Ratings agency Moody's: Barclays Center has "strong recovery prospects," given pent-up demand, though chance remains for another COVID hit

Moody's announces completion of a periodic review of ratings of Brooklyn Arena Local Development Corporation, the ratings agency announced 10/13/21. 

In other words, it didn't attempt to change the credit rating, which in October 2019 was downgraded to junk (Ba1), but it tried to survey the arena's prospects, which should be improving thanks to resumption of events.

This came after the arena operating company released its FY 2021 results, which reflected a very rough year, given that the arena was mostly closed.

From the announcement:

Moody's Investors Service ("Moody's") has completed a periodic review of the ratings of Brooklyn Arena Local Development Corporation and other ratings that are associated with the same analytical unit. The review was conducted through a portfolio review discussion held on 7 October 2021 in which Moody's reassessed the appropriateness of the ratings in the context of the relevant principal methodology(ies), recent developments, and a comparison of the financial and operating profile to similarly rated peers. The review did not involve a rating committee. Since 1 January 2019, Moody's practice has been to issue a press release following each periodic review to announce its completion.

Impact of the pandemic

From the announcement:

Brooklyn Arena Local Development Corporation's ("Barclays Center Project" or "Arena") Ba1 rating reflects the financial impact on the Arena from the coronavirus pandemic balanced against its long-term revenue generating potential as a live sports and entertainment venue in New York City, one of the strongest media, sports and entertainment markets. The credit profile also heavily weights the proven strength of the owner's Operating Support Agreements with the NBA for both the Arena and the Nets that has covered the Arena's operating costs and debt service obligations as needed since the onset of the pandemic.

In other words, Brooklyn Nets owner Joe Tsai, who owns the arena operating company, is willing to cover losses, as I reported: $52 million in the last fiscal year. (Don't worry; he gets tax write-offs.) From the announcement:

As a result of this support, debt service coverage ratios [DSCR] have been breakeven for the last couple of fiscal years but are forecast to improve now that pandemic related capacity constraints have been lifted and events begin to return. 

Note that break-even is not good! There's supposed to be a surplus in the DSCR. Moody's in November 2020 said an upgrade to a stable outlook might happen if DSCR exceeds 1.2x, or more than 120% of required coverage.

As I noted in a November 2019 overview, back in 2009, when the initial arena bonds were issued Moody’s estimated a robust DSCR of 2.85x, meaning that net revenues should be nearly triple the payment obligation.

When the bonds were refinanced in August 2016, Moody’s predicted that, given such lowered payments, the debt would be easier to pay. DSCR could the reach a solid 1.9x, or nearly twice the money needed. That didn’t happen. Instead, the bonds went to junk.

Recovery likely, but clouded

From the recent Moody's press release:

The Arena recently held its first concert since the pandemic began and has strong recovery prospects as other venues have seen once reopening from pent-up demand for live events. That said, the Arena remains exposed to potential future pandemic capacity restrictions should local cases spike, though this is not expected owing to high regional vaccination rates. The Arena also remains exposed to rebuilding its forward events calendar as well as any long-term changes in consumer sentiment towards arena-based activities.

That's plausible, though there could be new variations that have an impact.

The arena has reserves: 

The credit profile also reflects the security afforded by the PILOT bond structure and strong indenture required liquid reserves that include a cash-funded, 12-month debt service reserve, a strike reserve equal to 50% of annual debt service as well as other liquid reserves.

Ignoring Kyrie

Note that Moody's issued its statement 8/13/21, six days after the portfolio review, which was too early to assess the Nets' 8/12/21 announcement that star guard Kyrie Irving, who's resisted vaccination, would not play or practice with the team. 

That definitely diminishes the Nets' championship odds, but they still have a strong team, and could either get Irving back or possibly trade him for another valuable player.