Thursday, March 31, 2005
Copyright © Las Vegas Review-Journal

Monorail's bonds fall to 'junk' status

Lagging ridership, revenues reflected in Moody's rating

Riders board the Las Vegas Monorail on Dec. 27 at the Sahara Station. The system has operated all but one day since Dec. 24. REVIEW-JOURNAL FILE PHOTO

Critics of the glitch-plagued Las Vegas Monorail might consider the transit line a piece of junk. Now, bonds that helped pay to build the system really are junk.

About $455.8 million in bonds were dropped to "speculative" grade, or "junk" status, by Moody's Investors Service on Wednesday amid concerns over lagging ridership and revenues to date.

The bonds, which covered a large chunk of the $650 million system's price tag, had been "investment" grade by the global credit ratings firm.

Although the downgrade has no effect on the monorail's day-to-day operations, it's a financial black eye for a system that's suffered a string of service pratfalls in 2004.

"The downgrade is our way of indicating to investors the prospects of timely payment of debt service are a little riskier now," said Anne Van Praagh, a Moody's analyst who prepared the company's monorail report.

"Long-term, we do think that this project has a lot of potential," she said.

The bonds are insured against default, protecting bondholders and the Nevada Department of Business and Industry, which issued the tax-free bonds on behalf of the nonprofit monorail company.

"This doesn't have any short-term effect on the project whatsoever," said Todd Walker, a monorail spokesman. "It has no impact on the state. It does not impact on the taxpayer."

But it would force the monorail to pay higher interest rates if it tried to raise more cash, though the system has sizeable reserves and has mothballed plans for a downtown extension.

"The downgrade is based on the actual revenues to date being lower than the original forecast, which is due in large part to the late opening and subsequent shutdown of operations," Moody's said in its report.

"The negative outlook anticipates that the system will be required to continue to achieve a significant ramp-up in ridership and revenues in order to achieve financial self-sufficiency," the report said.

"While the ramp-up period ridership through the first quarter of 2005 has shown positive growth, more operating history will be needed to fully assess credit quality," Moody's said.

The system was sidelined for most of 2004 amid various technical and mechanical problems. It has been able to fully operate all but one day since Dec. 24 but has missed ridership targets.

"This really has more to do with the system opening late and the problems that existed last year than where the system is operating and functioning today," Walker said. "I think the numbers will show a dramatic increase in March ridership and revenue over February."

Final numbers for March are pending, but this month the monorail had its largest ridership and revenue days ever. Farebox revenues topped $150,000 on March 15, and more than 48,000 people used the system one day later.

In January and February, the monorail averaged around 23,000 riders per day and roughly $66,000 in daily revenues, well below what was needed to break even.

Monorail officials have said they expect over 30,000 daily riders this month.

It's key that the monorail build on those numbers. Moody's noted that annual operating costs are around $21 million, almost $5 million more than originally expected.

That means the monorail needs $51 million a year in advertising and farebox revenues annually to cover its day-to-day costs and pay off its bonds, Moody's said.

"With $6 million in advertising revenues currently committed, the monorail would have to raise $45 million in farebox revenues" each year, said Moody's, which projects fares will bring in $34 million this year. Monorail officials expect almost $37 million.

"In Moody's view, this represents a significant challenge that will depend on continued system safety and availability and the success of ongoing marketing initiatives," the report said.

Despite the downgrade, the monorail isn't going broke.

Moody's noted that current revenues, combined with $81 million in reserves and monies owed, are enough to pay all bills at least through 2007.

The rating "is based on our expectation that the project's revenues will cover operating expenses in 2005, the first full year of operations, and that significant cash reserves will be sufficient to cover any operating deficits plus debt service if needed for the next two to four years," Moody's said.

Monorail officials told Moody's that a fare increase of 25 cents to one dollar per ride could help make up any shortfalls. Walker said a fare increase is not now planned, but he couldn't rule one out in the future.

Base one-way adult fares are now $3.