OREANDA-NEWS. July 14, 2015. Fitch Ratings has assigned a 'BBB-' rating on Del Mar Race Track Authority, CA's (Del Mar) \\$45.65 million series 2015 revenue bonds. Fitch also affirms its 'BBB-' rating on \\$25.46 million in outstanding series 2005 bonds, which are expected to be refunded with the series 2015 bonds. The Rating Outlook is Stable.

KEY RATING DRIVERS
The rating reflects the profile of Del Mar relative to the overall declining profile of the horse racing industry. A demonstrated ability to attract and maintain a core patron base, combined with semi-diverse revenues from wagering, events, food and beverage, and the County Fair have led the racetrack to continually outperform its peers. With the issuance of the 2015 bonds, initial low leverage of 3x and strong structural features that ensure rapid deleveraging are key to the ratings given the broader industry risks.

Weakening Condition Of The Horse Racing Industry: The industry has been characterized in recent years by declines in attendance and fluctuations in overall handle size due partially to difficult economic environment, which pressures racetrack net revenues. Racetracks also face increasing competition for wagerers, both from Internet gaming, which has driven a declining trend of the satellite wagering component of the authority's net revenues, and from regional Indian gaming casinos.

Premier Site with Strong Patron Base: Del Mar's long history and prominence, with a demonstrated ability to attract and maintain a core patron base, combined with semi-diverse revenues from wagering, events, food & beverage, and the County Fair have led the racetrack to outperform its peers historically. While 2014's results were lower than historical levels, the addition of a fall race meet and an increased pledged share of net concession revenues from \\$2 million to \\$4 million annually should strengthen revenues going forward. Management has demonstrated its willingness and ability to proactively control operating expenses and find additional revenue sources to mitigate the effects of lower wagering revenue levels.

Strong Management of Expenses and Facility Reinvestment: Del Mar's current five-year capital improvement plan through 2019 totals \\$34 million which incorporates several large projects. The program is expected to be funded through a combination of pay-go cash and debt, with \\$25 million in bond-funded projects earmarked by DMTC and the DAA.

Strong Prepayment Provisions: Existing series 2005 bonds are 100% fixed-rate and fully amortize by 2025. Following the proposed 2015 issuance, debt will amortize in 2038, extending the maturity for the refunded bonds to 2028 and issuing new debt maturing in 2038. Scheduled debt service for the 2015 issuance is \\$3.4 million, slightly up from current debt service of \\$3.1 million. However, a turbo prepayment feature provides for accelerated prepayment of principal for the 2015 bonds in the amount of 30% of pledged net revenues (subject to the \\$4 million cap on net Concession Revenues) exceeding 2 times (x) debt service. The existing prepayment feature will also remain in place, offering further protection if Coverage Test Revenues (i.e. Pledged Revenues including all available net Concession Revenue, not subject to \\$4 million annual limitation) fall below 2.0x debt service. No debt may be issued senior to the 2015 bonds, and rating agency verification will be required for any additional parity bonds.

Moderate Leverage and Adequate Coverage: Net debt to cash flow available for debt service (CFADS) on pledged revenue streams was 1.39x in 2014; with the new issuance, this is expected to increase to the 3.0x range, but is expected to fall below 2.0x within the first few years of amortization. Coverage remains relatively solid at 1.79x in 2014, increasing from 1.74x in 2013. The authority also benefits from a reasonable liquidity cushion, with combined District unrestricted cash and investments at \\$13 million for fiscal 2014.

Peer Analysis: There are no directly comparable peers, as this is the only racetrack that Fitch rates.

RATING SENSITIVITIES
Positive: Should performance stabilize above levels seen in the sponsor case (flat to positive growth in pledged revenues), the rating may see upward movement.
Negative: An acceleration in the decline of the California horse racing industry, and the impact on overall revenues.
Negative: Inability to offset declines in wagering revenues through expense management and growth in non-wagering revenue sources.
Negative: Additional leveraging for capital projects that is not supported by expected revenue levels could pressure the rating.

SUMMARY OF CREDIT
The 22nd District Agricultural Association (the district) and the Del Mar Race Track Authority are issuing \\$45.65 million in 2015 Revenue Bonds to both refinance \\$25.46 million in outstanding Series 2005 revenue bonds and provide for approximately \\$25 million of new money financing. The new bonds are fixed rate (2-5% vs. 4-5% for existing bonds), and benefit from a cash funded debt service reserve fund equal to lesser of (1) 10% new and outstanding bond proceeds; (2) MADS; or (3) 1.25x Average Annual Debt Service. The 2015 bonds have level scheduled debt service of approximately \\$3.4 million per year through final maturity in 2038. Savings as a result of the refunding are approximately \\$4.5 million (\\$1.2 million PV savings).

New money bonds will be used to fund various racetrack projects. The authority is replacing the existing synthetic race track, which is nearing the end of its useful life, and making improvements and major maintenance to the grandstand and other buildings on the fairgrounds. Major grandstand-related projects include improvements to elevators and escalators, fire protection systems, HVAC, and seating/patron amenities. Major fairground-related projects include utility systems, barn improvements, roofing and restrooms. The entire cost of the bond-funded projects is approximately \\$25 million. To the extent bond proceeds are insufficient to complete these projects, the authority will reduce the scope of the projects or use other available funds.

The bonds have the same rate covenant as the prior series 2005 bonds, and an additional bonds test of 2.00x (historical and projected). The district covenants that while the bonds are outstanding, funds on account will be maintained equal to at least MADS. A turbo prepayment feature provides for accelerated prepayment of principal for the 2015 bonds in the amount of 30% of pledged net revenues (subject to the \\$4 million cap on net Concession Revenues) exceeding 2.00x debt service. The bonds also continue to benefit from a principal prepayment feature in the event pledged revenues fall below 2.00x debt service coverage. The prepayment amount is equal to the lesser of (1) 50% Annual Debt Service for the preceding year; and (2) Pledged Revenues and interest and earnings on funds held by Trustee for such preceding year exceeded Annual Debt Service for the preceding year. Fitch views both prepayment features as facilitating the repayment of debt earlier than the scheduled final maturity of 2038.

Race track net revenues decreased to \\$3.3 million in 2014 from their previous level of \\$6.1 million in 2013. The main contributing factors to the reduction were a three-day period in late July in which seven horses perished and the related publicity and adverse weather, including rain/thunderstorms in late July for the first time in many years. While summer race attendance fell 8.9% (average daily wagering fell 6.4%) as a result of adverse publicity related to horse injuries on the new turf course, after closure and reopening of the turf course (on Aug 19) for maintenance and more cautious rules implementations, there were no significant racing injuries on the turf course for remainder of summer meet or the fall meet. While the 2014 results are likely an aberration, wagering revenues are recognized as volatile; and the increased pledge of concession net revenues serves to in part mitigate the potential for volatility in race track net revenues over time.

The addition of the Del Mar fall race meet bolstered 2014 results, with overall on-track wagering up 4% and on-track attendance up 11.9%. Off-track attendance was also up 33.5%. Average daily attendance at 2014 fall race was 186% above attendance at Hollywood Park's fall race meet a year prior (the best comparable given lack of a prior year's meet at Del Mar). Overall 2014 food and beverage revenues were up 11.7% due to the addition of the fall race meet. Despite a 6% drop in average daily attendance during the summer meet, food and beverage per capita spending was up 7.5% over a year prior for the summer meet, and was only \\$100k below expectations. The fall race meet contribution was 61% above expectations.

The Pledged Revenue debt service coverage ratio (DSCR) was 1.79x in 2014. Under various scenarios, the authority is expected to be able to meet debt obligations under the proposed 2015 bonds, and, in most cases, to pay off obligations prior to the scheduled 2038 maturity due to proposed prepayment mechanisms. For example, in a Base Case scenario which assumes Concession Net Revenues are held flat at FY2014 levels (pledged amount capped at \\$4 million) and Race Track Net Revenues are held flat at \\$6.1 million (consistent with FY2013, correcting for the one-time decline seen in 2014), prepayments total \\$18.9 million, resulting in payment in full by 2032 with no draw on reserve funds, and net leverage falling below 2.0x by 2020. In this case, Pledged Revenue DSCR remains above 2.3x, and Coverage Test DSCR remains at or above 2.9x.

In Fitch's more conservative Rating Case, in which a flat 7% decline is applied to revenues through maturity, prepayments total \\$15.5 million (\\$5.2 million in turbo prepayments through 2026, and \\$10.3 million in set-asides for back-ended principal repayment from 2027-2032), resulting in payment by 2033. Pledged Revenue DSCR falls below 2.0x in 2025 and Coverage Test DSCR fall below 2.0x in 2026, though debt service continues to be met without draws on debt service reserves. Leverage falls more slowly, but is below 2x by 2023.

Fitch also considered a breakeven scenario in which revenues were held flat for a five year period through 2020, then decreased at the maximum possible rate that still allowed for debt service payments. Without draws on the debt service reserve fund, the structure was able to support an 11% perpetual decline in revenues (paydown by 2034); when draws on the reserve are allowed, the structure can support a 14% perpetual decline in revenues (paydown by 2034). Both breakeven scenarios represent a catastrophic decline in the horse racing industry, and are viewed as unlikely; however Fitch takes comfort in the structure's ability to weather such a negative scenario, with all scenarios ultimately yielding full and timely bondholder repayment. The financial backing of the district through its covenant to maintain and fill-up the secondary reserve fund adds considerable credit support. However, should coverage fall substantially below expectations, the ratings would be pressured. Similarly, should net leverage fail to reduce as anticipated in the various cases per the prepayment mechanisms, the rating may see negative pressure.

Security:
The series 2015 bonds are secured by a combined pledge of operating revenues from the Del Mar Race Track, including net race track revenues and up to \\$4 million of net food and beverage concession revenues (an increase from \\$2 million under the pledge for the 2005 bonds). Net satellite wagering revenues, which were included in pledged revenues for the 2005 bonds, will be excluded from pledged revenues for the 2015 bonds. Net race track revenues are driven by attendance levels, in the form of admission and parking revenues, and commissions on overall handle.