Ratings agency Moody's: outlook for Barclays Center bonds now stable, no longer negative; cites Tsai's backstop for debt, (incomplete) recovery in live events

Though the Barclays Center is still struggling, with revenues far behind what's necessary to pay off construction bonds, the bond ratings agency Moody's yesterday offered a more positive outlook on those bonds, affirming the Ba1 (highest notch of junk) but declaring the outlook now stable, rather than negative. 

The bonds were issued by the Brooklyn Arena Local Development Corporation, a state entity, on behalf of Brooklyn Events Center, aka ArenaCo, which subleases the arena. (Note: clients pay ratings agencies, which gives them incentive not to be harsh.)

Moody's cited "the demonstrated equity support from ownership"--steady funding from billionaire Joe Tsai--"coupled with the continued cashflow improvement at the Arena that should reduce its reliance on future equity support over time." 

That means the arena won't have to draw on reserve funds to cover required PILOTs, or payments in lieu of taxes--the financial legerdemain that allows a tax-exempt site and tax-free bonds, which means lower annual payments.

Indeed, the arena is doing better than earlier in the pandemic, and just this month seems to have recovered a good chunk of its schedule.

Ownership incentives

"Ownership has a very high incentive to provide liquidity support to ArenaCo, if needed, because of the Arena's long-term revenue generating potential that contributes to the high franchise value of the team," Moody's stated. Indeed, only the Brooklyn location would drive the value of the Nets.

Not only has Tsai agreed to make required payments, "but there has been additional equity funded capital investment in the Arena that is expected to continue"--likely arena renovations--"as well as additional investment in the team."

Also, the team can access the league's financial support if necessary--unlikely--and the NBA can "bundle and sell the team with the Arena to repay any overdue and uncured PILOTs, which provides the owner with another strong incentive to continue to make the PILOT payments."

Strengths and cautions

"The Ba1 rating," said Moody's "reflects the strength and value of the Nets franchise, which includes the Arena, located in the strongest and most affluent media market in the US, coupled with the Nets' non-relocation agreement that ties the team to the Arena and provides a degree of long-term cash flow predictability."

It cites not just income (naming rights, sponsorships, and suites agreements) but also cites team improvements that have driven attendance growth.  (That said, injuries plus the absence of unvaccinated star Kyrie Irving, I'd add, have diminished the value of home games.)

Moody's cited "improvement in some recent sponsorship deals" and expects "upside potential in the next few years." (Could that include new arena naming rights, as the 20-year Barclays deal, launched in 2012, is way undervalued?)

Moody's cited "the continued recovery in other live events at the Arena that are a large generator of excess cashflow and are key to ArenaCo's long-term recovery."

While the "pent-up demand for live entertainment helps this recovery," Moody's said, "current total demand has remained about 10% to 15% below pre-pandemic levels. We expect this to improve over time."

Looking up, looking down

Moody's said it could upgrade its rating if cashflows generate annual debt service coverage ratios of at least 1.40x--more than 140% of what's needed.

Also, an upgrade could rely on "[r]eduction in leverage or debt service"--another refinancing?

A downgrade might happen if there are doubts or delays regarding the equity support Tsai has steadily provided, a drawdown on the established debt service reserve fund, or a change in ownership (unlikely), resulting in more parsimonious owners.