BRADENTON, Fla. Bonds that financed Louisville, Ky.’s KFC Yum! Center sports arena dropped farther into junk territory when Moody’s Investors Service downgraded the senior lien bonds to Ba3 from Ba2.
Moody’s said there have been recent positive changes to improve revenues but the changes would not result in a “drastically higher operating margin” for the Louisville Arena Authority. Debt service coverage narrowed to 1.06 times in fiscal 2013.
The drop to Ba3 affects $348.9 million of outstanding debt sold on behalf of the authority in 2008 by the Kentucky Economic Development Finance Authority. The outlook is stable, Moody’s said in a Nov. 14 report.
The deal sold in three series. Of the outstanding debt, $339 million is insured by Assured Guaranty Corp. The remaining $9.9 million of Series C bonds are unrated and uninsured.
All bond payments have been made on time and adequate cash flow is available to make payments in the foreseeable future, arena board member and Louisville Metro Council President Jim King told the Journal-Courier. King said the authority may now delay plans to refinance the bonds due to the downgrade.
Moody’s said some positive changes included last year’s hiring of Los Angeles-based AEG Facilities to manage the arena as part of the plans to shore up finances. Plans also call for resizing of the district surrounding the arena from which tax increment financing funds come in order to generate additional revenue.
The on-court success of the primary tenants -- the University of Louisville’s men’s basketball team won the 2013 NCAA championship and its women’s team was runner up -- was also a positive event.
“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,” Moody’s said.
The stable outlook is based on the expectation that a redefined two-square-mile TIF district will produce annual revenue of more than $6 million in the next two years, that AEG will continue to deliver its minimum guaranteed revenue, and the event revenues will be enough to cover fiscal 2014 operating expenses.
The outlook also anticipates that debt service coverage will be as low as 1.0 times in the near future, including payment contribution from Louisville.
Last December, Standard & Poor’s revised its outlook to negative from stable but maintained its BBB-minus underlying rating on the KFC Yum! Center bonds.