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Atlantic Yards Debt Gets Rated

Moody’s Investors Service and Standard & Poor’s gave the bonds for New York City’s controversial Atlantic Yards basketball arena their lowest investment-grade ratings yesterday.

Moody’s assigned a Baa3 with a stable outlook to the Brooklyn Arena Local Development Corp.’s $500 million of senior tax-exempt bonds, and Standard & Poor’s assigned them a preliminary BBB-minus.

The issuer plans to sell the bonds, which are backed by payments in lieu of taxes, to partially finance the construction of the Barclays Center, a $1.06 billion, 18,000-seat complex that will be the future home of the National Basketball Association’s New Jersey Nets franchise.

In assigning the barely investment-grade rating, Moody’s compared the arena’s projected revenue streams to comparable sports centers, including the new stadiums for Major League Baseball’s New York Yankees and Mets and an arena in Louisville, said Moody’s analyst Richard Donner.

“The Louisville arena is more like the Barclays Center in that it receives revenues from other sources than just athletic teams — it also has concerts and things like that,” Donner said. Among the revenues supporting the PILOTs are premium seating, sponsorship agreements, naming rights, ticket revenue from non-basketball events, Nets license fees, and concessions.

Projections vary over the years, but in the first year the biggest revenues are expected to come from sponsorships, at 30%, premium seating at 24%, and the naming rights agreement with Barclay’s Capital at 10%, Donner said. Rental payments from the Nets will generate a projected 8%.

Out of the 225 days a year the arena is expected to hold events, only 40 to 45 of those will be Nets games, he said.

“While the Nets are important as an anchor tenant, the arena is reliant upon other revenues,” Donner said. “We view that as a positive.”

Annual PILOT payments are expected to begin in the $30 million range in the early years and escalate over time into the $40 million range.

Moody’s expects the senior bonds will have a 10-year average debt-service coverage ratio of 2.85 times and stressed that even without being in operation, the existing sponsorship deals and naming rights deal would provide 0.95 times coverage on the bonds.

The bonds will be structured with various maturities out to 2047 and are expected to price next week.

The Moody’s report cited as credit positives the security of the PILOT bond structure, the strength of New York City as a media market, the non-relocation agreement with the Nets, an operating support agreement with Russian billionaire Mikhail Prokhorov, sponsorship agreements, and an equity structure that has $424.4 million invested in the arena.

Credit challenges include the weak financial position of the Nets, construction risks, and uncertain demand for the venue and sponsorships.

Under the operating support agreement, Prokhorov will enter into an agreement with the NBA that makes him the primary obligor for operating expenses, including debt service of the Nets, according to the report.

A source familiar with the deal said that the agreement does not pertain to debt service on the bonds. Prokhorov is expected to be a majority owner of the basketball franchise.

The underwriter, Goldman, Sachs & Co., has been in talks with Assured Guaranty Ltd. about insuring the deal.

The arena and the property under the arena will be owned by the Empire State Development Corp., a state entity, and leased to the issuer, the Brooklyn Arena LDC, which will in turn sublease it to ArenaCo, a subsidiary of developer Forest City Ratner Cos. ArenaCo will make payments in lieu of taxes to the issuer.

The project has been mired in controversy over its use of eminent domain to seize private homes and businesses on behalf of the developer, which has included the arena as a key component of a larger $4.9 billion development mostly consisting of high-rise apartment towers. The project faces several lawsuits from opponents, but in the most important case, the New York Court of Appeals, the state’s highest court, ruled last month that the state had the right to seize the property.

Along with the PILOT bonds, approximately $146 million of subordinate corporate bonds are expected to be issued by the parent company of ArenaCo, according to the Moody’s report.

Last week the Brooklyn Arena LDC approved up to $825 million of bonds for the project, of which up to $650 million was to be PILOT bonds. The deal was sized down to improve the senior debt’s coverage ratios, Donner said.

The issuer has to sell the PILOT bonds by the end of the year because of changes to Internal Revenue Service rules.

Fitch Ratings will not rate the deal.

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