NEW YORK--()--Fitch Ratings has affirmed its 'BBB+' rating on LA Arena Funding LLC's (Staples Center) approximately $181 million outstanding revenue-backed notes.
The Rating Outlook is Stable.
KEY RATING DRIVERS
--Strong Underlying League Economics: The National Basketball Association (NBA) and the National Hockey League (NHL) maintain strong historical fan and sponsorship support demonstrated by solid attendance and viewership levels despite labor disputes.
--Three Major Anchor Tenants and Experienced Operator in Strong MSA: The notes benefit from long-term leases with three anchor tenants, the NBA's Lakers and Clippers and the NHL's Kings, all of which have been successfully operating since the arena opened. Los Angeles's economic importance and diversity supports a broad expanse of fan and corporate backing, and Anschutz Entertainment Group (AEG) demonstrates a vast breadth of knowledge and experience operating sports and entertainment venues throughout the United States and abroad.
--Demonstrated Stability of Collateral: The collateral is inherently subject to revenue contract renewal risk, and the sector is vulnerable to economic downturns and discretionary spending, as with any other facility of this type. This risk is mitigated by management's robust operating history and success with suite, premier seat, and advertising and sponsorship renewals despite team performance and economic conditions. Currently, all such pledged contracts are leased on a long-term basis.
--Solid Financial Metrics and Adequate Debt Structure: Leverage levels in the 3x range and Fitch rating case coverage levels averaging 2x adequately support the 'BBB+' rating and compare favorably to peers. Though legal maturity of the notes occurs in 2026, two years after team leases expire, LA Arena Funding plans to amortize the debt on a scheduled maturity of 2021. Moreover, the Staples Center's status as one of the premier sports and entertainment venues in the U.S. and management's annual reinvestment in the facility underscore the arena's viability and attractiveness to tenants well beyond the lease terms.
--Suite, other premium seating, and advertising pricing and renewals that differ from past and projected performance to the extent that debt service coverage ratios decline materially below the 1.4x range from current levels between 1.5x and 1.6x.
--Currently, Fitch rates the NBA's league-wide borrowing facilities at 'BBB+', and, considering the discretionary nature of the collateral coupled with meaningful renewal risk, does not anticipate the L.A. Arena Funding rating migrating above that level.
The notes are secured by a bankruptcy-remote securitization of 101 luxury suites, on-site advertising agreements with the arena's 11 founding partners, the naming rights agreement with Staples Inc., annual contracts on 1,425 premier seats, and the minimum guarantee portion of the concession agreement with Levy Restaurants.
As host to anchor NHL and NBA teams, the Staples Center is periodically at risk to professional sports work stoppages, as is any arena of this type. Over the past year and a half, Staples Center has successfully operated through two work stoppages. Last year, the NBA lockout led to a shortened season of two preseason and 66 regular season games, usually eight and 82, respectively. This year, a work stoppage in the NHL led to a shortened 48-game regular season, down from the usual 82, with no preseason games, normally three home games.
While a potentially brand damaging full-season NHL stoppage was averted, Fitch still has concerns related to possible harmful long-term effects to the NHL brand and fan support. NHL franchises have a solid dedicated arena fan base, as demonstrated by solid arena attendance after the 2004-2005 season work stoppage. However, fan attendance and corporate support for the 2013 season, as well as for the 2013-2014 season, could be materially different given the combination of weak and uncertain national and regional economic conditions and growing sport entertainment options.
The NBA is coming off a strong 2011-2012 season, which produced positive viewership and attendance trends despite the shortened season. Season-to-date 2013 is continuing positive trends. For more information related to Fitch's broader sports outlook, please see report '2013 Outlook: Sports - NFL, NBA, and MLB Roll Positively into 2013; NHL Faces Uncertainty,' dated Dec. 14, 2012.
Despite the NHL work stoppage, the Staples Center is still budgeting for 220 events this fiscal year. Including the NBA lockout the arena still held well over 200 events in 2012, and pledged collateral on the arena notes resulted in a 1.54x debt service coverage ratio, above the Fitch base forecast of 1.48x and in line with coverage in 2011 of 1.53x.
Because of the structure of suite and premier seat license agreements requiring the arena to meet a 150-event threshold to avoid crediting premium seatholders for missed games, all pledged premium seat revenues still flowed to L.A. Arena. Furthermore, the majority of the refunds are payable by the anchor teams. Only one advertising contract requires a pro rata credit based on the number of Kings games missed out of the normal regular season. More than recovering these lost revenues is a renewed advertising agreement with American Express, which has resulted in a solid increase in arena founding partner revenues and is part of a larger global partnership with AEG.
Fitch also notes that AEG is currently up for sale. Because LA Arena Funding owns all collateral pursuant to the original 1999 sale agreement and securitization, noteholders are protected from any change in ownership above the special-purpose-vehicle (SPV) level.
In terms of gross revenue, LA Arena Funding earned more in fiscal 2012 on a consolidated basis than any other year previously, despite the NBA lockout. Consolidated coverage of debt service equalled 1.93x, approaching pre-recession levels and compared to 1.86x the year before and 1.62x budgeted. This year, arena management is budgeting for 1.75x coverage of the arena notes from GAAP EBITDA. Previous declines in consolidated coverage levels were the result of reductions in non-pledged revenue sources and increases in operating and maintenance expenses.
In its base scenario, Fitch assumes that revenues increase moderately as the Staples Center exhibits solid pricing power and demand remains stable. Under this scenario, Fitch estimates the debt service coverage ratio to remain in the 1.5x to 1.6x range. Fitch ran a stress scenario that contemplated reduced revenue contract renewal levels as a result of sustained reduced demand and decreased pricing power for six consecutive years, a scenario which Fitch views as unlikely. Coverage under this scenario never falls below 1.31x and averages 2.02x through scheduled maturity.
The Staples Center is owned and operated by the LA Arena Company and Anschutz Entertainment Group. The arena seats up to 20,000 for concerts, 19,997 for basketball games, and 18,118 for hockey games. Staples Center opened in October 1999 at a construction cost of $375 million. The NBA's Lakers and Clippers and NHL's Kings have leases to play all home games at the arena through 2024. The Clippers lease was recently extended from 2014 through 2024. Fitch views the long-term lease extension positively since the Clippers lease was previously the only anchor team agreement that did not expire after the scheduled maturity of the notes.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance' (July 11, 2012);
--'Rating Criteria for U.S. Sports Facilities' (Aug. 9, 2012).
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
Rating Criteria for U.S. Sports Facilities, Leagues, and Teams