NEW YORK - (Business Wire) Fitch Ratings has downgraded the underlying rating on the $451.4 million in outstanding Director of the State of Nevada Department of Business and Industry Las Vegas Monorail project revenue bonds, 1st tier, series 2000 to 'C' from 'CC'. The Las Vegas Monorail Co. (LVMC) is the nonprofit public-benefit corporation responsible for the project. A 'C' category rating means that default of some kind appears imminent or inevitable. Fitch downgraded the bonds to 'CC' in July 2007. Fitch does not rate the $149.2 million in outstanding Las Vegas Monorail project revenue bonds, 2nd tier, series 2000, and the $48.5 million in outstanding Las Vegas Monorail project revenue bonds, 3rd tier, series 2000.
The downgrade reflects the continued drain on internal liquidity due to continued weak ridership trends and lower than expected fare revenues. Fitch anticipates available internal liquidity to continue to be drained consistent with the previous estimate in August 2008, and last for approximately one year. Additionally, $21 million in a surety bond provided by Ambac Assurance Corporation (Ambac) (not rated by Fitch) comprising first-tier debt service reserve funds will likely be drawn upon in the upcoming July 2009 debt service payment. In the event that there is a performance issue on the Ambac surety, funds will likely be insufficient to make the next first-tier debt service payment.
Fitch's 'C' rating on the first-tier bonds reflects an extremely constrained financial environment stemming from continued declines in monthly revenues for the first five months of calendar 2009 as compared to the first five months of 2008 despite a $1 fare increase on the unlimited One-Day Pass. Strong competition from buses on the Las Vegas strip and taxis continue to contribute to the monorail's deteriorating financial position. Despite management's efforts in recent years to raise and lower fares in efforts to stimulate revenue growth or establish a larger ridership base, fare revenues have failed to grow to levels sufficient to pay debt service.
January to May year-to-date average daily ridership decreased by 23.6% to 17,027 from 22,238 in 2008, primarily due to an increase in the unlimited daily fee to $13 from $12 which now accounts for 28% of tickets sold, down from approximately half that in 2008. The decrease also reflects lower visitor volumes, air traffic, and convention attendance overall in the region. The average fare in May 2009 increased to $4.45 from $3.52 in May 2008. Despite the toll increase, average daily revenues decreased by 5.9% to $76,105 for the first five months of calendar 2009. Some of the reduction is likely attributable to the economic downturn given that average fares are now at levels comparable to 2006 and ridership and revenue numbers are approximately 16% below 2006 levels. Additionally, overall visitor volume in Las Vegas was down 4.4% in 2008. Given the trend in ridership in the first five months, Fitch believes there is a strong likelihood that total fare revenues for 2009 will be lower than last year.
Monorail demand remains weak, in part due to the lack of marketing partnerships with the casinos and more recently weak economic conditions. To the extent management's efforts are more successful than in the past, liquidity may last longer; however, this appears unlikely given the reduction in visitor volumes at Las Vegas. Fitch cannot rule out the possibility of additional fare adjustments to build ridership with the goal of establishing a firm base level of demand; however, efforts to date have failed to generate sufficient net revenues for debt service. Fitch believes the monorail retains some ability to increase ridership levels if it is perceived that the monorail provides a superior competitive means of transportation. The fare structure changed slightly in 2008, with a $1 increase to the unlimited day pass, and streamlining of options with only local and single rides and one- and three-day unlimited passes currently available.
In May 2008, the company hired Conway Del Genio Gries (CDG) as chief restructuring officer at the request of Ambac, the insurer of the first-tier bonds, with whom the company and the trustee entered into a forbearance agreement. At the suggestion of CDG's report in September 2008, the company is continuing to implement recommended changes in efforts to boost revenue and reduce expenses.
With higher than expected sensitivity to the fare increase and an overall lower base of ridership, fare revenues continue to be insufficient to meet the monorail's debt service obligations. After the recent January 2009 debt service payment, debt service reserve fund amounts are $3.7 million and $3.3 million for the first and second tiers, respectively. Additionally, approximately $21 million remains in a surety bond held with Ambac. Beginning in January 2008 and continuing in July 2008 and January 2009, there have been draws from the cash portion of the first- and second-tier debt service reserve funds. Internal liquidity consisting of the first-tier bonds debt service reserve fund and the second-tier bonds debt service reserve fund only provides a near-term cushion to lower than expected fare revenues and are available to pay debt service. Additionally, excess proceeds in the construction fund total approximately $3.4 million, some of which can be used to pay debt service in an event of default. Due to continued declines in ridership and revenues, Fitch estimates that fare revenues combined with internal liquidity will likely not be adequate to meet first-tier bonds debt service obligations beyond 2010, while the second-tier bonds would encounter payment problems earlier. At best, debt service payment problems may only be marginally deferred with better than expected ridership levels.
LVMC is required to set rates so that revenues available after operations and maintenance expenses cover first-tier bonds debt service at least 1.40 times (x) and all debt service obligations by 1.10x. LVMC is currently in technical default as a result of not being in compliance with this covenant. Fitch believes it is unlikely that LVMC will meet this covenant for the foreseeable future given the significantly lower than expected financial performance.
The first-tier bonds are limited obligations payable from monorail fare and other operating revenues after operations and maintenance expenses and prior to the payment of second- and third-tier bonds. The monorail project consists of an extension and upgrade of an existing 0.8-mile monorail between the MGM Grand Hotel and Casino to Bally's Hotel and Casino and construction of three miles of new guideway from Bally's north to the Sahara Hotel and Casino. Seven stations are located along the alignment serving major hotels, attractions, and the Las Vegas Convention Center along the Las Vegas Strip. Monorail management continues to analyze plans to extend the monorail to Las Vegas McCarran International Airport in order to enhance ridership.
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.
Fitch Ratings, New York
Brian Taylor, CFA, 212-908-0620
Chad Lewis, 212-908-0886
Cindy Stoller, 212-908-0526 (Media Relations)
cindy.stoller@fitchratings.com
