Fitch Affirms Del Mar Race Track Authority, CA Rev Bonds at 'BBB-'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the 'BBB-' rating on Del Mar Race Track Authority, CA's (Del Mar or the authority) outstanding $27.2 million series 2005 revenue bonds. The Rating Outlook is Stable.

The affirmation reflects the stable financial profile of Del Mar relative to the overall declining profile of the horse racing industry. A demonstrated ability to attract and maintain a core patron base, combined with diverse revenues from wagering, events, food & beverage, and the county fair have led the racetrack to continually outperform its peers.

KEY RATING DRIVERS:

Weakening Condition of Horse Racing Industry: The industry has been characterized in recent years by declines in attendance and fluctuations in overall handle (amount of money wagered) due partially to the difficult economic environment, which puts pressure on racetrack net revenues. Racetracks also face increasing competition for wagerers, both from internet gaming, which has driven a declining trend in the satellite wagering component of the authority's net revenues, and from regional native American gaming casinos.

Strong Patron Base with Semi-Diverse Revenue Streams: Del Mar's long history and prominence, with a demonstrated ability to attract and maintain a core patron base, combined with semi-diverse revenues from wagering, events, food & beverage, and the county fair have led the racetrack to continually outperform its peers. Management has demonstrated its willingness and ability to proactively control operating expenses and find additional revenue sources to mitigate the effects of lower wagering revenue levels.

Conservative Debt Structure: Debt is 100% fixed-rate and fully amortizes by 2025. Debt service is flat at $3.1 million through maturity. A prepayment feature offers extra protection if Coverage Test Revenues (i.e. pledged revenues including all available concession revenue, not subject to $2 million annual limitation) fall below 2x debt service.

Very Low Leverage with Adequate Coverage: Net debt-to-EBITDA on pledged revenue streams was 1.22x in 2013. Coverage remains relatively solid at 1.74x in 2013. The authority also benefits from a reasonable liquidity cushion, with combined district unrestricted cash and investments at $13.1 million as of June 30, 2014.

Planned Facility Reinvestment: Del Mar's current five-year capital improvement plan through 2018 totals $29 million and incorporates several large projects. The program is expected to be largely funded on a pay-go basis but may require additional sources of funding.

RATING SENSITIVITIES:

Negative - Acceleration in the decline of the California horse racing industry, and the impact on overall revenues;

Negative - Inability to offset declining wagering revenues through expense management and growth in non-wagering revenue sources;

Negative - Additional leveraging for capital projects that is not supported by expected revenue levels could pressure the rating;

Positive action is unlikely given the discretionary nature of the relatively narrow revenue stream.

TRANSACTION SUMMARY:

Del Mar remains one of the nation's premier horse racing facilities, consistently ranking in the top three nationally, based on both its annual attendance and its wagering base. However, overall attendance at the racetrack has been in general decline, with more pronounced declines evidenced in off-track attendance (primarily driven by the implementation of advanced deposit wagering and native American gaming alternatives in the local area). In addition, overall handle at Del Mar has been historically volatile as increases in handle size relating to out-of-state wagering and off-track betting have run alongside stagnant handle sizes for on-track wagering.

In 2013, on-track attendance was up 2% over 2012 levels, with an average daily attendance of 17,656; off-track attendance was down 4.6%, following decreases of 4.6% and 7.3% in 2012 and 2011 respectively, causing total attendance in 2013 to be down 1.2% over 2012.

Despite lower attendance, total handle grew 5.1% in 2013, reflecting the second consecutive year-over-year increase in overall handle since 2007. Furthermore, daily average combined handle at Del Mar totaled $12.8 million, the highest in the state of California. Preliminary results for the first 12 days of Del Mar's 2014 race season indicate that total average daily wagering is off 1.2% as compared to the same period last year. Average on-track attendance is also down 2.5%, in part due to rain and a back-loaded 2014 schedule. However, food and beverage sales are up 1.0%, and average per capita sales are up 5.0% year over year. In addition to 2014's 36-day summer race meet, Del Mar will be adding a 15-day fall race meet as a result of the closure of the Hollywood Park racetrack. The meet will run November 7-30, with average daily attendance expected to be roughly half of that seen for the summer race meet.

As a result of the widening of Del Mar's turf course, allowing up to 14 horses to run in a turf race, average field sizes have increased from 8.7 horses in 2013 to 9.2 in 2014 for the first 12 days of the race meet. Del Mar's 'ship and win' program incentivizing out-of-state horse owners to enter races at the track also continues to increase field sizes. While this incentive program has some associated costs, management indicates that the incremental purses and commissions generated by larger fields exceed the costs of program implementation.

The authority's operating expenses have remained under control over the last few years, helping to offset the effect of the declining trend in attendance. Del Mar's current capital improvement program (CIP) projects $29 million in spending over the next five years (2014-2018). This compares to a previous plan of $24 million for the 2013-2017 period. The plan anticipates several sizable projects that include water runoff infrastructure improvements and extensive track replacement and enhancement. The plan also accounts for maintenance, rehabilitation and improvements that are non-critical in nature. Management indicates that borrowing may be required for future elements of the plan, but continues to evaluate funding options.

Del Mar maintains moderate liquidity, with unrestricted cash and investments totaling $13.1 million at June 30 2014, equating to 72 days cash on hand. Leverage is increasingly modest as debt is paid down, with net debt-to-EBITDA of 1.22x on pledged revenue streams. Overall debt service coverage remains at 1.74x in fiscal 2013. Coverage test net revenues, which include non-pledged concession revenues, have remained sufficiently high to achieve 2.0x or higher coverage, and so no prepayment of principal has been necessary.

Under a Fitch rating case assuming no revenue growth in fiscal 2014 and a 7% decline in pledged revenues every year from fiscal 2015, the coverage test is not breached until 2024, resulting in the set-aside of funds for the final year of debt service. However, the use of Del Mar's surplus fund balance along with the district's unrestricted cash is sufficient to meet bondholder repayment.

SECURITY:

The series 2005 bonds are secured by a combined pledge of operating revenues from the Del Mar Race Track, including net race track revenues, up to $2 million of net food and beverage concession revenues, and net satellite wagering revenues. Net race track revenues are driven by attendance levels, in the form of admission and parking revenues, and commissions on overall handle.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--Rating Criteria for Infrastructure and Project Finance (July 12, 2012);

--Rating Criteria for U.S. Sports Facilities, Leagues, and Teams (Aug. 9, 2012).

Applicable Criteria and Related Research:

Rating Criteria for Infrastructure and Project Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867

Rating Criteria for U.S. Sports Facilities, Leagues, and Teams

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685897

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=852394

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Contacts

Fitch Ratings
Primary Analyst
Emma Griffith, +1 212-908-9124
Director
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Jeff Lack, +1 312-368-3171
Associate Director
or
Tertiary Analyst
Samuel Marsico, +1 212-612-7810
Analyst
or
Committee Chairperson
Scott Zuchorski, +1 212-908-0659
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Emma Griffith, +1 212-908-9124
Director
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Jeff Lack, +1 312-368-3171
Associate Director
or
Tertiary Analyst
Samuel Marsico, +1 212-612-7810
Analyst
or
Committee Chairperson
Scott Zuchorski, +1 212-908-0659
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com