UPDATE 1-Las Vegas Monorail bankrupt; Ambac faces exposure

(Recasts, adds Ambac comment)

NEW YORK, Jan 14 (Reuters) - Las Vegas, the U.S. gambling mecca whose neon-lighted fortunes have been dimmed by the weak economy, has suffered another blow with a bankruptcy filing by its monorail operator.

The Las Vegas Monorail Co, the not-for-profit company that operates the 3.9-mile (6.3 km) elevated service that connects several hotels on the Las Vegas Strip and the city’s convention center, filed with federal bankruptcy court on Wednesday.

“The decline in the monorail’s operations is tied directly to the decrease in gaming revenues in Nevada, and particularly along the Las Vegas Strip,” the chief executive of Las Vegas Monorail, Curtis Myles, said in a court filing.

Ridership “has not met projections formed prior to the economic collapse,” he added.

The monorail is expected to keep operating during the bankruptcy process.

The bankruptcy filing exposes bond insurer Ambac Financial Group Inc ABK.N to a potential $1.16 billion of liabilities, the filing said.

Ambac Assurance Corp insured $451 million of tax-exempt bonds used to finance Las Vegas Monorail’s purchase of the rail line from MGM Grand-Bally’s Monorail LLC in 2000, according to the filing with the federal bankruptcy court in Las Vegas.

According to the bankruptcy petition, Las Vegas Monorail has between $10 million and $50 million of assets, and between $500 million and $1 billion of debt.

The recession has reduced the number of visitors to Las Vegas’ casinos and hurt convention attendance, and the city’s real estate market has suffered one of the steepest declines in the country.

Ambac said if Las Vegas Monorail company stops making payments on some senior “first tier” bonds, “total exposure under (Ambac’s) policy and surety will be approximately $1.16 billion.”

The company declined to comment on whether it has set aside reserves to cover any losses.

“But this is something we have been monitoring for a very long time,” said Peter Poillon, managing director of investor relations for Ambac.

Ambac asked the court to dismiss Las Vegas Monorail’s Chapter 11 petition for reorganization and refile its case under Chapter 9, a part of the federal bankruptcy code that applies to municipalities.

Ambac and rivals have struggled to write new business since losing their “triple-A” credit ratings in 2008 in the wake of losses linked to risky debt and securitizations.

Last year, Ambac warned it could run out of cash and be forced to seek bankruptcy protection.

In the court filing, Myles said Las Vegas Monorail since 2004 has used proceeds from the initial financing and debt service reserves to keep operating, but has now depleted those resources.

He said that while revenue was sufficient to cover operations, it was never sufficient to service debt.

The case is In re Las Vegas Monorail Co, U.S. Bankruptcy Court, District of Nevada, No. 10-10464. (Additional reporting by Jon Stempel; Editing by Leslie Adler)