Ratings agency Moody's cautious toward Barclays Center's financial prospects in pandemic (as of November), but says billionaire Tsai offers backstop
That document was produced before the announced plan to re-start the NBA season in December and then to welcome fans later this month, nor the arrival of a third Brooklyn Nets star, James Harden.
(The fine print: Brooklyn Events Center, aka ArenaCo, was set up to manage the construction, operations and maintenance of the Barclays Center. Empire State Development, a state authority, owns the Arena and the land, which it leases to the state entity Brooklyn Arena Local Development Corp., which issued the tax-event bonds and subleases the arena to ArenaCo, which pays off the bonds via payments in lieu of taxes, or PILOTs. That fig leaf of public ownership offers significant savings compared to taxable bonds.)
Many unknowns persist
Much will depend on the duration and trajectory of the virus and the uncertainty related to the level of in-person fan attendance at Nets’ home games, concerts and other events when the Arena does reopen. The Arena's exposure to demand risk has left it vulnerable to shifts in market sentiment during these unprecedented operating conditions, and the Arena's financial performance remains vulnerable to the continuing virus outbreak.
Given pandemic-related wariness, that could lead to lower revenues from sponsorship sales and/or lower prices for premium seating, Moody's warned, though it said the addition of stars Kevin Durant and Kyrie Irving should drive ticket sales.
Moody's did not address the role of Harden, which further boosts interest in the Nets and makes a longer playoff run more likely, bolstering potential revenues. (It also raised the team's payroll.)
According to Moody's, the arena has been losing money but has paid its bills without drawing down $80 million in reserves, thanks mainly to capital contributions by billionaire Joe Tsai, who owns the arena company, the Brooklyn Nets, and New York Liberty.
Strengths and weaknesses
Moody's cited credit strengths, including Tsai's role, the New York media market, the arena company's existing reserves, and multiple revenue streams. The Nets/arena have a new CEO, John Abbamondi, tasked with building the business.
Such strengths are counterbalanced by the uncertain impacts of the pandemic, including questions about consumer demand; weak underlying cash flow even before the pandemic (the arena has "historically underperformed financially"); and a looming increase in debt service on the horizon, starting in 2026.
In other words, they'd better get it together in the next five years.
Income covers debt service?
Moody's generously--to my mind--calculated a debt service coverage ratio (DSCR) of just 1.05x for FY 2020, indicating that the arena had enough money, albeit barely, to cover debt service.
By contrast, I calculated that operating income was well below the amount needed to cover debt service, which would lead to a DSCR underwater, below 1.
Note: though Investopedia defines DSCR as "taking net operating income and dividing it by total debt service," Moody's included a $13.5 million "capital contribution" from Tsai, which made up for the weak operating income.
That allows the rating agency to avoid a trigger for a ratings downgrade. Read strictly, it's clear the arena didn't--and likely won't--have enough income from operations to pay its debts. Then again, a ratings downgrade is supposed to be a warning, and the presence of a billionaire committed to backstop the payments should counteract that.
That does not mean the financial institutions lending to pro teams and their owners are going to declare those loans to be in default, though. Conversations with a trio of sports bankers... indicated that the far more likely scenario is banks and bond issuers waiving or amending covenants so that the borrower can remain in compliance and simply extracting a fee for the additional risk they’re taking on.
Moody's negative outlook reflects its estimate that DSCR will remain below 1.2x, but says an upgrade to a stable outlook might happen if the arena books events and DSCR exceeds 1.2x.
Moody's noted that the arena company's DSCR was above 1.5x for FY 2016 and FY 2019, but dipped to 1.23x in FY 2017 and 1.03x in FY 2018. That was due the obligation to pay the Islanders a fixed fee, coupled with an inability to reap revenue from the hockey business.
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