SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has affirmed Del Mar Race Track Authority, CA's (Del Mar) $45.65 million series 2015 revenue bonds at 'BBB-'. The Rating Outlook is Stable.
The 'BBB-' rating reflects the 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 semi-diverse revenues from wagering, events, food and beverage, and the County Fair have led the racetrack to continue to outperform its peers. Pledged coverage is forecast to remain strong relative to past performance, with a Fitch rating case minimum of 1.9x through 2020. Following the 2015 issuance, initial low leverage of 3.7x and strong structural features that ensure rapid deleveraging are key to maintaining the ratings given the broader industry risks.
KEY RATING DRIVERS
Weakening Condition of the Horse Racing Industry: The industry has been characterized in recent years by declines in attendance and fluctuations in overall handle size due partially to a difficult economic environment which has put pressure on racetrack net revenues. Racetracks also face increasing competition for wagerers, from both Internet gaming, which has driven a declining trend in the satellite wagering component of the authority's net revenues, and from regional Indian gaming casinos.
Premier Site with Strong Patron Base: 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 outperform its peers historically. Overall, results were down nearly 4% in 2015 due to heavy rains the opening weekend of the summer meet and to a decline in attendance for the fall meet, which just held its inaugural year in 2014. The increase in racing days to 60 in 2015 and the increase in pledged share of net concession revenues to $4 million annually from $2 million historically should strengthen revenues going forward. 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.
Strong Management of Expenses and Facility Reinvestment: Del Mar's current five-year capital improvement plan (CIP) through 2020 totals a modest $19.1 million and incorporates several large projects. In 2015, Del Mar replaced its polytrack surface with an all-dirt track. Grandstand enhancements are currently ongoing and slated for completion in time for the 2017 Breeders Cup. Capex is expected to be funded through a combination of pay-go cash and prior debt proceeds. No future debt issuances are anticipated at this time.
Strong Prepayment Provisions: Debt is 100% fixed-rate and fully amortizing by 2038 with a flat debt service profile of $3.2 million per annum. However, a turbo prepayment feature provides for accelerated prepayment of principal in the amount of 30% of pledged net revenues (subject to the $4 million cap on net Concession Revenues) exceeding 2x debt service. A second prepayment feature offers further protection if coverage test revenues (i.e. pledged revenues including all available net Concession Revenue, not subject to $4 million annual limitation) fall below 2x debt service. No debt may be issued senior to the 2015 bonds, and rating agency verification will be required for any additional parity bonds.
Moderate Leverage and Adequate Coverage: Net debt-to-cash flow available for debt service (CFADS) on pledged revenue streams climbed to 3.7x in 2015, following the new debt issuance, but is expected to steadily deleverage in the near term. Moreover, two turbo amortization mechanisms exist that could lead to early repayment of the bonds in advance of maturity. Coverage has increased to 2.24x in 2015, from 1.79x in 2014, due to the increase in pledged annual concession revenues up to $4 million, which is supported by numerous cash flow streams. Debt service coverage ratio (DSCR) based on net concession revenue alone is 1.21x. Indenture DSCR, which is inclusive of all revenues with no caps on concession revenue, is 3.69x. Del Mar also benefits from a reasonable liquidity cushion, with combined district unrestricted cash and investments at $13.9 million for fiscal 2015, or approximately 170 days cash on hand.
Peer Analysis: There are no directly comparable peers, as this is the only racetrack that Fitch rates.
Negative: A sustained period of indenture debt service coverage ratio (inclusive of all revenues with no cap to concessions) below 2.5x;
Negative: An acceleration in the decline of the California horse racing industry, and the impact on overall revenues;
Negative: Inability to offset declines in 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;
Positive: Should performance stabilize above levels seen in the sponsor case (flat to positive growth in pledged revenues), the rating may see upward movement.
The addition of the Del Mar fall race meet in 2014 has continued to bolster overall on-track attendance, as summer results have been in gradual decline. While 2015 fall race meet results were 9% lower than the inaugural year and summer race meet attendance was down 3%, hampered by heavy rains the start of opening weekend, overall wagering continued strong growth for the second straight year, up 13% in 2015 following a 24% increase in 2014. The increase in wagering is driven primarily by off-track and out-of-state handle growth. Average daily on-track attendance has been negatively impacted by the increase in racing days to 60 in 2015 from 51 in 2014 and 37 in 2014. Concession food and beverage revenues were up 1.7% in 2015 following 15.1% growth in 2014 in connection with the introduction of the fall race meet.
Race track net revenues were down to $2.6 million in 2015 from their previous level of $3.3 million in 2014 and an average of $6.1 million in the preceding five years. The main contributing factors to the reduction were back-to-back years of adverse weather events during the summer race meet and negative publicity in 2014 related to on-track horse injuries. Race track pledged revenue for 2015 was also impacted by an 8.6% increase in expenses due to maintenance costs and the increase in racing days. This is offset by a 9.5% increase in net commissions with a five-year compound annual growth rate of 6%. Wagering revenues are recognized as volatile, and the increased pledge of concession net revenues up to $4 million serves to partially mitigate the potential for volatility in race track net revenues over time.
The five-year CIP budget through 2020 is a modest $19.9 million. It is funded by pay-go cash and proceeds from the 2015 bond issuance. In 2015 Del Mar completed the replacement of its synthetic racetrack with an all-dirt track in time for its summer meet. Ongoing projects include making improvements and major maintenance to the grandstand and other buildings on the fairgrounds. Major grandstand-related projects, which include improvements to elevators and escalators, fire protection systems, HVAC, and seating/patron amenities, are scheduled to be completed in time for the 2017 Breeders Cup. Major fairground-related projects include utility systems, barn improvements, roofing and restrooms. To the extent bond proceeds are insufficient to complete these projects, the Authority will reduce the scope of the projects or use other available funds. There are currently no plans to issue any additional debt.
Pledged revenue DSCR increased to 2.24x in 2015, up from 1.79x in 2014 due to the increased pledge of concession food and beverage revenues. Under Fitch's base case scenario, which assumes flat racetrack revenue growth and net concession revenues capped at $4 million, minimum DSCR through 2020 is 2.27x, deleveraging to 2.71x in 2020. Minimum indenture coverage, inclusive of all revenues with no cap applied to concession revenue, is 3.12x. As per the pledged revenue turbo amortization feature, with pledged annual coverages in excess of 2.0x DSCR, prepayments are triggered which result in principal payment in full by 2036, without drawing on debt service reserve funds.
In Fitch's more conservative rating case, racetrack revenues are stressed by integrating historical peak-to-trough revenue declines aggregated across five years. Expenses are stressed at 2.5% inflation. Under this scenario, minimum pledged DSCR through 2020 remains a solid 1.9x and indenture minimum indenture DSCR is 2.61x. Net Debt/CFADS de-levers more slowly to 3.38x in 2020 and prepayments trigger early amortization. The financial backing of the district through its covenant to maintain and fill-up the secondary reserve fund adds considerable credit support. However, should coverage fall substantially below expectations, the ratings would be pressured. Similarly, should net leverage fail to reduce as anticipated in the various cases per the prepayment mechanisms, the rating may see negative pressure.
Bonds are secured by a combined pledge of operating revenues from the Del Mar Race Track, including net racetrack revenues and up to $4 million of net food and beverage concession revenues. Net racetrack revenues are driven by attendance levels, in the form of admission and parking revenues, and commissions on overall handle.
Additional information is available on www.fitchratings.com
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