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The Barclays Center's peculiar financial underperformance

Yes, both the New York Islanders and Brooklyn Nets seem playoffs-bound, which is definitely a boon for the Barclays Center, adding more games likely to draw larger crowds and more revenues. So yes, the 2018-2019 fiscal year promises to be better than 2017-18.

But the latter was a financial disaster, as documents show and Crain's New York Business reports today, in Barclays Center is sending the Islanders packing. Could it improve its fortunes?

The subheading is "Arenas overestimate revenue and understate expenses because demand is so fluid," which is surely true in part, but also because they have reason--aiming to convince bond buyers of financial stability--to project over-optimistic scenarios.

I'll have a longer analysis of financial results one of these days, but first, let's look at the Crain's article. "Since inception, they've underperformed," said Richard Donner, senior credit officer at Moody's. "We thought they'd eventually turn around, but year after year it's the same."

That's an interesting quote, since the ratings agencies have, while moderating their outlooks, still resisted downgrading the arena bonds into the category of "junk."

Looking at the numbers

From the article:
Arena revenues for the 2017–18 season came in $34 million short of the $183 million projected by the facility's owner. Meanwhile, operating expenses were $7 million higher than the $135 million forecast. Tack on other missed projections and instead of producing $24 million in net cash flow, the arena chewed up $21 million, according to disclosures to bondholders.

In all, Barclays generated a $54 million net loss for the 2017–18 season after accounting for interest payments on its substantial debt, depreciation and other expenses. Still, that was an improvement over the previous year's $177 million loss.
I don't consider all those numbers "real," but rather accounting losses. But the numbers are still pretty ominous.

Yes, revenues exceeded expenses only about $7 million. Then, interest expense of $21 million--bond payments--put Barclays in the red, for the first time in the arena's history without adding any additional costs.
Going forward

One question raised by the article is whether the loss of the Islanders--which the arena, unwisely in retrospect, guaranteed payments in return for revenues from ticket sales and concessions--will be a financial gain.

The team is currently scheduled to split the next two seasons between Barclays and the Nassau Coliseum while the new arena in Belmont is being built, but that could change. And another question is whether Belmont, when built, will compete for some concerts and other events.

One lesson, though, is that we should take any projection with a major grain of salt.

The crucial backstop

That said, the Barclays Center is not in any danger of default on bonds, because, as a condition of the partial sale of the Brooklyn Nets to Joe Tsai last year, the arena operator--Mikhail Prokhorov's BSE Global--gained a crucial financial backstop. (Remember, he's not the owner.)

Though the $1 billion transaction with Alibaba tycoon Tsai did divert additional revenues from the arena to the team, as ratings agency Moody’s explained, it also allowed Prokhorov to create a $345 million reserve fund to deliver supplemental revenue and ensure that bondholders are repaid.