use to finance the construction of the Graton Resort & Casino and repay a portion of existing debt. -- We are assigning the senior secured term loan and the senior secured notes our 'B' issue-level rating. -- We are also assigning our 'B' issuer credit rating to the Authority. -- The stable rating outlook reflects our belief that despite substantial debt funding, the property will ramp up steadily to generate sufficient cash to service the capital structure. Rating Action On Sept. 26, 2012, Standard & Poor's Ratings Services assigned Rohnert Park, Calif.-based Graton Economic Development Authority (the Authority) its 'B' issuer credit rating. The rating outlook is stable. The Authority is a wholly owned unincorporated instrumentality of the Federated Indians of Graton Rancheria (the Tribe). At the same time, we assigned the Authority's $375 million senior secured term loan due 2018 and $450 million in senior secured notes due 2019 our 'B' issue-level rating (the same as our issuer credit rating). The senior secured term loan and senior secured notes are pari passu. The Authority also raised a $25 million priority revolving credit facility, which we will not rate. Additionally, pro forma for the transaction, the Authority will have $50 million outstanding in a management loan (manager loan), which is held by a subsidiary of Station Casinos LLC and will be subordinated to the senior secured notes and senior secured term loan. We do not assign recovery ratings to Native American debt issues because there are sufficient uncertainties surrounding the exercise of creditor rights against a sovereign nation, including whether the Bankruptcy Code would apply, whether a U.S. court would ultimately be the appropriate venue to settle such a matter, and to what extent a creditor would be able to enforce any judgment against the sovereign nation. The company plans to use proceeds from the proposed transaction to: -- Fund the development and construction of the Graton Resort and Casino (the casino); -- Establish an interest reserve to fund debt service during the construction period and the first several months following the opening of the casino; -- Repay $175 million of the outstanding manager loan; -- Fund ongoing Tribal costs; and -- Fund transaction fees and expenses. Rationale Our 'B' issuer credit rating on the Authority reflects our assessment of its business risk profile as "weak" and its financial risk profile as "highly leveraged," according to our criteria. Our assessment of the business risk profile as weak reflects the vulnerability of new gaming projects to uncertain demand and difficulties managing initial costs, which can lead to poor profitability during the first several months of operations, as well as the Authority's reliance on a single asset to meet debt service needs. These risks are somewhat mitigated by our expectation for the property to be the highest asset quality in proximity to the San Francisco market, a somewhat protected market position, and an experienced property manager in Station. However, although there are approximately 2.1 million adults within a 60-minute drive of the property, we see some risk in the fact that the adult population within 30 minutes of the property is only about 354,000 people. Our assessment of the Authority's financial risk profile as highly leveraged reflects a large debt burden and the challenge that new casino properties often face when trying to ramp up cash flow quickly enough to satisfy fixed charges. Despite these risks, we are forecasting that the property will generate excess cash flow to facilitate deleveraging, beginning in its first full year, and have EBITDAM (earnings before interest depreciation and management fees) coverage of interest in the high-1x area at the end of 2014, reaching the high-2x area at the end of 2016. We expect the facility, located in Rohnert Park, Calif., approximately 60 minutes from San Francisco, will feature at opening: -- 3,000 Class III slot machines, 134 table games, and 18 poker tables; -- Four full-service restaurants and nine quick-service offerings in the Marketplace food court; and -- 5,700 parking spaces, both surface parking, and approximately 1,800 spaces in a five-level garage. The authority has entered into a guaranteed maximum price contract (GMP) with its contractors covering 80% of hard construction costs. The GMP, along with a contingency of 19% of hard costs, largely mitigates the risk of construction delays and cost overruns, in our view. Station will manage the casino on behalf of the Tribe through SC Sonoma Management LLC, a subsidiary created for the purpose of managing the property. Terms of the management agreement require the payment of a management fee for seven years after the opening of the casino equal to approximately 24% of net revenues (as defined by the management agreement; essentially net revenue minus operating expenses). While the majority of the management fee will be subordinated to debt service, Station will receive a priority management fee of $6 million. The Tribe is a federally recognized Native American tribe with 1,300 enrolled members. Its reservation is approximately 254 contiguous acres, over 60 of which have been set aside for the Casino. A seven-member council governs the Tribe, with members elected every two years. We expect distributions from the Authority will fund the vast majority of the tribal expenditures, as the Tribe has limited sources of other funds. Performance expectations We expect net revenue to be in the high $300 million area in 2014, ramping up to around $440 million in 2016. In our view, the property will likely generate gaming revenue that is substantially higher than most of its competitors in the Northern California Region (including both San Francisco and Sacramento), given its location advantage, size, and amenities. We believe our assumptions are in line when compared with other gaming markets around the U.S., based on population and income statistics. In addition to taking share from existing operators in the Northern California Region, we believe the property will likely spur incremental gaming revenue in the region given its expected quality and proximity to San Francisco. Additionally, we believe the property should benefit from Station as the manager, which not only has extensive experience in local market casinos, but also has experience in the surrounding markets, as it previously managed the Thunder Valley casino near Sacramento, Calif. We forecast EBITDAM margins in the mid-40% range. In our calculation of EBITDAM, we have subtracted the priority management fee and a priority distribution to the Tribe (a total of $12 million, $6 million to each). Additionally, we have incorporated a payment to Kenwood Investments No. 2 (Kenwood), a consultant to the Tribe. Under our performance expectations, we expect EBITDAM coverage of interest in the high 1x at the end of 2014, reaching the high 2x at the end of 2016. We expect total debt to EBITDAM slightly below 5x at the end of 2014, improving to the low-3x area at the end of 2016. The expected improvement in credit measures reflects the growth in EBITDAM as the property matures and scheduled debt repayments under the proposed credit agreement. Liquidity Based on the capital structure and incorporating our performance expectations, we assess the Authority's liquidity profile as "adequate," according to our criteria. Our assessment includes the following expectations: -- We expect sources of liquidity over the next 12 to 18 months to cover uses by around 1.2x. -- We believe that net sources would be positive following the property's ramp-up period, even if EBITDA is 15% lower than our current expectations. Sources of liquidity will include funds from the financing (including the $25 million revolver, which we assume will not be drawn at the time of opening). Uses will include the development and construction costs of the casino, interest expense, the repayment of existing debt, ongoing Tribal distributions, and transaction fees and expenses. Interest on the manager loan will be paid in kind (PIK) at a rate of 11.625% until the opening of the casino, at which point it will convert to cash payment. After the casino opens, payments of the priority management fee and tribal distributions also begin. In addition to priority tribal distributions of $6 million, excess tribal distributions of up to $6 million are allowed to be paid once the casino is open (under the proposed terms of the credit agreement any payments made to Kenwood will count against the excess tribal distribution). Any excess distributions to the Tribe beyond the $6 million will not be allowed until the manager loan is repaid in full. If the manager loan is repaid, excess tribal distributions can increase to $14 million. However, the manager loan cannot be repaid unless pro forma debt to EBITDAM is below 3x. Any excess distributions beyond $14 million must then be matched dollar for dollar to repay the term loan. Under the credit agreement, there is 5% annual amortization (paid quarterly) and a 50% excess cash flow sweep. The 50% excess cash flow sweep stops if debt to EBITDAM is below 2x. Under our performance expectations, we have modeled any excess cash beyond $20 million going toward repayment of the term loan until debt to EBITDAM is below 3x. Given the incentive structure in the proposed capital structure (i.e., excess distributions beyond $6 million cannot be paid to the Tribe until the manager loan is repaid in full), we believe the Authority will likely shift its focus toward repaying the manager loan as soon as possible to increase excess tribal distributions. The credit facility includes financial maintenance covenants, including a total leverage ratio, a fixed-charge coverage ratio, and maximum consolidated capital expenditures. Under our performance expectations, the Authority would be in violation of the initial 4.25x total leverage covenant after the first measurement date. However, we expect the Authority would likely be able to achieve an amendment to address a breach, given our expected leverage and liquidity levels. (Under the management teams' forecast, the Authority would generate sufficient EBITDAM to remain in compliance with the covenants) Outlook The stable rating outlook reflects our belief that, despite substantial debt funding, the property will ramp up steadily to generate sufficient cash to service the capital structure. We could raise our rating if the casino opens stronger than our current expectations, such that we expect EBITDAM coverage of total interest to remain above 2.5x. However, a more aggressive posture toward expansion spending or distributions than we have contemplated could preclude an upgrade. We could lower the rating if performance is materially worse than our expectations, or if construction delays and cost overruns signal a potential liquidity shortfall, such that we expect EBITDAM coverage of interest to track below 1.5x. Related Criteria And Research -- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Standard & Poor's Revises Its Approach To Rating Speculative-Grade Credits, May 13, 2008 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 -- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008 Ratings List New Rating Graton Economic Development Authority Issuer Credit Rating B/Stable/-- $375M sr secd term loan due 2018 B $450M sr secd notes due 2019 B Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.