Thursday, July 16, 2015

Report: Prokhorov may buy Forest City's share of team/arena; document shows Ratner's group owes Prokhorov $31M+ for capital calls

Russian billionaire Mikhail Prokhorov apparently wants to own all of the Brooklyn Nets (he owns 80%) and the Barclays Center (how owns 45%).

Sports journalist Ric Bucher of Bleacher Report said Prokhorov wants to buy the 20% share of the Brooklyn Nets owned by Forest City Ratner/Enterprises and associated parties in Nets Sports & Entertainment (NS&E), as well as NS&E's 55% share of the Barclays Center.

"The latest is that in the next two weeks we could hear an announcement that he's actually buying 100 percent of the franchise, buying the Barclays Center, going all in," Bucher said, acknowledging the situation could change.

As noted in documents from Forest City Enterprises, NS&E owes Prokhorov well more than $31 million, and the sale could convert that debt to equity, as described below. (NetsDaily says the sum is $50 million.)  And if Forest City doesn't pay, Prokhorov would get an additional 12% share in the team, leaving Forest City with just 8%--an unlikely scenario.

Nothing firm yet

document from Forest City Enterprises filed with the Securities and Exchange Commission regarding the company's planned conversion to a real estate investment trust (REIT) acknowledges that there are question marks regarding the sale of "non-core assets," such as the Brooklyn Nets and Barclays Center:
To date, we have neither entered into any definitive agreements relating to such asset sales, nor received firm expressions of interest from third party buyers for many of the assets we intend to sell. Consequently, there can be no assurance that we will be able to complete any asset sales on terms that are favorable to us, or at all. Further, even if we are able to undertake the asset sales required to achieve our strategic objectives, negotiating and executing the sale of multiple assets in multiple transactions may require a significant amount of management time and resources. 
From the document: the Nets up for sale

The document acknowledges there have been multiple discussion regarding the sale of the team, and then the arena:
During the six months ended December 31, 2014, Forest City began discussions with several interested parties for the potential sale of its ownership interests in the Nets. In the course of those discussions, certain parties have also expressed interest in acquiring all or a portion of Forest City’s ownership interests in Barclays Center. Neither NS&E nor Forest City has entered into any binding agreement concerning the sale of these ownership interests and cannot give assurance that it will close on the sale of a portion or all of these ownership interests on terms favorable to it or at all. As of the date of this proxy statement/prospectus, we are continuing to discuss the disposition of NS&E’s ownership interests in these two assets.
As noted by NetsDaily, "Sports Business Journal reported in February that the NBA has told the team's owners that it would have difficulty approving a [team] sale because of the one-sided lease the team has with the arena"--but that problem would be avoided if the same entity owns both.

From the document: Prokhorov has funded NS&E's capital calls

It also describes how NS&E has not funded the required capital calls to make up for Nets losses, but instead made a deal with Prokhorov:
NS&E did not fund the Nets capital calls related to the 2013-2014 and 2014-2015 NBA basketball seasons, respectively. This did not constitute a default under the agreements related to Forest City’s investment in the Nets because, in 2013, NS&E entered into a forbearance agreement with the majority partner. Under the forbearance agreement, the majority partner agreed to fund NS&E’s portion of Nets capital calls through July 12, 2015 and forbear the majority partner’s right to dilute NS&E’s ownership interests in the Nets for a period of two years in exchange for a fee. In July 2015, NS&E and the majority partner amended the forbearance agreement to extend the forbearance period to August 12, 2015 for an additional fee. Upon expiration of the forbearance period on August 12, 2015, NS&E is required to repay the majority partner approximately $25,000,000 plus related fees. In addition, NS&E is obligated to fund approximately $6,300,000 for its share of a Nets capital call for the upcoming 2015-2016 NBA basketball season by August 12, 2015. If NS&E does not fund the forbearance amounts, related fees and the 2015-16 Nets capital call by August 12, 2015, NS&E’s ownership interests in the Nets will be diluted from 20% to approximately 8%. Based on continuing discussions with interested parties regarding the potential disposal of NS&E’s ownership interests, management believes the value of its current 20% ownership interest exceeds the funding requirement necessary to maintain that 20% ownership interest.
(Emphases added)

Indeed, if the Nets are worth $1.5 billion, according to Forbes, NS&E's 20% stake is worth $300 million. Surely that value exceeds the cash it would take to repay Prokhorov for those loans.

Prokhorov's company Onexim told NetsDaily, "We can confirm that Onexim Sports and Entertainment is looking at various ways to restructure debt owed to the company in connection with its US assets."

From the document: the Barclays Center

The document describes the increasing lease payments required to repay PILOTS, or payments in lieu of taxes:
Forest City owns and operates the Barclays Center, a 670,000 square foot world-class arena and home to the Nets (the “Arena”). The Arena will be the home of the New York Islanders hockey team, a member of the National Hockey League, beginning in the upcoming 2015-2016 season, and expects to host more than 200 cultural and sporting events annually.
Forest City has a controlling financial interest in the Arena through a financing lease obligation with an agency of the state of New York (the “Arena Lease”). The same state agency issued $511,000,000 PILOT Bonds for the purpose of paying for construction cost, servicing interest during the construction period and establishing the required collateral reserves. The Arena Lease has an initial term of 37 years, with six 10-year renewal options and a final two-year renewal option. Lease payments primarily consist of amounts to cover the debt service payments of the PILOT Bonds, which mature at the expiration of the 37-year Arena Lease. Also, included in each lease payment is an amount equal to 10% of the debt service payment that goes into escrow to be used for certain operating and maintenance costs as defined in the applicable agreements. The Arena and related Arena Lease are accounted for as a financing lease obligation on our consolidated financial statements. Payments under the Arena Lease are secured by a mortgage that encumbers the Arena and are allocated between principal and interest in a manner which produces a constant interest rate of approximately 8% over the term of the Arena Lease. The liability balance on our consolidated balance sheet at December 31, 2014 related to the Arena Lease amounted to $402,540,000. Lease payments over the next five years are expected to be $29,762,000, $33,148,000, $33,938,000, $34,667,168 and $35,335,591, respectively.
The Arena is reported as a separate segment in our consolidated financial statements as of December 31, 2014 that are incorporated by reference in our Annual Report on Form 10-K. The Arena has total assets of $955,570,000 as of December 31, 2014 of which $864,675,000 is included in depreciable real estate. The Arena is depreciated over 34.5 years on a straight-line basis, which correlates to the remaining initial term of the Arena Lease and the license agreement with the Nets to occupy the Arena.
For U.S. federal income tax purposes, our tax basis in the Arena is $340,684,900.

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