Sept 13 - Fitch Ratings has affirmed its underlying 'BBB-' rating on the Del Mar Race Track Authority, CA's (the authority) outstanding $30.4 million series 2005 revenue bonds. The Rating Outlook is Stable. KEY RATING DRIVERS 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. The California Horse Racing Board changed annual race scheduling and commission levels, with race days reduced 10%-15% in 2009, and held flat for 2010 and 2011. 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. Strong Patron Base with Semi-Diverse Revenue Streams: 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 continually outperform its peers. 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. Conservative Debt Structure: Debt is 100% fixed-rate and fully amortizes by 2025. Debt service is flat at $4.8 million until 2013, then declines to $3.1 million thereafter. A prepayment feature offers extra protection if Coverage Test Revenues (i.e. Pledged Revenues including all available Concession Revenue (not subject to $2 million annual limitation) fall below 2.0x debt service. Very Low Leverage with Adequate Coverage: Net debt to EBITDA on pledged revenue streams was 1.89x in 2011. Coverage has declined slightly with the drop in revenues; however, it remained relatively solid at 1.64x in 2011. The authority also benefits from a reasonable liquidity cushion, with unrestricted cash and investments at $16.4 million as of June 30, 2012. Strong Management of Expenses and Solid Facility Reinvestment: Del Mar's current five-year capital improvement plan totals $15.1 million. However, the program is non-critical in nature and focuses on routine maintenance and improvements. The program is cash funded on a pay-go basis. What Could Trigger a Rating Action --An acceleration in the decline of the California horse racing industry, and the impact on overall revenues; --Inability to offset declines in wagering revenues through expense management and growth in non-wagering revenue sources; --Additional leveraging due to unforeseen additional borrowing for capital projects could pressure the rating. Security The series 2005 bonds are secured by a combined pledge of operating revenues from the Del Mar Race Track, including net race track revenues, a portion of net food and beverage concession revenues (capped at $2 million), and net satellite wagering revenues. Net race track revenues are driven by attendance levels (i.e. admissions and parking) and commissions on overall handle. Credit Update Del Mar remains one of the nation's premier horse racing facilities, consistently ranking in the top three nationally, based on both its annual attendance and its wagering base. However, overall attendance at the race track has generally declined with more pronounced declines evidenced in off-track attendance (primarily driven by the implementation of Advanced Deposit Wagering and Indian gaming alternatives in the local area). In addition, overall handle at Del Mar has fluctuated in the past, as increases in handle size for out-of-state wagering and off-track betting have offset stagnant-to-declining handle sizes for on-track wagering. For 2011, on-track attendance was flat with 2010 levels, which grew 4.2% over 2009; however, off-track attendance was down 7.3%, following a decrease of 6.6% and 4.7% in 2010 and 2009, respectively. Total attendance for 2011 was down 2.5% over 2010 and total handle dropped 4.2% over 2010. For 2011, Del Mar's daily average of 17,844 attendees (relatively flat to 17,960 in 2010) wagered $11.3 million, leading the state of California. Statewide attendance (excluding Del Mar) declined 4% in 2011 while statewide handle was off 2.88%. These were much less severe than the declines of 16.4% in statewide attendance and 17.1% in statewide handle seen in 2010. Preliminary results for Del Mar's 2012 race meet indicate wagering revenues are up 3.8% from the same period in 2011 primarily due to the 34.2% increase in on-track per capita wagering, while on-track attendance is down 1.2%. The authority's overall level of operating expenses associated with its racetrack operations has remained in control over the last several years. From fiscal 2007 to 2011, operating expenses declined on average approximately 1.1%, including a 5% increase in 2011. District operating revenues through July 2012 were up 7.4% over the same period for 2011, largely driven by variable costs associated with the second year in a row of record attendance at the 2012 San Diego County Fair. Concert admission revenues were up 39% over 2011, carnival space rental revenues were up 31%, and food and beverage revenues were up 24%, driven by the increased attendance levels attributed to the addition of well-known entertainment acts such as Cirque du Soleil. Through July, operating expenses are up 8.3%, largely due to expenses associated with the increased activity. While Del Mar maintains adequate liquidity (unrestricted cash and investments at the district totalled $16.4 million at June 30 2012), it also maintains a moderate degree of leverage with net debt to EBITDA of 1.89x on its pledged revenue streams. Overall debt service coverage was 1.64x in fiscal 2011, down from 1.85x in fiscal 2010 and 1.84x in fiscal 2009. Coverage test net revenues have remained sufficiently high to achieve 2.0x or higher coverage, so no prepayment of principal has been necessary. Under a Fitch stress test assuming no revenue growth in fiscal 2012 and a 7% decline in pledged revenues every year beginning in fiscal 2013, the coverage test is not breached until 2021, resulting in the set-aside of funds for the remaining four years of debt service. However, the use of Del Mar's surplus fund balance along with the district's unrestricted cash is sufficient to meet bondholder repayment. While the decline of the industry is the largest concern for the credit, Fitch takes some comfort in the financial backing of the district through its covenants. Del Mar has a strong 2.00x rate covenant on the incurrence of additional debt with no additional leverage anticipated, and benefits from the added protection of covenants requiring prepayment of principal if annual debt service coverage from the authority's principal revenue sources (including the full amount of available net concession revenues) falls below 2.00x in any given year. The district pledges to maintain minimum fund balances equal to maximum annual debt service on the outstanding series 2005 bonds.