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

Posted on: Tuesday, 10 July 2007, 18:22 CDT

Fitch Ratings has downgraded to 'CC' from 'CCC' 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 'CC' category rating means that default of some kind appears probable.

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 'CC' of the first tier bonds and Negative Outlook reflect an extremely constrained financial environment stemming from continued declines in monthly revenues for the first six months of 2007 as compared to the first six months of 2006 resulting from ongoing declines in ridership and a summer fare reduction. Fitch recognizes that the fare reduction in June increased ridership levels for June, however, still resulted in declining fare revenues. 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 to aggressively raise fares on Jan. 1 2006, fare revenues have failed to grow to levels sufficient to pay debt service. Additionally, Fitch anticipates available internal liquidity to be drained slightly more rapidly than was previously estimated in October 2006, when Fitch downgraded the bonds to 'CCC'. Fitch currently expects internal liquidity to only last for, at best, 3 years.

While June's average daily ridership increased by 27% to 23,790 from 18,766 over last year, primarily due to a reduction in the unlimited daily fee to $8 from $15, which now accounts for approximately 62% of total tickets sold, it resulted in average daily revenues declining to $74,079 from $84,348 or 11%. The average fare in June 2007 fell to $3.11 from $4.44 in June 2006. Furthermore, year-to-date revenues have declined to $15.5 million from $16.4 million or approximately 5%.

Ridership through June is up slightly at 2%. However, not including the June increase, ridership was down 2.6%. Given the trend in the first 6 months, Fitch believes there is a strong likelihood that total fare revenues for 2007 will be lower than last year. Fitch does note that operating expenses through the first six months are tracking about $1 million less than budget or about 4%.

Monorail demand is weaker than expected, in part due to the continued lack of aggressive marketing partnerships with the casinos. To the extent management's efforts are more successful than in the past, liquidity may last longer. Fitch cannot rule out 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 competitive means of transportation. Management raised fares on Jan. 1, 2006 to address lower than expected revenues, however it has been largely unsuccessful. 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%.

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. Internal liquidity consisting of general reserve funds, primarily excess construction funds, totaling approximately $12.5 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 and revenue 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 1.4 times (x) and all debt service obligations by 1.1x, it is unlikely that LVMC will be able to 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 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. 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.

Source: Business Wire

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