The Las Vegas Monorail was developed at a cost of $650 million — but based on its meager ridership and revenue levels it’s now worth just $16 million to $20 million.
That caused a bankruptcy judge to express skepticism Monday about Las Vegas Monorail Co.’s plan to emerge from bankruptcy in which it would still be encumbered by $44.5 million in debt — more than twice its value as a company.
On top of that, Judge Bruce Markell noted, the monorail’s own financial projections show it facing a deficit of $38.4 million in 2019.
“I don’t buy it,” Markell told Monorail attorneys during a day-long hearing.
“I’m not sure if this plan is not just kicking the can down the road,” said Markell, who nevertheless didn’t immediately rule on the Monorail’s request for approval of its reorganization plan.
Markell said he would issue a written ruling soon.
A Monorail executive and a financial analyst for the company testified there are several potential upsides that could erase the $38.4 million deficit projections. They include the Monorail benefiting from an increase in visitation to Las Vegas, the system picking up extra riders from Caesars Entertainment Corp.’s Project Linq under development behind the Flamingo hotel and hopes for further ridership increases should the Sahara hotel reopen.
The Monorail also plans to apply for and receive some $15 million in grants from the U.S. Transportation Department to help pay for capital projects including replacement of trains and equipment between 2012 and 2019.
Curtis Myles III, CEO of Las Vegas Monorail Co., also said federal grants and private money could be tapped to expand the system to McCarran International Airport – a project that no doubt would cost hundreds of millions of dollars but that Myles and Monorail creditors feel is crucial to boosting ridership.
In order to be eligible to apply for federal grants, the Monorail will need to either become a government entity or be sponsored by an existing local government. Creating such a legal relationship may require approval of the Legislature and Gov. Brian Sandoval.
The monorail reorganization plan also authorizes the monorail to consider adding two stations on its existing 3.9-mile route between the MGM Grand and the Sahara.
Myles declined to say where on the system those stations would be added, but obvious gaps for the system are between the Harrah’s station and the Las Vegas Convention Center station; including in the area of the Sands Expo Center and Wynn Las Vegas.
Plans have also been discussed over the years to expand the system to downtown Las Vegas, but Myles said the proposed airport expansion is a higher priority.
During the hearing, Myles estimated the value of the Monorail company currently based on its financial performance is about $16 million. A financial analyst for the company estimated it's worth up to $20 million.
Markell said his concerns about the reorganization plan are based on the law requiring him to find the Monorail won’t likely end up in another bankruptcy or another financial restructuring anytime soon.
Looking at the system’s financial forecast, the judge noted it didn’t meet predicted ridership levels after it opened in 2004.
“This is an entity that has had trouble meeting projections over time,” he said.
The judge expressed concern that under the reorganization plan, the system would continue to pay Myles a salary of $288,240 and the seven monorail directors $2,500 each per month for a total of about $500,000 per year.
“You’re paying a half million dollars to the board and Mr. Myles to do what?” Markell asked
In May 2010, after the Monorail bankruptcy was filed, Myles voluntarily reduced his pay from $346,200 annually.
Monorail attorney William Noall of the Las Vegas law firm Gordon Silver said Myles has extensive experience in transportation agencies and that the flawed financial projections when the Monorail was under development “are not the fault of present management.”
Noall insisted the Monorail will be able to meet its financial obligations after emerging from bankruptcy, particularly after earning support for the plan from creditors standing to lose hundreds of millions of dollars.
Despite Markell’s skepticism about the reorganization plan on the table, it was overwhelmingly approved by bondholders in a creditor vote even though they stand to see $663 million of their claims against the Monorail extinguished.
A majority of the top-tier bondholders owed some $500 million will see their debt replaced by the new $44.5 million in new debt under the proposed plan.
Lower-ranking bondholders owed some $207.3 million would receive nothing.
The bondholders overall support the plan because an alternative, closure and liquidation of the system, would yield them a lot less money -- $8.5 million.
Bondholders attorney Philip Bentley urged Markell to approve the plan, arguing there’s a “real possibility” the system could be successful if it can correct a fundamental design flaw in which it did not originate at the airport.
“The monorail was poorly designed because it didn’t go downtown or to the airport,” Bentley said.
Unable to cover debt payments because of over-optimistic ridership projections, the Monorail filed for bankruptcy protection in January 2010.
The Monorail, in its latest financial report, said that since filing for bankruptcy on Jan. 13, 2010, and through September it had lost $38.7 million on revenue of $43.5 million. The loss was driven by the Monorail’s biggest expense, $39.7 million in noncash accounting expenses for depreciation of its system and equipment.
Once the Monorail emerges from bankruptcy, its depreciation expenses are expected to fall dramatically when the value of its assets are restated to new, substantially lower levels under fresh-start accounting.