SAN FRANCISCO — The Las Vegas Monorail Co., which has more than $600 million of municipal bonds outstanding, sought Chapter 11 bankruptcy protection Wednesday.
The nonprofit company was formed in 2000 to acquire and extend a rail system that connects hotels on the Las Vegas Strip. The monorail has made money in recent years, but not enough to cover its debt-service payments, and a 30% drop in convention traffic since the recession began convinced the board it can’t afford to pay its debts.
The bankruptcy could be a drain on struggling Ambac Assurance Corp., the insurer on $460 million of the bonds. The monorail has already called on the insurer to make two debt-service payments worth $20.5 million, and Ambac — which is rated Caa2 by Moody’s Investors Service and CC by Standard & Poor’s — in court estimated its exposure at $1.16 billion if the monorail never makes another debt-service payment.
“We have debt that we can’t pay from the operations, so the goal is to restructure the debt in a way that puts us in a position to meet those obligations,” monorail chief executive officer Curtis L. Myles 3d said in an interview Thursday. “We’re having discussions with our bondholders’ representatives and our bond insurer, and hopefully we’ll reach some sort of agreement that allows us to come away with something that works for both of us.”
The insurer filed a 21-page motion seeking to dismiss the bankruptcy as soon as it was filed on Wednesday.
Ambac argued that the monorail is actually a state agency and should not be eligible for bankruptcy protection under Chapter 11. The insurer said the monorail should use the Chapter 9 municipal bankruptcy code. While the company is incorporated as a nonprofit, its board is appointed by the governor of Nevada, and the Nevada Department of Business and Industry was the conduit issuer for the bonds.
In its Chapter 11 filing, the monorail company said its bond documents explicitly stated that Nevada is not responsible for the debt and the bonds are payable solely from system revenue.
If it were a Chapter 9 filing, the monorail case would dwarf the 2008 bankruptcy of Vallejo, Calif., in size, making it the most significant Chapter 9 filing since Orange County, Calif., in 1994. Vallejo has less than one 10th the amount of debt outstanding than the monorail does.
Myles said he sees no immediate prospect of drawing government aid to the project, and can’t cover debt service with the monorail’s meager profits.
He said reports in the local media claiming the nonprofit had reached an agreement with bondholders before filing for bankruptcy were incorrect. He said the company has been negotiating with Ambac and bond trustee Wells Fargo Corporate Trust Services.
The automated, driverless 3.9-mile rail line connects hotels on the Las Vegas Strip to the convention center, and the monorail has the right to expand to McCarran International Airport.
The monorail’s ridership has been well below projections since it opened in 2004. According to bond offering statements in 2000, the monorail expected 21.2 million passengers a year by 2009, but the company’s bankruptcy filing says it carried just six million people last year.
In 2009, officials said the monorail had $27.6 million of revenue and $22.6 million of expenses. That left just $5 million to cover $34.4 million of debt-service obligations. The company drew on sureties from Ambac to pay the debt service on the senior debt and has not made payments to second-tier and subordinate bondholders.
“It wasn’t shockingly surprising to be honest with you,” said Peter Poillon, a managing director at Ambac. “That’s a transaction that we’ve been monitoring very, very closely for a very long time. It’s a transaction that has been stressed almost from day one of its operations.”
Poillon would not say what reserves, if any, the insurer has set aside for the transaction.
“We’ve had our eye on that, and we have taken precautions that we thought were necessary over time,” he said.
He said the $1.16 billion liability estimate in the Ambac court filing assumes payment of all interest and principal over the life of the $460 million debt that Ambac insures.
Ambac reported $11.4 billion of claims paying resources at the end of the third quarter.
Dan Seymour contributed to this story.