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Fitch Downgrades Las Vegas Monorail, Nevada, to 'CCC'; Outlook Negative

Posted on: Tuesday, 17 October 2006, 18:01 CDT

Fitch downgrades to 'CCC' from 'BB' 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. The Las Vegas Monorail Co. (LVMC), is the nonprofit public-benefit corporation responsible for the project. The Rating Outlook is Negative. A 'CCC' category rating means that default is a real possibility and capacity for meeting financial commitments is solely reliant upon sustained, favorable business or economic conditions.

The bonds are insured by Ambac Assurance Corporation, whose insurer financial strength is rated 'AAA' by Fitch. 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.

Fitch's downgrade to 'CCC' of the first tier bonds and Negative Outlook reflect an extremely constrained financial environment stemming from recent declines in 2006 monthly revenues compared to last year resulting from greater than expected ridership diversions following this year's fare increase. Despite management's efforts to aggressively raise fares on Jan. 1 2006, fare revenues have failed to grow to levels sufficient to pay debt service and available internal liquidity is expected to be drained more rapidly than was previously estimated. Fitch currently expects internal liquidity to only last for, at best, 4 years. While year-to-date revenues are tracking approximately 7.5% higher for 2005, given continued recent downward trends in ridership, Fitch expects total fare revenues for 2006 only be slightly better from last year.

Management raised fares on Jan. 1, 2006 to address lower than expected revenues, however it has been largely unsuccessful, as the facility appears to be at or past its revenue maximization point. LVMC raised rates for all fare classes. The single-ride fare was increased to $5.00 from $3.00, or 67%, and multi-trip fare options were raised between 50%-75%. Although service reliability has improved, ridership levels have declined on average 30% month-over-month from 2005, far beyond Fitch's expectations with the fare increase. August 2006 daily ridership declined to 18,739 from 30,145 for 2005, or 38% and average daily revenues declined to $81,318 from $86,507 from 2005, or 6.0%. Fitch expects total ridership for 2006 to equal about 7 million passengers which is approximately 35% of the forecast developed at the time the bonds were sold. At the same time, operating expenses are about 20% higher than the initial estimates, primarily reflecting higher than expected insurance costs. However, LVMC is pursuing cost-containment measures and expenses are tracking about 6.8% less than budgeted.

With higher than expected sensitivity to the fare increase and an overall lower base of ridership, Fitch expects fare revenues to be insufficient to meet the monorail's debt service obligations. Internal liquidity consisting of remaining construction funds totaling more than $32.9 million, the first-tier bonds debt service reserve fund of $42 million and the second-tier bonds debt service reserve fund of $14.3 million all provide an important offset to lower than expected fare revenues and are available to pay debt service. However, 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 2009-2010, while the second-tier bonds would encounter payment problems earlier. Based on this analysis, resources would not be sufficient to make third-tier bonds debt service payments, which begin in 2012. Debt service payment problems may be deferred with better than expected ridership levels. While, 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, it is unlikely that LVMC will meet this covenant for the foreseeable future given the significant diversions from this year's fare increase.

Monorail user value is weaker than expected, in part due to the lack of comprehensive marketing partnerships with the casinos that were anticipated. To the extent management's efforts are more successful than in the past, liquidity may last longer. Fitch cannot rule the possibility of additional fare adjustments, including reductions, to build ridership with the goal of establishing a firm base level of demand with the potential for further growth. Fitch believes the monorail retains some ability to increase ridership levels, if it is perceived that the monorail provides a superior means of transportation to alternative congested means such as taxis and buses.

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 the 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.

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.

Source: Business Wire

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