Value Investors Club / Las Vegas Monorail Company (51769RAA2)

Description

We like the Series A bonds issued by the Las Vegas Monorail Company (“LVMC”) which operates the monorail system on the Las Vegas strip. It’s probably very hard to buy a sizeable amount of these or even get your hands on them given the small issue size and that they trade extremely thinly so this idea is better suited to smaller funds.

The LVMC bonds are basically an orphan security from the Company’s 2012 bankruptcy that nobody has paid attention to. The legacy bondholders pre-restructuring reached a settlement with bond insurer Ambac to get a portion of their money back. Since the current holders went after Ambac for their recoveries, LVMC holders have been selling their stub investments in the Series A and Series B bonds at pennies on the dollar as these are miniscule positions and immaterial to their overall recoveries.

The Series A bonds are currently quoted at 2 cents if you can even call that a quote because last trade was on May 8th for 1 bond at a price of 8 cents. Nuveen who holds most of the 2019s had these marked to 50-60% of face per their latest fund filings. The prices are basically all over the place but at a huge discount to where they should be.

Basically we think these are worth face ($10 million) plus around $1 million of accrued interest since the bonds were PIK-ing interest from 2012-2015 and now pay cash interest with a 5.5% coupon. Plus you have a first lien on the monorail system in Las Vegas which is actually a pretty decent business at current ridership levels.

Background

The Las Vegas Monorail Company (“LVMC”) operates the monorail that connects restaurants, shows, shops, clubs, hotels and casinos in Las Vegas. The 3.9-mile system runs on an elevated track linking casinos and the Las Vegas Convention Center east of the Strip and is the only privately owned public transportation system in the United States.

LVMC was founded in 2000 as a not-for-profit corporation to develop and operate the monorail system in Las Vegas. LVMC acquired the original monorail that connected the MGM Grand and Bally’s. An expanded rail line going north to the Sahara Hotel & Casino (now the SLS Hotel) opened in 2004.

The total project cost to develop the monorail system was around $650 million which was financed with the proceeds from tax-exempt Las Vegas Monorail Project Revenue Bonds issued in 2000 through the State of Nevada.

Unfortunately, LVMC never achieved its lofty financial projections of 22 million riders (peak ridership reached only 6 million in 2007) making its debt load unsustainable. In January 2010, LVMC filed for bankruptcy protection following a slump in ridership and tourists to Las Vegas during the financial crisis. LVMC emerged from bankruptcy at the end of 2012. The reorganization reduced ~$650 million of debt to $13 million and valued LVMC at ~$20 million in enterprise value.

Financial Performance

The monorail had around 4.9 million riders in 2016 and generated fare revenues of $21.4 million and $2 million of EBITDA (10% margin). Ridership has increased 18% from 2013-2016 but is still way below the peak passenger count of 7.9 million in 2007 when LVMC generated revenues of $30.2 million.

LVMC has successfully returned the business to profitability by bringing O&M in-house which was previously outsourced to Bombardier until early 2015. The O&M in-sourcing helped LVMC reach EBITDA break-even in 2015. O&M expense which is about 50% of revenues includes estimated capital asset replacement costs to

maintain the physical infrastructure including platforms, ticket vending machines, escalators, and train interiors.

LVMC is also pursuing initiatives to boost revenue by introducing new options into the fare structure (eg.weekly and monthly passes), increasing online ticket sales and by finding ways to increase advertising revenuefrom the wrapping on the trains and video displays inside the trains. Fares ($5 for a single ride) have not changedsince 2013 levels so there is probably room for an increase.

Monorail ridership has been more resilient to public transport disruption by ride sharing services (Uber, Lyft) which have been widely available since 2015. There were double digit degreases in taxi and bus ridership in 2016 whereas monorail ridership in Las Vegas fell by only 2.8% with Q1 2017 ridership levels up 3% vs. the prior year period.

We think this is because the monorail is still a lot cheaper than taking a taxi at a cost of about $5 per ride vs. $20-25 for a cab and $9-10 for Uber from the MGM to SLS. Additionally, a significant portion of riders travel the monorail to/from conventions given the route and station locations. As a reference, convention attendance increased by 1.2% in 2014, 13.4% in 2015 and 7.1% in 2016. LVMC has also started integrating its fare collection system with convention badges and did this for two of the largest conventions held in Las Vegas and plans to do this with more of them. Anyways it’s probably safe to assume ridership will remain flat or grow modestly (1-2% per annum) from current levels.

Capital Structure and Valuation

LVMC has two series of bonds outstanding, $10 million of Series A bonds due 2019 which have a first lien on LVMC’s assets and $3 million Series B bonds due 2055 which are subordinated to the Series A bonds and have a junior claim on the collateral.

Prior to January 2015, LVMC had the option to PIK interest on both series of bonds if working capital was less than $2.4 million. Both series of bonds are currently paying cash interest at a rate of 5.5%. As of Q1 2017, there is about $1.3 million in accrued interest payable on these bonds. On April 15, 2017, the Series A bonds started to amortize quarterly at $87,500 (3.5% per annum) which amounts to $262,500 in 2017 and $350,000 in 2018 in principal repayments.

Today, LVMC is a $2-3 million EBITDA business with limited project related capex. Maintenance capex is included in O&M expense and any project capex must be approved by 2/3 of voting bondholders of each series.

Assuming flat ridership to 2016 levels and no fare increases, LVMC generates around $2 million of unlevered free cash flow which means that at face value, the Series A bonds create the company at only 5x FCF.

LVMC will generate enough liquidity to make cash interest and principal payments until 2019. The indenture permits the incurrence of $5 million in “permitted indebtedness” and $5 million in “permitted liens” which together with projected cash build of should be more than sufficient to address the 2019s outstanding at maturity.

Conclusion

At current market prices which are at a significant discount, the LVMC Series A bonds look extremely cheap, even at 50-60% of face where Nuveen, one of the largest holders is marking them. At face value, LVMC is created at a 20%+ unlevered FCF yield through the Series A bonds. We think that the Series A bonds are a compelling investment if it’s possible to source any inventory to buy these.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

Recovery in ridership numbers

Amortization and cash interest payments on 2019 bonds

Refi of 2019s

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			2017	2018
Price:	60.00	EPS	0	0
Shares Out. (in M):	0	P/E	0	0
Market Cap (in $M):	0	P/FCF	0	0
Net Debt (in $M):	8	EBIT	0	0
TEV (in $M):	0	TEV/EBIT	0	0