Ratings agency S&P (citing Nets' deal) joins Moody's (citing Islanders) in warning that Barclays Center bonds verge on junk
Update: NetsDaily advanced the story, suggesting that the original lease was unfair to the team owner:
Underlying the change, say those familiar with the deal, is the NBA’s requirement that the arena and team financials be “unstapled,” as one source called it. The Nets lease has always favored the arena. That didn’t matter much when Prokhorov owned 100 percent of both, but with Tsai buying 49 percent of the team —and having an option to buy a controlling interest in 2021— the league wanted a more arm’s length arrangement. The lease, noted one source, is now market rate, that is, in line with other NBA leases.By the way, the ratings just one notch above investment grade have always been par for the course with the arena bonds, in 2009 and again in 2016. What's notable is that the the rating has remained consistent despite a much lower cushion (aka debt service coverage ratio, or DSCR) to pay off bonds.
Still, some clouds
The change in rating outlook to negative reflects weaker than expected financial performance for fiscal year (FY) ended June 30, 2017, owing to a drop in revenues and cash flow caused by the attendance and related ticket sales decline at the New York Islanders (the Islanders) home games held at the Barclays Center. The rating action factors in our belief that similar financial underperformance will continue for the next 12 to 18 months owing in large part to the contractual arrangements between the Islanders and the Barclays Center. Specifically, weak financial performance during FY 2017 was in large part driven by the Barclays Center's obligation to make fixed annual payments to the Islanders for an anchor tenant guarantee fee.
To bridge the gap in revenue loss, a reserve account was established with a portion of the sale proceeds (estimated to be $345 million). A top-off mechanism was also created to utilize residual cash flow that would be otherwise distributed to the sponsors back to the project in the event the debt service coverage ratio (DSCR) falls below 1.38x based on the arena's calculations.
Our preliminary view of the net impact of the changes is that the reserve size and mechanics of the top-off provisions, along with our own operating assumptions for the arena and methodology for calculating DSCR (which differs from the project), may lead to a decline in coverages well below our previously forecast minimum DSCR of 1.35x.
A downgrade would be warranted if ratios fall consistently toward 1.3x against our former expectation of 1.35x. We could remove the rating from CreditWatch negative if we conclude the sale's provisions (to establish a reserve account and provide additional support to substitute for lost revenues) provide for forecast DSCRs that fall toward the top of the 1.2x-1.4x range under our calculations.That said, S&P seems to be taking the long view, since it says 1.35x was the minimum "we were previously expecting in 2041." So there may be time to adjust the rating.
As I've noted, the performance of the arena has been such that the lowered interest rate significantly helped the arena operator escape financial dangers.