Fitch Affirms Del Mar Race Track Authority, California at 'BBB-'; Outlook Stable.

NEW YORK -- Fitch Ratings affirms its underlying 'BBB-' rating on the Del Mar Race Track Authority's (the authority) outstanding $45 million series 2005 revenue bonds. The Rating Outlook is Stable. Series 2005 bond proceeds were used to refund the authority's $23 million outstanding revenue bonds and to finance approximately $25 million in improvements to the Del Mar Race Track facility. The bonds are secured by a combined pledge of net race track revenues, net food and beverage concession revenues (up to a maximum of $2 million), and net satellite wagering revenues.

The 'BBB-' rating on the authority's bonds is primarily based on the structural features that should enable the authority to counter the effects of declining industry trends. These features include: the bonds' level debt service structure and short, 20-year life; the additional liquidity provided by minimum fund balance levels (equal to maximum annual debt service [MADS]); and a pledge to refill reserve draws from legally available funds of the 22nd District Agricultural Association (the district), a state entity which owns and operates the 410-acre Del Mar Fairgrounds facility. In addition, there is an annual requirement to pre-pay (or set aside to the call date) up to 50% of annual debt service from surplus pledged funds available after debt service, if the primary revenue sources of the race track provide less than 2.00 times (x) coverage of annual debt service. The long history and prominence of the Del Mar race track and its demonstrated ability to attract and maintain a stable patron base also provide support for the bonds.

Credit concerns center on the weakening position of the U.S. horse racing industry, characterized by declining attendance and wagering trends at many racetracks. These risks include internet and online gambling alternatives, competition for patrons provided by regional Indian gaming casinos, the attractiveness of other sporting and recreational venues in the region such as professional baseball, and the potential for changes in state legislation to affect the distribution of statewide wagering revenues.

Del Mar remains one of the nation's premier horse racing facilities, maintaining a relatively steady attendance base over the last three decades. The track consistently ranks in the top three nationally based on both its annual attendance and its wagering base. Fitch views this as important, since pledged revenues are closely linked to on-track attendance. On-track attendance for 2005 was flat from the prior season, and total attendance, which includes the satellite wagering facility, declined 4%. However, the racetrack's total handle increased 5% from 2004. Preliminary data for 2006 shows a small 3% decline in on-track attendance. The attendance decline was in part attributed to some negative national press due to notable horse racing injuries this year and also to several unseasonably hot weather days in the Del Mar area. The authority expects to regain lost patrons in the 2007 season.

Despite the lack of growth in its patron base, Del Mar's financial performance provides comfort that its operations will continue to be steady in the near term. The two attendance-related elements of pledged revenues, net race track revenues and concessions, make up 91% of pledged revenues. The remaining 9% comes from satellite wagering net revenues, which are derived from patrons wagering at the track and from off-track patrons wagering via the simulcast race transmission. Based on fiscal 2005 performance, pledged revenues increased 4% on 2004 and would provide about 2.13 times (x) actual coverage of debt service, which begins in fiscal 2006. Preliminary pledged revenue data for fiscal 2006 shows that debt service coverage was marginally lower, but still at acceptable levels.

A dire Fitch stress test assuming a 10% decline in pledged revenues every year beginning in 2006 results in use of the district's allocated fund balance, but does yield 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. The district's operations, excluding depreciation and race track operations, generated $59.9 million in revenue and $10.8 million in net revenues in 2005, a 12% improvement on 2004. As of fiscal 2005 the District also had $23 million in liquidity, of which a minimum of $4.8 million will be retained as a surplus fund for debt service on the authority's debt, if necessary.

The District has not yet finalized its 2005-2020 master plan as yet but plans to undertake the near-term replacement of the current dirt track with a synthetic surface. The replacement will be undertaken in early 2007 in time for the race season and is expected to cost approximately $8 million. While the District had not previously budgeted the entire surface replacement for this year, the new track surface was expected to be incorporated into longer term capital improvement plans. The new track should be safer for both horses and jockeys and will preserve the quality of the racing experience while saving an estimated $500,000 in annual maintenance costs. The track's cost will reduce the District's available fund balance to approximately $15 million but Fitch believes that this level of liquidity still allows the District to support the authority's debt-service for a few years if necessary.

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