BRADENTON, Fla. — Lower income and high operating expenses at Louisville’s KFC Yum! Center prompted Moody’s Investors Service Tuesday to drop the rating on the arena bonds to below-investment grade.

Moody’s downgraded the underlying rating two notches to Ba2 from Baa3 on $339 million of outstanding senior debt sold by the Kentucky Economic Development Finance Authority. The outlook is negative.

The bonds were issued for the Louisville Arena Authority in 2008 to build the 22,000-seat arena, home to the University of Louisville’s Cardinals basketball team.

Assured Guaranty Municipal Corp. insures the senior bonds, which included tax-exempt Series A bonds and a taxable, $30 million Series B. Another $9.9 million of unrated and uninsured taxable Series C bonds were also sold.

The bonds are secured by arena revenues and guaranteed annual payments from the Louisville/Jefferson County Metro Government up to $309 million in addition to incremental sales tax revenue from a district around the arena.

Tax-increment finance revenue has come in lower than expected, factoring into the downgrade along with the arena’s high operating expenses, increased dependence on Metro Louisville’s additional payments, and the weakened financial metrics going forward, Moody’s analyst Esra Akyol wrote.

The negative outlook reflects the uncertainty of TIF revenue growth and narrow debt-service coverage ratios going forward, Akyol said.

Near- and mid-term coverage ratio forecasts fall short of initial projections after taking into account the projected growth of future TIF revenues, which may not fully support the arena’s debt service in the near future as initially projected.

The arena completed its first year of operations in November and was successful in attracting 250 non-university events, many with nearly 100% attendance.

“Increased revenues did not increase net operating income due to the significant operating expenses incurred,” Akyol said.

The Louisville Arena Authority is continuing to look at ways to reduce expenses and increase revenue, said spokeswoman Amanda Storment.

“We are optimistic that the TIF revenue will increase this year,” she said.

Storment also pointed out that Standard & Poor’s in January affirmed its BBB-minus rating on the bonds, and revised the outlook to stable from negative.

S&P analyst Ben Macdonald said the outlook change reflected the agency’s view of a September amendment to the calculation of TIF revenues designed to help meet debt-service coverage levels.

He added that factors supporting the BBB-minus rating include the success of the University of Louisville basketball program.

“The program is a top college basketball revenue generator with a consistent high-occupancy home crowd for men’s games,” Macdonald said.

The arena also has strong government support, experienced management by the Kentucky State Fair Board, guaranteed concessionaire payments, an existing fan base and near sellouts of the facility under higher pricing compared to the university’s former location.

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