BRADENTON, Fla. - Louisville, Ky.'s KFC Yum! Center sports arena suffered another blow when Standard & Poor's dropped its underlying rating on the arena's bonds to junk-level BB from investment-grade BBB-minus.

The two-notch downgrade affects about $399 million of Series 2008A-1, A-2, and 2008B of senior project revenue bonds issued for the Louisville Arena Authority Inc. by the Kentucky Economic Development Finance Authority.

The outlook is stable at the lower rating, S&P said Dec. 26. The senior bonds are insured by Assured Guaranty Corp.

The LAA also has $9.9 million of 2008C taxable subordinate bonds outstanding that are not rated or insured.

S&P said its action on the senior bonds was the result of weak debt service coverage, the LAA's reliance on "volatile" sales tax-based tax incremental financing revenue for a portion of debt service, and the agency's view of revisions to the TIF district that could improve revenues over the longer term.

Debt service coverage is expected to remain weak for at least the next five years, the agency said, adding that its growth assumptions for the TIF have been reduced to 4% over the next three years, and 3% after 2016, compared to prior projections of 5% in 2013 and 3% after 2016.

"The stable outlook reflects our view that stable- to modest-growth in arena revenue and the guaranteed metro payments from Louisville-Jefferson County Metro Government provide some downside protection to the LAA, and should insure that the debt service coverage ratio will not drop meaningfully below our projections, which remain weak for the next five years," said analyst Jayne Ross.

Since operations began in 2010, the authority has faced a number of challenges "that we view will take several years to manage through and have led to weak debt service coverage," Ross said.

The arena opened in an economy recovering from a recession, had to replace its original operator due to poor performance, and has fallen short of projected recovery from TIF revenues that partly support debt service payments. The debt is secured by TIF and arena revenues, and Metro's guaranteed payments that contribute to the revenues if needed to pay debt service.

The arena is home to the University of Louisville's highly ranked men's and women's basketball teams.

This year, officials agreed to modify the TIF district, which is used to calculate the sales and property tax assessments from a six-mile to a two-mile district.

"The smaller TIF district should be more representative of the actual impact the arena has on the TIF district as compared with the original six-mile TIF district," said Ross. "In our view, there will still be volatility in sales tax-based TIF payments during an economic cycle and the possibility of concentration in the tax base given that many of the business establishments are in the hospitality sector, which is highly susceptible to economic downturns."

S&P said that it assigned a recovery rating of three to the debt, which means that under the agency's simulated default scenario the senior bonds could see a "meaningful" or 50% to 70% recovery of principal if a payment default occurred.

In November, Moody's Investors Service dropped its already speculative-grade rating on the senior bonds to Ba3 from Ba2.

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