Fitch Affirms Denver Arena Trust Revenue-Backed Notes at 'BBB-'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the Denver Arena Trust (DAT) 'BBB-' rating on approximately $9.7 million in 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.

--Two Major Anchor Tenants and Experienced Operator in Robust Metropolitan Area: Home to the NBA's Denver Nuggets and the NHL's Colorado Avalanche, the Pepsi Center is the only modern arena in Colorado. Both tenant franchises are popular in the region with stable fan bases. Kroenke Sports and Entertainment, LLC, operates the facility and has reinvested adequately in the arena and associated amenities. Denver-Aurora-Broomfield service area data indicate wealth levels and unemployment rates favorable in comparison to both statewide and national averages.

--Expected Stability of Collateral: Renewal risk and price sensitivity associated with arena suite licensing agreements has heightened, especially against the backdrop of the sluggish economy and the last two years of partial-season labor stoppages in the NBA and NHL. Nevertheless, as a result of the recent negotiations of collective bargaining agreements (CBAs) in both leagues and scheduled maturity of the notes this coming November, Fitch does not foresee a likely scenario that would inhibit the trust from making the final scheduled payments of principal and interest on time and in full this coming November.

--Narrow but Contractual Revenue Pledge: Though a narrow pledge of luxury suite agreements and two sponsorship agreements secures the notes, the revenues are mostly contractual, and the gross claim on these revenues protects bondholders from margin volatility at the arena operating company level.

--Flexible Debt Structure and Adequate Financial Resources: DAT reported relatively stable debt service coverage ratios in the 1.3x range from 2006 through the principal payment in November of 2011 on scheduled principal and interest payments. However, the last two years of lockouts led to materially lower coverage of scheduled payments for the years ended November 2012 and November 2013 of 1.2x and 1.1x, respectively. The structure allows for a flexible amortization profile under which principal repayments can be deferred until legal maturity in November of 2019 without triggering an event of default, still over four years before the team leases expire. The target maturity date is November 2014, however, and the trust has historically elected to meet that schedule to amortize the debt more quickly. DAT projects to meet its final scheduled amortization payment this November.

RATING SENSITIVITIES

--Suite contract defaults between now and November combined with renewal results significantly below expectations in that timeframe that would cause the trust not to pay its final scheduled principal payment and to defer a portion to subsequent years.

SECURITY

The bonds are secured by a pledge of revenue agreement rights including all revenues associated with these rights and the right to enter into renewal/replacement agreements.

CREDIT UPDATE

From December 2013 through November 2014, the trust has paid or is scheduled to pay $12,683,000 in principal, interest and other debt-related fees. Cash currently in place and revenues locked in from December 2013 through November 2014 - when the final principal payment is made - pursuant to suite and advertising contracts totals $13,580,972. Therefore, DAT should be able to make the final scheduled payment on the notes from current locked-in cash by a factor of 1.07x, absent unexpected suite defaults between now and then. In addition to locked-in revenue, DAT is expecting to generate an additional $4.8 million in renewal results and other suite sales - including a conservative assumption of a 25% haircut on renewals scheduled to be executed this coming year - which would enhance coverage to 1.49x.

Denver Arena Trust is a business trust formed for the purpose of acquiring all of the rights, title and interest in the revenue agreements and pledged contracts associated with the notes, the proceeds of which were used for the construction of the Pepsi Center. The Pepsi Center is currently owned and operated by the Kroenke Arena Company, which is in turn owned by Kroenke Sports and Entertainment, LLC. The arena seats up to 19,000 for hockey and 20,000 for basketball. The arena opened in October 1999 at a construction cost of approximately $180 million. The Avalanche and Nuggets have leases to play all home games at the center through 2024.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Rating Criteria for Infrastructure and Project Finance,' (July 11, 2012);

--'Rating Criteria for U.S. Sports Facilities, Leagues, and Teams,' (Aug. 9, 2012).

Applicable Criteria and Related Research:

Rating Criteria for Infrastructure and Project Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867

Rating Criteria for U.S. Sports Facilities, Leagues, and Teams

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685897

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=823906

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Primary Analyst
Charles Askew, +1-212-908-0644
Analyst
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Chad Lewis, +1-212-908-0886
Senior Director
or
Tertiary Analyst
Markian Dziuk, +1-312-368-3187
or
Committee Chairperson
Saavan Gatfield, +1-212-908-0542
Senior Director
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Charles Askew, +1-212-908-0644
Analyst
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Chad Lewis, +1-212-908-0886
Senior Director
or
Tertiary Analyst
Markian Dziuk, +1-312-368-3187
or
Committee Chairperson
Saavan Gatfield, +1-212-908-0542
Senior Director
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com