NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB-' rating on Del Mar Race Track Authority, CA's (Del Mar or the authority) outstanding $30.4 million series 2005 revenue bonds. The Rating Outlook is Stable.
Key Rating Drivers:
Weakening Condition Of The Horse-Racing Industry: In recent years declining attendance and fluctuations in overall handle size (due partially to the difficult economic environment) have put pressure on racetrack net revenues throughout the industry. Del Mar has further suffered as a result of the California Horse Racing Board's 2009 decision to reduce the number of race days by 10%-15% that year and to hold them flat for 2010-2012. Racetracks also face increasing competition from regional Native American gaming casinos and from internet gaming; the latter has significantly cut into the authority's net revenue from satellite wagering.
Strong Patron Base with Some Revenue Diversity: Del Mar has a long operating history and has consistently demonstrated its ability to attract and maintain a core patron base. Furthermore, its revenue base is relatively diverse, arising from wagering, events, food & beverage, and the county fair. As such, the racetrack has continually been able to outperform 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 in recent years.
Conservative Debt Structure: Debt is 100% fixed-rate and fully amortizes by 2025. Debt service will be $4.8 million in 2013, declining to $3.1 million thereafter. A prepayment feature offers extra protection if coverage test revenues (comprised of pledged revenues as well as additional unpledged concession revenue above the $2 million pledged annually) fall below 2.0x debt service.
Low Leverage, Healthy Coverage: Leverage, defined as the ratio of net debt to EBITDA on pledged revenue streams, was 1.28x in 2012. Although coverage has generally declined slightly in recent years as a result of the drop in revenues, it increased to 1.74x in 2012. The authority also benefits from a reasonable liquidity cushion, with authority and district combined unrestricted cash and investments at $14.6 million as of June 30, 2013.
Strong Expense Management and Facility Reinvestment: Del Mar's current five-year capital improvement plan totals $24 million, an increase over previous years. The largest project is the widening of the turf course, which will allow 14 horses to run instead of eight, with the remainder focusing on routine maintenance and improvements. The program is cash funded on a pay-go basis.
Rating Sensitivities:
--Acceleration in the decline of the California horse racing industry, and the impact on overall revenues;
--Inability to offset declining wagering revenues through expense management and growth in non-wagering revenue sources;
--Additional currently unforeseen borrowing for capital projects could pressure the rating.
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.
Credit Update:
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 race track 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 2012, on-track attendance was down 1.2% on 2011 levels, with an average daily attendance of 17,623; off-track attendance was down 4.6%, following decreases of 7.3% and 6.6% in 2011 and 2010 respectively, causing total attendance in 2012 to be down 2.3% on 2011.
Despite lower attendance, total handle grew 6.6%, reflecting the first increase in overall handle since 2007, as a result of higher per capita wagering activity by attendees. Furthermore, combined handle totaled $12.2 million, the highest in the state of California. Preliminary results for Del Mar's 2013 race season indicate wagering revenues are up 6.8% from the same period in 2012, primarily due to an increase in on-track per capita wagering, while on-track attendance is up 0.7%.
Average field sizes increased from 8.4 horses to 8.7 in 2012, in part due to Del Mar's 'ship and win' program that incentivizes out-of-state horse owners to enter races at the track. 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 overall level of operating expenses associated with its racetrack operations has remained under control over the last few years, helping to offset the effect of the declining trend in attendances. Del Mar's current capital improvement program (CIP) projects $24.2 million in cash-funded spending over the next five years (2013 - 2017). This compares to a previous plan of $15.1 million for the 2011-2015 period. The increase is largely due to a new project for the widening of Del Mar's turf course allowing 14 horses per race instead of eight, with handle expected to increase as a result and, furthermore, making Del Mar eligible to host the Breeders' Cup.
Del Mar maintains moderate liquidity, with unrestricted cash and investments totaling $14.6 million at June 30 2013, equating to 87 days cash on hand. Leverage is increasingly modest as debt is paid down, with Net Debt to EBITDA of 1.28x on pledged revenue streams. Overall debt service coverage was 1.74x in fiscal 2012, up from 1.64x in fiscal 2011 but below the 1.8x range seen in fiscal 2009 and 2010. Nevertheless, 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 stress test assuming no revenue growth in fiscal 2013 and a 7% decline in pledged revenues every year from fiscal 2014, the coverage test is not breached until 2023, resulting in the set-aside of funds for the final two years 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.
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=800660
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