Standard & Poor's on Friday revised its outlook to negative from stable on the Kentucky Economic Development Finance Authority's Louisville arena revenue bonds.

S&P affirmed its BBB-minus rating on $319 million of 2008A-1 fixed-rate bonds and 2008A-2 capital appreciation bonds, as well as $20.1 million of 2008B taxable fixed-rate bonds. Another $9.9 million of taxable subordinate fixed-rate bonds are not rated.

The bonds were issued for the Louisville Arena Authority Inc. to build the 22,000-seat KFC Yum! Center.
"The negative outlook reflects our view of continued project exposure to potentially volatile tax increment finance revenue and uncertainty about direct arena revenue and expenses in the near term," said analyst Ben Macdonald.

The TIF revenue comes from a pledge of the state, and includes 80% of incremental sales and property tax revenue in a six-square-mile zone that encompasses Louisville's central business district as well as an adjacent residential area and a corridor along Interstate 65. The TIF pledge also includes 80% of incremental income taxes earned on the arena site.

Although some changes were made last year to TIF calculations, and there was a recent change in the arena's operator, "the project remains exposed to underperformance in either TIF revenue growth or arena net revenue," Macdonald said.

Debt service coverage should remain low for the rating in the near term.

"There is no rating upside in the medium term," he said, adding that S&P would revise the outlook to stable if TIF amounts meet or exceed projections, and the arena operator produces revenues above its minimum guarantee.

The arena opened on the city's downtown waterfront in October 2010 to become the home for University of Louisville basketball and volleyball programs.

In May, Moody's Investors Service dropped its rating on the arena's $339 million of outstanding senior bonds to Ba2 from Baa3, citing the center's lower than expected revenues and high operational costs.

On July 1, the authority signed a 10-year management contract with Los Angeles-based AEG Facilities, which provided an up-front $1.1 million fee and guaranteed annual payments of more than $1 million thereafter.

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