Fitch Affirms LA Arena Funding (Staples Center) at 'BBB+'
NEW YORK -- February 18, 2014
Fitch Ratings has affirmed its 'BBB+' rating on LA Arena Funding LLC's
(Staples Center) approximately $158.4 million outstanding revenue-backed
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 & 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
support 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; one Founding Partner advertising
agreement was terminated, but negotiations for a replacement contract are
currently underway with three companies.
--Solid Financial Metrics and Adequate Debt Structure: Leverage levels in the
3x range and Fitch rating case coverage levels averaging 2.1x 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 to 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.
--Contract Renewal or Pricing Pressure: Suite, other premium seating, and
advertising pricing and renewals that differ from past and projected
performance leading to debt service coverage ratios materially below the 1.4x
range from current levels between 1.5x and 1.6x could lead to a downgrade.
--Upgrade Currently Not Anticipated: 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 revenue from certain
premier seating contracts, and the minimum guarantee portion of the concession
agreement with Levy Restaurants.
Despite the NHL lockout last year and the NBA work stoppage the year before,
LA Arena Funding earned more gross revenue these past two years on a
consolidated basis than any other years previously. As a result, consolidated
coverage of debt service equalled 2.20x, surpassing pre-recession levels and
comparing favorably to 1.93x the year before and 1.75x budgeted. Previous
declines in consolidated coverage levels were the result of reductions in
non-pledged revenue sources during the recession and increases in operating
and maintenance expenses.
Pledged contractual revenue sources covered debt service in 2013 at 1.51x.
Unlike consolidated EBITDA through the recession, noteholder collateral did
not exhibit significant volatility, as the bankruptcy-remote securitization of
the pledged collateral does not leave the notes exposed to margin or expense
fluctuations. Advertising revenues represent the largest percentage of
collateral and have increased 5.4% since 2008, reflecting pricing escalations
in the contracts and a new agreement executed last year with American Express.
Naming rights payments from Staples Center escalate at 4% until two years
prior to the scheduled maturity of the notes, at which point $34 million in
debt will remain. The second largest revenue stream, suite revenues,
experienced a certain degree of pricing pressure through the recession, but
occupancy levels have stayed at or near 100%.
In its base scenario, Fitch assumes that pledged 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
at current levels. Fitch's rating scenario contemplated reduced suite 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 1.33x and averages
2.11x through scheduled maturity. In the event of a significant downside
scenario, the flexible amortization profile of the debt would allow LA Arena
Funding to defer principal through 2026 at legal maturity.
Fitch notes that the nearby Forum in Inglewood recently underwent a renovation
funded by the Madison Square Garden Company. Though the Forum could offer a
meaningful degree of competition for concerts and other events, Fitch does not
foresee significant negative implications for noteholders. Again, the
securitization for the notes is not subject to margin volatility of LA Arena
Funding and as such is not at direct risk to declines in variable revenue
streams such as concessions and other event revenue. Furthermore, Fitch views
as a credit positive AEG's ability to generate record revenue levels the last
two years through two partial season work stoppages of anchor tenants in the
NBA and NHL.
The Staples Center is owned and operated by the LA Arena Company and AEG. 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'.
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
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Elizabeth Fogerty, New York
Fitch Ratings, Inc.
One State Street Plaza
New York, NY, 10004
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