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Default danger: Monorail finances shaky

18 October 2006

By Omar Sofradzija

LAS VEGAS, Nevada -- Default is a looming danger for the Las Vegas Monorail after low fares failed to draw enough riders and a fare hike chased off too many passengers, according to a bleak financial analysis released Tuesday.

The assessment by Fitch Ratings, a New York-based credit rating firm, also dropped the monorail's bond rating further into "junk" status, possibly imperiling plans to extend the $650 million line to McCarran International Airport and around the Strip.

The report cited greatly weakened ridership, flat revenues and continued losses in downgrading bonds used to build the privately run 4-mile monorail line behind the Strip to "CCC" from "BB," and calling its outlook "negative."

The "CCC" ranking means "default is a real possibility," said Scott Trommer, an analyst for Fitch who has been tracking the monorail.

Monorail officials acknowledged the sober assessment but retained confidence that a turnaround is pending in 2007.

"I'm not going to counter what Fitch said, but I don't believe that" default is likely, said Ingrid Reisman, Las Vegas Monorail Co. vice president. "We're developing a good plan, and we're implementing what we need to implement for the system to perform they way it's supposed to perform."

And while monorail leaders are working to boost ridership, revenues and ratings, the monorail is helping limit traffic congestion and pollution on the Strip by getting tourists out of cars, albeit in smaller numbers than once sought.

"It's serving a valuable purpose," Reisman said.

The monorail has not turned a profit since opening in mid-2004 and establishing regular service late that year.

It has around $89 million in cash reserves, enough to cover its bills through next year.

But it could start having problems paying off bonds as soon as 2008 and entirely run out of cash by 2012, unless the monorail seizes on a moneymaking formula that does not now exist, Fitch Ratings said.

While "debt service payment problems may be deferred with better than expected ridership levels," there's little reason to believe such a turnaround is near, according to the company's report.

"The key issue is significantly lower than expected revenue performance of the monorail," said Trommer. "We would need to see a fundamental change in their financial profile" for that assessment to improve.

Analysts hoped a January increase in the base one-way fare from to $5 from $3 would net a slight ridership loss and strong revenue gains, but instead farebox receipts fell 6 percent while ridership plummeted a staggering 30 percent, Fitch Ratings said.

"The $5 base fare is probably too high," said Chad Lewis, a Fitch analyst.

That pushed monorail ridership to less than 20,000 daily riders as of late, only one-third of original expectations. Meanwhile, operating costs are 20 percent higher, Fitch said.

It's not clear what the monorail can do to come up with the $123,000 a day in farebox revenues once pegged as a break-even point.

Actual receipts have rarely topped $90,000 per day.

And revenues may never grow much higher. The report notes the monorail "appears to be at or past its revenue maximization point."

Reisman could not say whether the original expectations for farebox revenues will ever be reached or if the system would need to find other revenue streams to make up the difference. But she said the system's business plan is under scrutiny.

"We're constantly looking at our business model. We're constantly tweaking things here and there," she said.

Fitch Ratings noted the monorail company has cut its expenses by nearly 7 percent in recent months, in hopes of stemming its losses.

The report said further fare "adjustments, including reductions, to build ridership" are possible, and that 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."

Reisman said a fare decrease isn't imminent, but a restructuring of fare packages is possible.

Current ticket packages come in single-ride, two-ride, 10-ride and all-day passes.

The monorail will continue with efforts to sell tickets at off-site locations like ticket brokerages and travel agencies, and enter into marketing alliances with Strip resorts and conventions, according to Reisman.

"We do recognize the monorail has undertaken some marketing efforts. At this point, it has yet to translate into the necessary revenues" to meet obligations, Trommer said.

Reisman said those efforts will take time to show results in the form of spinning turnstiles.

"We still anticipate a 12- to 18-month time frame to see results," she said. "There are still so many activities that we are just starting to implement.

"We'll start seeing the effects of those activities in 2007," she said.

The monorail has also engaged rider focus groups in hopes of better gauging passenger needs, preferences and dislikes.

Analysts aren't ruling out the possibility that the monorail will tap into an unknown ridership market that would provide sufficient revenues.

Reisman said the time lines offered by Fitch Ratings aren't putting any added pressure on monorail officials to turn a profit.

"The clock is not going any faster than it was," she said.

The bleak review comes as the monorail plans a $500 million extension to the airport and an $800 million loop connecting all major resort corridor convention centers.

The monorail now travels on the east side of Strip casinos, between the Sahara and the MGM Grand.

But whether the monorail can gain additional funding without improving ridership, revenues and, in turn, its bond rating is questionable.

Junk-grade bonds carry higher interest rates, ballooning project costs, and are a tough sell.

When asked if the monorail's current financial situation would make private funding for an extension difficult, Trommer said, "I would suspect so."

Monorail officials say they aren't yet sure how to pay for the extensions, other than they won't ask for a taxpayer handout.

"We're moving forward on the extension," Reisman said. "No matter what the ratings are on the existing bonds, it doesn't make an extension any less necessary."

In the event of a default, the monorail's bonds are insured by AMBAC Assurance Corporation of New York, and a contingency fund exists to tear down the line, theoretically exposing taxpayers to no risk.

Copyright GamingWire. All rights reserved.


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