Basketball probe is credit negative for KFC Yum! Center bondholders

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BRADENTON, Fla. – Criminal allegations against senior athletic personnel at the University of Louisville are credit negative for investors holding bonds that were issued to build the KFC Yum! Center, Moody's Investors Service said.

The 22,000-seat, multi-purpose arena in downtown Louisville, Ky., is overseen by the nonprofit Louisville Arena Authority, whose $360 million of junk-rated bonds were issued by the Kentucky Economic Development Finance Authority.

The bonds are rated Ba3 with a stable outlook by Moody’s and BB with a negative outlook by S&P Global Ratings.

The arena is home to the University of Louisville's men's and women's basketball teams. The arena authority receives revenues from concerts and other events, as well as from the teams, including 10% of men’s basketball gross ticket sales and 5% of women's basketball gross ticket sales.

Moody’s placed the University of Louisville and its foundation under a review for possible downgrade Oct. 3 partly because of the developing federal investigation into basketball recruiting violations.

Authorities have not indicated what, if any, penalties the team could face as a result of at least one basketball coach being included in a criminal complaint involving fraud and corruption schemes investigated by the FBI and the U.S. Attorney's Office for the Southern District of New York. The university’s athletics board voted to fire basketball coach Rick Pitino, who said he had no knowledge of the alleged activities.

“A worst-case scenario could include a suspension of play for an unknown length of time,” said Moody’s analyst John Medina. “If the men's basketball team does not play at the arena, the arena will lose those 20 guaranteed events and would look to replace them with other events like concerts, but the margin earned and demand for these events is more volatile than the historically predictable revenue generated by the men's basketball games.”

The women's basketball team is not affected by the investigation and is still expected to play at the arena.

S&P revised its outlook to negative from stable on the Louisville Arena Authority Oct. 5, to reflect its view of the “limited financial cushion” supporting the bonds at the current rating to absorb the penalties or sanctions, if any, imposed by National Collegiate Athletic Association related to the FBI's allegations.

The arena authority and its financial advisors are preparing to refund and restructure the bonds to smooth out and extend debt service payments.

The latest rating actions do not take the upcoming bond sale into account, including plans to strengthen the credit and funding sources, according to officials.

The bond sale is expected to take place before the year is over, officials said.

The Kentucky State Property and Buildings Commission considered the Kentucky Economic Development Finance Authority's bond resolution for the arena refinancing on Wednesday. Officials did not respond to a request for information about whether the resolution was approved.

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