Moody’s downgrades Yum! Center debt, again

As we’ve written the past few weeks, the Louisville Arena Authority has been publicly optimistic about their progress turning around the finances of the Yum! Center, despite a good deal of evidence showing that this might not be warranted.

Today credit rating agency Moody’s came out with their new report on their ability to pay back construction bond debt, and their thumb is down.

Here’s the full report:

New York, November 14, 2013 — Moody’s Investors Service has downgraded the underlying rating on the Kentucky Economic Development Finance Authority’s (KEDFA) Louisville Arena Project Revenue Bonds senior lien bonds to Ba3 from Ba2. The outlook is stable. Debt outstanding includes: $319 million Series 2008-A bonds, $20 million Series 2008-B bonds and $9.9 million Series 2008-C bonds. The Series A bonds include $284 million of current interest fixed rate bonds, and $26.9 million of capital appreciation bonds. The Series B bonds are taxable fixed rate bonds. Both issues are insured by Assured Guaranty Corp. (A3; stable outlook). The Series C bonds are unrated and uninsured.

RATINGS RATIONALE

The downgrade is based on the arena’s historically narrow total debt service coverage with FY2013 at 1.06 times, its low operating reserve levels with depleted Renovation and Replacement Fund reserve, and the arena’s continued dependence on the volatile sales tax based TIF revenue.

We recognize the recent positive changes including the addition of AEG as operations manager to control daily operations and ticketing, the University of Louisville’s men’s and women’s basketball team success as Cardinal’s 2013 NCAA championship, and the re-sizing of the TIF district to generate additional revenue. However the downgrade reflects our view that these improvements will not result in drastically higher operating margin for LAA as a result of the authority’s limitations with respect to its operating agreements and its ascending debt service payment requirements.

Outlook

The stable outlook is based on our expectation that redefined 2-sq mile TIF district will produce annual TIF revenue over $6 million in the next two years, AEG will continue to deliver its minimum guarantee, the event revenues will be enough to cover LAA’s operating expenses in FY2014, and the expected DSCR in the near future will be between 1.0 times to 1.1 times, including the Metro Louisville maximum payments.

What could change the rating – UP

Sustained improvements in debt service coverage to over 1.2 times, replenished reserves, greater than projected sales tax growth in the TIF district and arena revenue growth could have a positive impact on the rating.

What could change the rating – DOWN

Shortfalls in debt service payments, and use of senior debt service reserve could result in further downgrade. Significant changes to the TIF district exemptions which impact the projected debt service coverage could also place downward pressure on the rating.

Strengths:

*Strong support from the state and Metro Louisville decreases the demand risk for the arena

* Strong attendance record for the arena’s anchor tenant, the University of Louisville’s men’s and women’s Cardinals basketball teams, provides stability

* The contract granting the TIF revenues can only be canceled with approval of the bond trustee

Challenges:

* The authority’s debt service payments rely on volatile TIF revenues

* Steady and continuous growth in TIF district sales taxes will be needed to support debt service going forward

* The TIF district exempts certain projects from payment of all or some of the taxes supporting the project. Future projects could be added to TIF district exemptions by action of the legislative council of Metro Louisville, but not without approval by the state and the authority

* The authority’s continued narrow financial performance with 1.06 times total debt service coverage ratio in FY2013

* Arena’s base operating expenses continues to be larger than originally forecasted in the Series 2008 financing

* LAA’s revenue sharing lease with ULAA limits the authority’s profit upside from the successful anchor tenant

Same old same old… pathetic TIF revenues and a strange lease where the University of Louisville takes most of the spoils.

The only thing saving LAA appears to be the willingness of the state and city taxpayers to jump in when needed… that’s you, so good job with that.

2 Trackbacks

  1. […] due to the much less than expected sales tax revenue from its TIF district. With Moody’s downgrading the debt last month, S&P coming out with a new report any day now, and a great deal of […]

  2. By S&P downgrades Yum! Center debt, again – FatLip on December 27, 2013 at 9:57 am

    […] month after the Moody’s credit rating agency downgraded the Louisville Arena Authority’s ability to pay back its construction bond debt for the Yum! […]

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