Wednesday, November 17, 2010

Over the 38-year term for arena bonds, lots of unknowns: continuing revenue, cost of renovations

In ratings reports regarding the Atlantic Yards arena, Standard & Poor's assessed both the strengths and weaknesses of the project, justifying a rating of BBB-, or the lowest run of investment grade.

One weakness:
The 38-year debt term is longer than most comparable rated projects.
Well, it's true that the comparably rated bonds for the Yankees' and Mets' new stadiums have 40-year terms, but baseball stadiums generally endure longer than arenas and the two baseball teams have established track records in New York City.

The unknowns: who pays for renovation?

But there are two unknowns that I haven't seen addressed in the bond materials and ratings.

First, the arena would inevitably have to be renovated, given the track record of numerous arenas, as detailed below.

Second, the analyzed revenue--e.g., from naming rights and sponsorship deals--covers a term far shorter than 38 years.

That may be standard practice and some deals may be renewed at a higher price, but it still means that, to some extent, the analysis turns into guesswork. As the bond offering statement acknowledged, the renewal of the deals remains an unknown.

Click on the graphic below to enlarge; it shows the naming rights agreement at 20 years, while founding partner/sponsorship agreements and suite license agreements average five years.


A successful Atlantic Yards arena--to be known as the Barclays Center during the 20-year initial period of naming rights, at least--could generate significant income to pay off the bonds over 38 years, as well as pay other expenses. (The arena lease would cover 37 seasons, since the term of the bonds includes part of the construction period.)

But a new sponsor, or a Barclays renewal, surely would help, given that the the debt service payments will rise from $30 million a year to $50 million a year in 28 years. Remember, the state gave away naming rights.

The debt service requirements are below; click to enlarge.


Revenue for ArenaCo


From the bond offering statement:
Under the Nets License Agreement, ArenaCo will retain the right to receive all Arena-related revenues that have not been specifically designated to be received and retained by New Jersey Basketball. ArenaCo expects that the principal sources of Arena Tenant Revenue will be luxury suite premiums; revenues from food, beverage and merchandise concessions; revenues from non-Nets events held at the Arena...; Naming Rights Fees received pursuant to the Barclays Center Naming Rights Agreement and other signage/advertising revenues received under Founding Partner/Sponsorship Agreements and other contracts for advertising at the Arena; the License Fee and the Merchandising Fee...

Although ArenaCo will not receive any ticket revenues from Home Games, attendance at Home Games will have an effect on Arena Tenant Revenue... Under the Nets License Agreement, revenues from sales of tickets to Home Games would not be specifically included in Arena Tenant Revenue. However, the License Fee paid annually by New Jersey Basketball to ArenaCo will be calculated using a formula based in part on ticket sales from Home Games.

...All Arena-related revenue that is not specifically categorized as Arena Tenant Revenue and which is to be retained by New Jersey Basketball pursuant to the Nets License Agreement will comprise Nets Team Revenue. In addition to the License Fee, New Jersey Basketball will pay to ArenaCo the Merchandising Fee in accordance with (and subject to the terms of) the Nets License Agreement.

ArenaCo expects to begin collecting some of Arena Tenant Revenue with respect to an NBA season (generally, October to April, with the post-season occurring generally in May and June) prior to the start of the Bond Year in which such season starts, through, for example, advance sales of luxury suite licenses. ArenaCo generally expects to collect Arena Tenant Revenue generated by its contractual agreements and from non-Nets events held at the Arena (including Naming Rights Fees received pursuant to the Barclays Center Naming Rights Agreement and other signage/advertising revenues received under Founding Partner/Sponsorship Agreements and contracts for advertising at the Arena; luxury suite premiums and revenues from food, beverage and merchandise concessions) throughout the year, both during an NBA season and the NBA off-season.
Significant cushion?

In its ratings report on the bonds, Moody's wrote:
In addition, the rating reflects solid cashflow coverages that support debt service. Under the base case, the project produces 10-year average debt service coverage ratios of 2.85x on the senior (PILOT) debt and 1.91x on a consolidated basis (senior plus subordinated debt). The coverages remain strong even under various downside attendance scenarios.
That doesn't cover the term of the bonds, of course. The table below is from the bond offering statement.


Uncertainties

From the bond offering statement:
Uncertainty exists regarding future Arena Tenant Revenue. Among other things, work stoppages or general and local economic conditions may affect ArenaCo's ability to generate Arena Tenant Revenue from Arena audiences, advertisers and sponsors as may competition for such audiences, advertisers and sponsors from stadia, arenas, sports facilities, amphitheaters, theaters and other venues within the region. The ability of ArenaCo to generate Arena Tenant Revenue may also be affected by future trends in cultural, entertainment and sporting activities, changes in government regulation, change in advertisers, marketing strategies and budgets, changes in public tastes and attitudes and changes in demographic trends, all of which are not possible to predict. Founding Partner/Sponsorship Agreements that are in execution as of the date of this Official Statement, as well as all Suite License Agreements and the Barclays Center Naming Rights Agreement, have terms that end prior to the final maturity date of the Series 2009 PILOT Bonds. Except for the CSL Financial Feasibility Study, the projections of Arena Tenant Revenue have not been examined by any financial advisor to verify either the reasonableness of the assumptions used by ArenaCo or its affiliates, the appropriateness of the preparation and presentation of the projections or the conclusions contained in such projections. Nonetheless, the projections of Arena Tenant Revenue have been prepared based on the terms of agreements executed as of the date of this Official Statement, management experience with other facilities, results at other comparable new NBA arenas, consultation with industry experts including CSL International, and ArenaCo's judgment and assumptions. There can be no assurance that future events will correspond with past events or that future financial results of the Arena will correspond with past financial results of the IZOD Center or other NBA arenas. Furthermore, there can be no assurance that the assumptions and conclusions of ArenaCo or its Affiliates with respect to future operations, including performance under executed contracts, will be achieved. If Arena Tenant Revenue is deficient, such deficiency will adversely affect ArenaCo's ability to make PILOTs and, accordingly, the Issuer's timely and full payment of the principal of and interest on the Series 2009 PILOT Bonds.
(Emphases added)

Impact on revenue

There are several variables regarding long-term revenue:
Among other factors, Arena Tenant Revenue will likely be affected by the following:
· the on-court performance and popularity of the Nets, which in turn may be dependent in part upon New Jersey Basketball's ability to attract, draft and retain talented basketball players and its ability and willingness to pay those basketball players competitive salaries;
· the competitiveness of the other NBA teams against which the Nets is scheduled to play at the Arena;
· the ability to enter into Suite License Agreements, Founding Partner/Sponsorship Agreements and other advertising agreements on economically attractive terms (and to renew those agreements on economically attractive terms);
· the ability of the other parties to advertising, sponsorship, naming rights, and marketing agreements, Suite License Agreements and other Arena Tenant Revenue-generating agreements to perform their financial obligations thereunder;
· general and local economic conditions;
· admission prices to Home Games and other Arena events;
· competition for audiences, advertisers, sponsors and other potential revenue sources from other stadiums, arenas, sports facilities, amphitheaters, theaters and entertainment venues within the New York metropolitan area;
· work stoppages or slowdowns by the NBA, NBA players or workers performing essential functions at the Arenal
· changes in technology, public tastes and demographic trends, including changes that may affect the continuing popularity of live sporting events generally and basketball in particular in the greater New York area;
· ArenaCo's ability to book non-Nets events at the Arena;
· the condition and location of, and traffic flows to and from, the Arena; and
· the convenience and availability of parking, subway and pedestrian access to the Arena.
The station naming rights agreement

The agreement with the Metropolitan Transportation Authority to put "Barclays Center" on the Atlantic Avenue/Pacific Street station is apparently also a factor (perhaps because if the arena naming rights sponsor can't get a sweet deal from the MTA, it might not pay the arena operating company as much?):
In addition, there can be no assurance that either the twenty- (20-) year term of the TA Naming Rights Agreement will be extended or a new agreement will be entered into at such time with the Transit Authority. This may adversely affect the Arena Tenant Revenue that may be generated under future naming rights agreements. Furthermore, a default by a party under the TA Naming Rights Agreement could result in a loss of the naming rights thereunder, which may affect the rights and obligations of the parties to the Barclays Center Naming Rights Agreement.

In summary, the estimates used by ArenaCo or its Affiliates with respect to future Arena Tenant Revenue are based on management experience, results at other comparable new NBA arenas, executed contracts, consultation with industry experts and assumptions of ArenaCo and its Affiliates concerning future operations, which they believe are relevant and accurate. However, it is possible that assumed circumstances will not materialize, that anticipated events may not occur or may have unanticipated results, and that unanticipated events may occur to cause future Arena Tenant Revenue to vary materially from the projections.
The CSL feasibility study

As I wrote last December, Plano, TX-based consultant, Convention, Sports, and Leisure International (CSL International), has concluded that there's a healthy market for the planned Brooklyn Arena, given the large local population, the base of potential sponsors and advertisers, and the enthusiasm of promoters.

The 180 page Market Analysis, conducted at the behest of arena sponsor Brooklyn Arena LLC (controlled by Forest City Ratner), was included as part of the the Barclays Center Arena Preliminary Official Statement prepared by Goldman Sachs.

Here's the methodology:
Our procedures included analyses of:
• project history, objectives, timing and financing;
• assessment of competitive and comparable facilities;
• analysis of current National Basketball Association (“NBA”) pricing and premium seating programs;
• demographic and socioeconomic characteristics of the New York market relative to the other U.S. markets currently supporting an NBA franchise;
• analysis of historical operations of the New Jersey Nets and projected operations at the Barclays Center; and,
• third party interviews with potential stakeholders that may have an interest in the premium seating products that have been developed for the Barclays Center.

We also participated in gathering information, assisted ArenaCo in identifying and formulating assumptions, and assembled the accompanying statements of forecasted income and cash flows for ArenaCo, based upon those assumptions.
Note that the financial forecast, "based on the assumptions that were provided by, or reviewed with and approved by, ArenaCo," covers only five years.

The MSG example

But consider that new bonds, or additional income, will surely be needed to fund a renovation. Madison Square Garden (MSG), which opened in 1968, went through its first renovation in 1991, 23 years later.

Now, at 42, MSG is supposed to go through a second renovation, which will cost up to $850 million--more than the cost of a new arena almost anywhere else.

Garden owners, beneficiaries of uniquely valuable real estate, can afford it. It helps that they have a curious tax exemption, worth about $15 million next year, passed under the assumption that it was needed to keep the New York Knicks and New York Rangers from leaving.

Guess what: they're not leaving the country's biggest media market.

Short life spans for some arenas

In Seattle, the Washington State Pavilion (1962) was remodeled as the Washington State Coliseum, which in 1967 became home to the Seattle SuperSonics and was rebuilt 27 years later as Key Arena. Some 13 years after that, team owners were unsuccessful in getting public funding for a renovation or new arena, and the team moved to Oklahoma City for the 2008-09 season.

The Miami arena, completed in 1988, lost the Miami Heat in 2000 to the American Airlines Arena. The Florida Panthers left, as did concerts. The arena was sold via an auction in 2004 and demolished in 2008.

The Orlando arena opened in 1989 and, within eleven years, was deemed obsolete. A new arena will open later this year, 21 years later.

The Nets' most recent home, the Izod Center at the Meadowlands, opened in 1981 and lost the team just this year, 29 years later.

None of the four arenas noted above had the luxury suites and premium seating that are now standard.

Still, new bells and whistles surely will become standard. The Atlantic Yards arena won't last 38 years without a major renovation, or becoming obsolete. Who's going to pay?

1 comment:

  1. It's probably worth taking a look at the comparators. The Yankee and Mets had much lower amounts of revenue coming in under long-term contracts, and were expected to produce much more cash relative to their debt service, which was possible because they were established franchises. The ten-year contracts for sponsorship revenue etc, which are almost enough to make debt service, give the Nets some time to become an established franchise. Which may be long enough. I don't know. I can't stand basketball. But then look at the pain tolerance of Knicks fans. As for how to pay for a big-ticket renovation beyond normal lifecycle maintenance. The answer is they'd need to do either a full refinancing, if the tax rules will countenance it, or an additional financing if the bond indenture will permit it. I forget if it does. But it can be done, and remember, by that point the arenaco will have paid off some of its debt, so would have the potential ability to raise some more, though as you note, the debt service burden is higher on the back-end. But these are issues standard to sports financing. If a team stays unpopular for long enough then any financing is toast. The next phase of Atlantic Yards opposition is to see what sort of effect this legacy of bitterness has on attendance.

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