SAN FRANCISCO — A bankruptcy judge in Las Vegas is scheduled to hear arguments today over whether or not the Las Vegas Monorail Co. really is an independent nonprofit that is entitled to file for Chapter 11 bankruptcy protection.

The monorail, in default on more than $600 million in tax-exempt revenue bonds, filed for Chapter 11 in January. The bankruptcy filing followed five years of operations in which revenue and ridership fell far short of estimates.

The monorail operator financed construction of the system with a 2000 bond issue for $649 million issued through the Nevada Department of Business and Industry.

Ambac Assurance Corp. backs the $451 million first-tier debt; there are also uninsured second and third subordinate tiers.

Ambac and bond trustee Wells Fargo Bank NA have moved to have the case dismissed, arguing that the monorail is in reality a governmental entity, and not eligible for Chapter 11.

The monorail corporation is a municipality under bankruptcy law, Ambac argued in its filing, citing a governance structure under which "the state of Nevada exercises significant control over LVMC's governance, financial affairs and operations."

"Since these are governmental-purpose bonds, the debts need to be adjusted in a forum in which the state of Nevada at least participates," McDermott Will & Emery LLP partner William Smith, representing Ambac, said in a phone interview. "The bonds could only have been issued if this was an instrumentality of the state of Nevada."

The conduit issuer of the bonds, the Department of Building and Industry, argued otherwise in its brief responding to Ambac and Wells Fargo.

"It is common for essentially private corporations to similarly take advantage of tax-exempt financing without rendering them 'governmental units' or 'municipalities' within the meaning the Bankruptcy Code," the department's brief argues. "The tax-exempt bond structure for which LVMC entered into the tax agreement is similar in this regard to the tax-exempt bond structures used by charter schools. An entity may enter into agreements to take advantage of tax-exempt bonds without rendering itself an instrumentality of the state for all purposes."

The bonds were sold with the expectation that monorail revenue would repay debt service. But ridership and revenue projections were wildly inaccurate.

Ridership forecasts used for the 2000 bond offering documents projected that 2010 ridership would exceed 21 million. Currently, the monorail system expects about 6.2 million riders this year.

The shortfall rendered the monorail system unable to service its bond payments. The debt service reserve on first-tier bonds was wiped out after the July payment, at which point the monorail also stopped paying interest to lower-tier, uninsured bondholders, according to disclosure documents.

The monorail does bring in enough revenue to cover its operating costs — and that is important, according to Smith.

"At least in Ambac's view this is in fact a manufactured crisis," he said. "There's no particular reason why it has to be in Chapter 11 today or in any other proceeding today. It's not a question of whether or not its debts need to be adjusted — they will. The issue is going to be the circumstances by which they are worked out."

When the first tier bonds were sold in 2000, they carried underlying ratings at the triple-B minus level from Moody's Investors Service and Fitch Ratings, plus Ambac's AAA wrap. Now Moody's rates the monorail bonds C and Fitch assigns a D, while Ambac is rated Caa2 by Moody's and CC by Standard & Poor's.

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