Fitch Affirms NBA's Notes and Revolving Facility at 'BBB+'; Outlook Stable

NEW YORK--()--Fitch Ratings affirms the National Basketball Association's (NBA) approximately $858 million league-wide revolving facility borrowings (privately placed through its affiliate Basketball Funding, LLC) and $1.4 billion of the NBA's senior notes (various issues due through 2024) (privately placed through its affiliate Hardwood Funding, LLC).

The Rating Outlook is Stable.

The 'BBB+' rating affirmation reflects the NBA's solid position among professional sports leagues, both in the U.S. and globally, its large and growing fan base, and the NBA's strong economic model. Fitch views the strong demonstrated viewership and attendance trends and international marketing and growth initiatives favorably as the NBA continues to grow overall league revenues. Given recent national television contract renewal trends in other leagues and sports, there is a strong likelihood that the national broadcast contract will be renewed at a significant increase. However, the rating reflects the moderately leveraged nature of the notes and facility compared to peers and related debt service coverage ratios relative to current annual television revenues.

KEY RATING DRIVERS:

Solid Underlying League Fundamentals: The NBA has a strong economic model that includes equal distribution of multi-year national television contract revenues and significant revenue sharing among member teams. Debt service is supported by large contractual revenue streams from investment grade counterparties. The current collective bargaining agreement (CBA) between the NBA and NBA Players Association includes solid core elements that promote financial stability and competitive balance. Domestic fan attendance and viewership remain stable and the league continues to grow the existing large international fan base.

Long History of Television Contracts: The NBA's current television contracts run through 2016 (eight-year contract with Disney [ESPN & ABC] and Turner [TNT]). Viewership levels in 2011-12 increased despite the work stoppage in 2011. Overall, 2012-13 viewership and 2013-14 games through March 19, continue recent robust ratings across Disney and Turner/TNT. Given recent sports industry television renewal trends both at the league level and franchise level, Fitch expects the NBA to have a favorable renewal or extension of its national television contracts.

Positive League Oversight and Governance: The league maintains significant resources and has demonstrated a willingness to step in and aid 'distressed' franchises. For example, the NBA successfully assisted the New Orleans Pelicans during ownership issues and ultimately bought the team and facilitated a sale at a higher valuation.

Strong Liquidity and Coverage but Team Exposure: Structural provisions ensure timely payment of debt service, as national television revenues flow into an account established by the NBA to meet debt service obligations, including funding of interest and labor contingency reserves, before distribution to the participating teams. However, debt obligations are several commitments of participating teams, and a bankruptcy of an individual team could cause a disruption in debt service payments. This risk is mitigated by the agreement of all NBA teams to allow a bankrupt team's national television revenues to continue to flow to the lenders to cover debt service and by the league letter of credit and the league's oversight and governance.

Refinancing Risks Expose Teams to Potentially Higher Costs: The bullet maturities associated with the notes and the necessity of bank renewals associated with the revolving facility expose the teams to potentially higher interest costs. This risk is partially mitigated by the league's recent effort to increase the ratio of long-term fixed-rate debt-to-revolving facility borrowings and take advantage of the current low interest rate environment.

RATING SENSITIVITIES:

A significant decline in national television contract rights fees, which given the current trend is unlikely, could negatively impact the financial profile and metrics of the facility.

Strong renewals of the national television contracts, resulting in lower overall leverage, could lead to positive rating movement.

SECURITY:

The revolving facility and notes are parity obligations secured by participating teams' national television contract revenues and other assets.

CREDIT UPDATE:

The NBA continues to have very strong viewership trends and game-day attendance. The 2012-2013 season was the second most-viewed full regular season in history on all three national networks - ABC, ESPN, and TNT. The last three NBA seasons were the most viewed in the league's history; this increasing national interest is attractive to broadcasters, as demonstrated by long ongoing partnerships with Turner (29 years) and ABC/ESPN (11 years). For the 2013-14 season-to-date (through March 19), television viewership is generally tracking favorably to expectations.

Attendance for the 2012-13 average regular season increased approximately 1% over the 2011-12 season, and 2013-14 is tracking marginally better than same period for 2012-13. For the 2012-13 season, the NBA's average net gate receipts were up 6% compared to the previous year, highlighting continued strong ticket pricing power despite tepid economic conditions. This trend continues for the 2013-14 season, with average gate receipts approximately 5.7% higher than the same period in 2012-13. Furthermore, NBA arenas are on pace to achieve ticket sales of 90%+ capacity for the 10th straight season.

Recent national television renewal trends with the National Football League (NFL), Major League Baseball (MLB) and the National Hockey League (NHL)(Canadian television contract) as well as NCAA basketball, NASCAR, Professional Golfers Association (PGA) and United States Golf Association (USGA) indicate the likely course of the NBA's upcoming renewals, given solid growth in television viewership since 2008. Fitch will continue to monitor the general television renewal environment leading up to the expiration of the NBA's television contracts to analyze any potential changes in the media landscape or broadcast appetite for NBA related content.

Leverage associated with the facility and notes declined marginally to 4.02x in 2012-13 from 4.25x in 2010-11 and is expected to decline to 3.70x in 2015-16 under the existing national television contracts. Positive rating migration will be partially driven by any increase in the broadcast contract revenues and resulting decrease in leverage under the borrowing facilities.

The NBA's 10-year CBA signed in December 2011 includes options available to both sides to opt out after notice, effective June 30, 2017. The CBA continues a number of the economic and competitive arrangements from prior agreements including the 'soft' salary cap/'tax' system. However, under the new agreement, the luxury tax system has been enhanced to include an escalating tax aimed at augmenting on-court parity and controlling payroll expenses. For the 2012-13 seasons, the tax rate was set at $1 for every $1 in salary over the tax level. Beginning with the 2013-14 season, tax rates for incremental spending above the tax level have increased as follows:

-- $0-5 million over tax level - $1.50 for $1;

-- $5-10 million over tax level - $1.75 for $1;

-- $10-15 million over tax level - $2.50 for $1; and

-- $15-20 million over tax level - $3.25 for $1.

Rates increase by $0.50 for each additional $5 million above the tax level.

Fitch views the collective bargaining and revenue sharing agreements positively as they aim to improve individual team financial strength and improve on court competitive balance. In Fitch's opinion, greater competitive balance and growing competition amongst teams drives greater fan interest.

The NBA currently has 30 teams in major metropolitan areas in the U.S. and Canada, of which 20 participate in the league lending facilities.

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

Applicable Criteria and Related Research:

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

-- 'Corporate Rating Methodology' (Aug. 8, 2012).

Applicable Criteria and Related Research:

Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

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=826274

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Chad Lewis, +1-212-908-0886
Senior Director
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Scott Zuchorski, +1-212-908-0659
Senior Director
or
Committee Chairperson
Saavan Gatfield, +1-212-908-0542
Senior Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings, Inc.
Primary Analyst
Chad Lewis, +1-212-908-0886
Senior Director
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Scott Zuchorski, +1-212-908-0659
Senior Director
or
Committee Chairperson
Saavan Gatfield, +1-212-908-0542
Senior Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com