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With ticket revenues nearly gone and sponsorship income plummeting, Barclays Center is in a deep financial hole (though FY 2020 was looking up)

The financially stretched Barclays Center, not surprisingly, is in deep(er) financial trouble after shuttering for the coronavirus crisis, with its $29.1 million in revenues dwarfed by $31.2 million expenses over the first half of this calendar year, according to financial documents released yesterday.

And it's worse than a $2.1 million loss suggests.

The arena is supposed to amass a significant cushion of net income, leaving ample cash to pay off some $36.2 million in annual required PILOTs (payments in lieu of taxes). Those PILOTs include $24.8 million in net debt service to pay for arena construction, plus a significant chunk that go back into arena operations and maintenance (see below).

As described below, though the arena operating company was in the black for the first half of FY 2020, the annual net income will be too little to cover PILOTs.

That said, a default is not coming. Billionaire Joe Tsai, who owns the Brooklyn Nets and the arena operating company, "has signed an operating support agreement whereby he unconditionally and irrevocably agrees to provide the Arena with all amounts necessary for the Arena to meet its expenses and payment obligations," ratings agency Moody's stated last October.

Plunging receipts

Barclays Center ticket revenues--which surely included rebates for canceled Nets games, concerts, and other events--have evaporated to almost nothing--just $28,697 for the most recent quarter, as shown in the graphic at left.

Also, quarterly suite and sponsorship income has plummeted to $3.55 million, which signals that the latter relies at least in part on a regular event schedule.

A dramatic quarterly change

Exactly how much the arena has been pinched is evident from the chart below, which shows how cash receipts in the fourth quarter of FY 2020 differ dramatically from those in previous quarters.

For example, in the three previous quarters the suite and sponsor installments ranged from $18.7 million to $26.8 million, vastly more than the $3.55 million in the most recent quarter.

Similarly, while ticket sales per quarter ranged from $24 million to $27 million, they plunged to almost nothing in the most recent quarter.

The 2020 outlook was looking better, pre-pandemic

February 2020 investor presentation
The documents released yesterday do not, however, provide the full picture for FY 2020, which ended June 30.

While the Barclays Center operating company has not released the annual financial results, I can piece together rough numbers.

During the first half of the fiscal year--the second half of calendar year 2019--the arena earned $14.2 million in net income, and was forecast to earn approximately the same amount in the second half of the fiscal year, according to the most recent investor presentation.

While that $29 million total would have been enough to cover bond payments but not the full $36.2 million in PILOTs, instead the net income looks to be about $12 million, leaving a deeper financial hole.

February 2020 investor presentation
(Note: I'm assuming the figures from the investor presentation represent the first half of the fiscal year, rather than seven months, which would be a literal interpretation of YTD.)

According to the February 2020 investor presentation, net income FY 2020 for the arena was expected to increase by 2% from FY 2019, a seeming minor uptick but reflecting significant change.

That involved a new deal structure with the New York Islanders, expected to improve net operating income (NOI) by $12.2 million, event profits reaching "all-time highs," and a revision of revenue from the Nets--as I wrote separately--expected to improve NOI by $15.7 million.

(It's surprising to me all that would've meant only a 2% increase.)

A scoop for Sportico

The first to spot the financial disclosures released to bond investors yesterday was the sports business publication Sportico, which yesterday reported BARCLAYS CENTER FINANCIALS SHOW FIRST HINT OF VENUES’ PANDEMIC PROBLEMS.

Because the construction bonds were sold via a government entity--the special purpose Brooklyn Arena Development Corporation, to enable tax exemptions and thus lower payments--the arena must be more transparent about its finances than most.

Sportico noted that the $2.1 million net loss was slightly smaller than reported in the first half of 2019--true--though that deserves an asterisk: the arena was in the last year of an onerous obligation to guarantee a minimum to the Islanders.

A cushion for bondholders?

From Sportico
One sentence from the Sportico article is misleading, because a source, while accurate at the time, is out of date:

An audited disclosure last year showed more than $322 million in cash, escrowed funds and marketable securities that can support payment of the bonds, although those funds aren’t legally committed to support the bonds, according to a 2018 investor presentation.
While the 2019 FY disclosure, based on the fiscal picture from June 30 of that year, did show that cushion of $322 million, that fund is gone. 

It was liquidated upon the culmination of the
February 2020 presentation
sale of the Nets and the arena company, and assigned to Tsai as team owner, as I explained separately. So Tsai effectively has that money to spend on the arena if necessary.

As of February 2020, according to the investor presentation (at right), the arena company had $67.2 million in reserve to support payment of the PILOTs--less than two years' worth.

Expected PILOTs and debt service

PILOTs, including debt service requirements, as estimated in 2016, are below. (The color-coded annotations were to show how required debt service had shrunk upon a refinancing.)