Standard & Poor's Rating Services said it lowered its ratings on the Kentucky Economic Development Finance Authority's Subseries 2008A-1, Subseries A-2, and Series 2008B project revenue bonds issued for the Louisville Arena Authority Inc. to BB from BBB-minus.
At the same time, the rating agency assigned recovery ratings to the project revenue bonds of 3, indicating its expectation for meaningful (50% to 70%) recovery of principal if a payment default occurs. The outlook is stable. Assured Guaranty Corp. insures the senior bonds.
The rating action reflects the view that the debt service coverage has not improved as expected and the estimate will remain weak for at least the next five years at 1.05x to about 1.1x, the LAA's reliance on the volatile sales tax-based tax incremental financing (TIF) revenue for a portion of debt service, and the revised zoning of the TIF district could improve this source of revenue to LAA over the longer term. In addition, the agency has reduced its growth assumptions for the TIF to 4% over the next three years, and 3% after 2016, relative to the 5% in 2013 and 3% growth rate thereafter expected in last year's review.
Standard & Poor's underlying (SPUR) rating on the project revenue bonds for LAA is BB.
"Since operations began in 2010, the LAA has faced a number of challenges that we view will take several years to manage through and have led to weak debt service coverage," said Standard & Poor's credit analyst Jayne Ross.
The stable outlook reflects stable to modest growth in arena revenue and the guaranteed Metro payments provide some downside protection to the LAA, and should insure that the DSCR will not drop meaningfully below S&P's DSCR projections, which remain weak for the next five years.
The agency would raise the rating if TIF revenues stabilize under the two-mile TIF district, such that it has greater visibility into long-term revenue from this source, along with other revenues, to support a DSCR that is sustained above 1.25x.
It also estimates that the arena would need to sustain net category B revenues above the AEG minimum guarantee and continue to reduce operating expenses to achieve these coverages, which are not expected in the near term. It could lower the rating if TIF revenue growth is below the forecast or if category B revenues after operating costs do not exceed the AEG annual guarantee.