LOS ANGELES — A judge rejected the Las Vegas Monorail Co.’s third amended plan to exit bankruptcy on Friday even though 97% of the bondholders voted in favor of it.
In his ruling, U.S. Bankruptcy Court Judge Bruce Markell stated that one of the key requirements for plan confirmation is feasibility, meaning that confirmation is not likely to be followed by liquidation or further financial reorganization.
If the judge finds the debtor failed the feasibility test, he can reject the reorganization plan even if the creditors have granted their consent, according to the judge’s order filed in the Nevada district of the U.S. Bankruptcy Court.
The monorail, structured as a nonprofit enterprise, issued $650 million of tax-exempt revenue bonds in 2000 through the Nevada Department of Business and Industry to finance construction of the 3.9-mile monorail that connects several of the city’s largest hotels. It filed for Chapter 11 bankruptcy in January 2010 after being unable to repay the debt. Ambac Assurance Corp., the insurer of the monorail’s senior debt, filed bankruptcy a few months later.
In its current plan, the rail operator proposed to discharge the debt by issuing $40.4 million of bonds, less than 7% of the amount owed to creditors, according to the filing.
Senior bondholders would have received a fraction of the par value of more than $450 million they hold, while lower-ranked investors would be wiped out. But the rail operators’ attorneys were able to secure approval from 97% of the bondholders, who represent 92% of the money owed, and to work out all other objections, the filing states.
The rail operator, however, had the burden to show that the plan confirmation would not be followed by the need for further financial reorganization regardless of creditor approval, Markell said. The judge’s ruling states that he does not think the rail operator met that burden of proof.
The judge filed two separate orders before the confirmation hearing held Nov. 14 that said he did not consider the rail operator’s current plan to be fiscally sound, and that without substantial changes, he was likely to reject the plan.
According to the filing, the plan called for issuing three types of bonds: cash-pay bonds in the principal amount of $10 million, bearing interest at 10%, with interest-only payable until 2017, and fully due and payable in 2019; capital expenditure bonds in the principal amount of $19.5 million bearing interest at 10%, interest-only payable until maturity in 2019; and capital appreciation bonds in the principal amount of $10.8 million bearing interest at 8.3%, with interest-only payments until maturity in 2055.
Under the reorganization plan, the rail operator said it would be able to make the interest payments for the next several years, but not the $29.5 million balloon payment due in 2018, according to the court filing.
The projected shortfall on debt payments between 2018 and 2024 is $38.4 million, the filing states.
Rail operator officials estimated that the LVMC will have cash net operating income, before debt service, of between $5 million and $8 million per year. In a declaration, the rail operator’s financial advisor, Matthew Kvarda of Alvarez & Marsal NA, said the LVMC will report negative net income, on an accrual basis, in every year until 2019, according to the bankruptcy filing.
The projected losses ranging from $15 million to $24 million annually are almost entirely accounted for by depreciation, a non-cash charge to income, which Kvarda testified indicates that cash would be available to bondholders, the filing states.
The LVMC’s estimated reorganization value of $16 million to $20 million is too small a base to sustain more than $40 million of reorganization debt, Markell said.
The rail operator’s plan also contained a liquidation option, but the judge said that did not make the plan more feasible.
In their testimony, Kvarda and Curtis Myles, the LVMC’s chief executive officer, spoke of three potential upside scenarios in which the rail operator might be able to make up this shortfall, according to the filing.
The first of the scenarios is if the now-closed Sahara Hotel, at the line’s terminus, reopens over the next two years. The hotel is expected to reopen in that time, but a date has not been set.
Another possibility is the opening of Project Linq, a new tourist attraction planned near Caesar’s Palace and expected to generate 240,000 to 480,000 additional rides per year.
The third scenario is that a bankruptcy discharge would improve the rail operator’s chances of qualifying for federal infrastructure funds or grants, or private financing or investment.
“The fact that neither Myles, nor Kvarda, included these upside scenarios in their basic projections is consistent with the fact that neither believes that any of these upsides are sufficiently firm or within LVMC’s control to be counted in their basic projections,” Markell wrote.
The reorganization’s goals also hinge upon expansion of the existing monorail system, which is dependent on securing either federal funding or additional private investment, according to the filing.
In Myers’ declaration, he said that if the monorail is unable to expand, it will likely close sometime after June 30, 2019.
“LVMC essentially asks the court to allow it to float along until it sinks, suggesting that when it ultimately sinks, the court need not concern itself with how creditors will make it onto the life raft — or even whether there will be a life raft available,” Markell said. “The court declines this invitation.”
Kvarda and Myles declined to comment.
The plan continues to be referred to in bankruptcy filings as the third amended plan even though it has gone through several revisions since it was introduced.
There is no limit to how many times a company can introduce reorganization plans, according to Nancy Rapoport, a law professor at the University of Nevada, Las Vegas.
“A company gets to stay in Chapter 11 as long as it is moving toward a situation where you can either sell or build the business,” Rapoport said. “If, over time, however, it looks like that is impossible, the bankruptcy judge may decide it’s time to pay the creditors and liquidate and be done with it.”