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FROM: INDIAN COUNTRY TODAY NEWSPAPER

_http://www.indiancountry.com/content.cfm?id=1096411489_
(http://www.indiancountry.com/content.cfm?id=1096411489)

Wall Street bond raters skeptical on sovereignty

(javascript:PrintWindow();) Posted: September 06, 2005 by: _Jim Adams_
(http://www.indiancountry.com/author.cfm?id=33) / Indian Country Today
_Click to Enlarge_ (http://www.indiancountry.com/pix/1096411489_large.jpg)
(http://www.indiancountry.com/pix/1096411489_large.jpg) Map courtesy
Steven McSloy -- The ''wall'' in Wall Street comes from a literal wall that
once separated the area's American Indians from the colonists. More than 250
years later, tribes are breaking down the barriers that once prevented them
from competing in the financial marketplace. NEW YORK - As Wall Street opens
more and more to tribal financing, one of the last barriers is the arcane
process of bond rating.

Three main rating agencies hold the keys to a public sale of tribal bonds,
most likely the cheapest way of raising money for either commercial projects
or tribal facilities like government buildings, clinics or schools. Their
verdict is so prized by investors that bond issuers have no choice but to pay the
rating fee, even when the result is less than complimentary.

But these agencies are just beginning to understand Indian country. Some
tribal leaders say they still have a lot to learn. Deron Marquez, chairman of
the San Manuel Band of Mission Indians, told the Native American Finance
conference earlier this summer that the bond raters were the slowest part of the
financial world to ''get it.''

Bond raters, in their turn, were out in force to explain their business. Two
of the big three agencies sent speakers to the conference, held at the
Mohegan Sun the end of June. Standard and Poor's deployed its biggest gun, general
counsel and managing partner James Penrose, to discuss ''the perceived risks
of tribal finance deals.'' S&P Director Michael Scerbo, its specialist on
tribal bonds, shared the stage with H. Fabian Ramirez from Fitch Ratings at
another panel on ''The Ratings Process: for Better or Worse.''

The panels gave a quick course on the system that assigns grades from
''AAA'' to ''D'' to almost all bond issues. Triple A is the best. It drops by
degrees, such as ''AA,'' ''A'' and ''BBB.'' The lowest ''investment-grade''
rating is triple B, an important cut-off since many large investors, such as
pension funds and banks, are forbidden by law from buying bonds with lower than
investment-grade rating.

Standard and Poor's gave an investment-grade rating to only one, the
Mashantucket Pequot issue for Foxwoods Resort Casino, of the 10 tribal gaming bonds
it has rated. (Scerbo also noted that only one of 35 commercial gaming
companies was rated investment grade.) Only one Indian tribe, the Southern Utes of
Colorado, has the highest AAA rating. According to the Fitch analysis, its
financial strength comes from both good management and rich energy resources.

Bonds below triple B are sometimes called ''junk bonds,'' or more politely
''high-yield bonds.'' Because they are seen as higher risk and sell to a
smaller market, they have to offer higher interest rates. The cost adds up, but it
has also attracted smart investors to tribal bonds. High-yield casino
issues are regularly oversubscribed by bargain hunters who implicitly think the
bond raters have overstated their risk.

Yet issues with investment grade ratings still produce more funding for
tribal use. A higher letter grade could mean money left over to add a day care
center or senior center to a tribal government building.

A higher grade, Ramirez wrote in a pamphlet distributed at the conference,
''ordinarily requires a history of balanced or improving fiscal operations,
conservative fund management, stable government and leadership, legal
enforceability of the debt obligations, and a borrowing structure that emphasizes
timely repayment.''

The analysts pore over a long list of factors, ranging from per capita
distribution policies to transparency of the accounting.

Along with the technical analysis, the raters confronted the major issue in
tribal credit: sovereignty. Penrose explained that agencies were leery of
grading bonds from tribal governments which could assert sovereign immunity
against suits. Ratings would be low without some sort of compromise on
sovereignty that provided for ''accountability.'' Investors, he said, needed a
mechanism ''that will translate into a meaningful chance for recovery.''

But some tribes had come with a solution, he said. Some casino bonds were
issued by tribal gaming authorities. These intermediate bodies could agree to
subject themselves to lawsuits or binding arbitration without compromising the
sovereignty of the tribal government itself. Since they could limit the
financial backing of the bonds to casino revenues, they also did not endanger
other tribal revenues if they ran into trouble.

Tribal bonds face another problem - the Internal Revenue Service. Because
states have sovereignty, too, the interest on bonds issued by state governments
and their municipalities are usually not subject to federal income tax.
Since they pay untaxed dividends, their interest rates are the lowest of all.

But tribes face a disadvantage. A glitch in federal law subjects their
issues to sharper scrutiny than any state undergoes. The IRS has threatened the
tax-exempt status of tribal bonds that it thinks don't serve strict government
purposes, a threat that makes the bond market and bond raters very nervous.

Bond raters watch tribal governments closely as well. In a report circulated
after the conference, Scerbo listed a number of positive factors he looked
for: ''reasonable terms for elected officials, a sufficient number of tribal
council members to effectively represent the tribe, an established
decision-making process which empowers decision makers while at the same time remains
flexible, and an alignment of interests between the tribal council and tribal
members.'' He said that his agency would interview at least one tribal
council member on these points while making its rating.

At the same time, weaknesses in government could lower a bond rating. Scerbo
cited the Seminole Tribe of Florida. Up untill 2003, he said, the
Seminoles' ''limited internal controls ... led to alleged impropriety by both the then
Tribal Council Chairman and Tribal Council.'' Even though the Seminoles had
improved controls since then and had a strong financial position and good
market for their six casinos, they received only a ''BB'' bond rating.

Penrose told the conference that tribes had only just begun to test the
public bond market. Rated bond issues, he said, made up only three percent of
total tribal borrowing. But Marquez recalled a time when ''tribes never had the a
bility to access the capital markets.'' It was only when tribes began to run
successful enterprises and show strong profits on their balance sheets that
financial institutions took an interest.

Now that Wall Street is well aware of the cash flow from tribal gaming and
an increasing number of non-gaming business successes, the doors to this
market are opening. And tribes and financial gatekeepers like the rating agencies
are beginning to learn each other's mysterious ways.

__________________
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