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Move over Greece, Pt. 3: S & P downgrades KFC Yum! Center bonds to ‘junk’

by Terry Boyd

KFC Yum Center events revenues have been disappointing.

KFC Yum! Center TIF and events revenues have consistently fallen short of servicing debt and interest payments.

This one is gonna’ hurt.

For the second time in one month, an international debt rating agency has downgraded the $340 million in KFC Yum! Center bonds to “junk” status, indicating an increasing chance of default compared to more stable investment-grade debt.

This morning, Standard & Poor’s downgraded the KFC Yum! Center bonds to BB, its highest non-investment or “speculative” grade rating, from BBB-, the New York City-based firms’s lowest rating for investment grade debt.

In the S & P rating system, an issuer rated BB is considered more stable in the short term compared to other low-rated borrowers. However, this low-rated issuer “faces major ongoing uncertainties and exposure to adverse business, financial, or economic conditions, which could lead to the obligor’s inadequate capacity to meet its financial commitments,” according to the S & P website.

S & P maintained its “stable” outlook for the arena bonds from their report last July, an indication of how likely it is the Louisville Arena Authority can meet its $22 million-plus annual obligation to pay back bondholders, an amount that increases substantially each year.

However,  S & P raters clearly see the obligation depending on Louisville Metro Government paying its full $9.8 million annual obligation.

From the report:

The stable outlook reflects our view that stable to modest growth in arena revenue and the guaranteed metro payments from Louisville-Jefferson County Metro Government (Metro) provide some downside protection to the LAA, and should insure that the debt service coverage ratio will not drop meaningfully below our projections, which remain weak for the next five years.

In this latest report dated Dec. 26, S & P raters emphasized they will have to see more revenue from the TIF district as well as additional events revenue beyond the $1 million annual guarantee from AEG Facilities, the Los Angeles-based firm that manages KFC Yum! Center, before they’ll upgrade their rating.

The Louisville Arena Authority has been paying Louisville-based financial firm Hilliard Lyons $10,000 per month to lobby the rating agencies for an upgrade, but to no avail.

This is the second negative S & P report in one year, and once again, the rater pointed to uncertainty as to whether the tax increment financing district created to fund the KFC Yum! Center can produce sufficient revenue to service the debt.

The S & P downgrade is likely to have major ramifications including ending all chances of refinancing the debt at lower rates, as well as leading to greater scrutiny of arena operations by state and local officials.

Last week, state Rep. Jim Wayne, who represents the 35th District in the general assembly, and state Sen. Chris McDaniel, who represents Northern Kentucky, told Insider Louisville they’re monitoring the KFC Yum! Center financials in anticipation of the Louisville Arena Authority asking the state for supplemental funding to avoid default.

Wayne and McDaniel added they want to see greater transparency from LAA about the true state of arena finances and its legal obligations to repay the Kentucky Fair Board about $5 million for lost business at the Kentucky State Fair and Exposition Center.

Wayne and McDaniel’s comments came after Moody’s Investor Services downgraded the KFC Yum! Center debt last month to Ba3 from Ba2, deeper into the firm’s rating for “junk,” or speculative debt.

That’s one step down in credit worthiness using Moody’s system of triple-A assigned to the safest investments, and C the riskiest.

More detail from the current S & P report:

“Since operations began in 2010, the LAA has faced a number of challenges that we view will take several years to manage through and have led to weak debt service coverage,” said Standard & Poor’s credit analyst Jayne Ross.

 The stable outlook reflects our view that stable to modest growth in arena revenue and the guaranteed Metro payments provide some downside protection to the LAA, and should insure that the DSCR will not drop meaningfully below our DSCR projections, which remain weak for the next five years.

We would raise the rating if TIF revenues stabilize under the two-mile TIF district, such that we have greater visibility into long-term revenue from this source, along with other revenues, to support a DSCR that is sustained above 1.25x. We also estimate that the arena would need to sustain net category B revenues above the AEG minimum guarantee and continue to reduce operating expenses to achieve these coverages, which in our view are not expected in the near term. We could lower the rating if TIF revenue growth is below our forecast or if category B revenues after operating costs do not exceed the AEG annual guarantee.

 

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  • Msradell

    Just wondering, does this really surprise anybody? The entire project has been a political boondoggle since its inception. The only smart group involved in the entire project was and still is The University of Louisville! Everybody else was so intent on creating this monstrosity that they didn’t look at the true numbers about how to pay for it.

  • J. Bruce Miller

    If the local university is the “only smart group involved’ it ought to be ashamed of itself, because IT is THE reason the Arena is going to be bankrupt. There’s an old saying
    “pigs get fat and hogs get slaughtered”. The local university was a pig, now its a hog and it’s going to get slaughtered unless it renounces its ridiculous non-arms-length contract with the arena and allows at least one other co-tenant to share the arena — namely a co-tenant in the form of an NBA team that will bring a minimum of 41 home dates every year, with an ADDITIONAL 600,000-700,000 patrons into the Arena, that will stabilize the finances and make the Arena ONE FOR THE ENTIRE REGION AND NOT FOR A SMALL SEGMENT OF THE ENTIRE REGION.

  • D.Randolph

    You mean, the only slimy, unethical, party involved was Tom Jurich (and UofL) correct? Yes, the buffoons that agreed to the contract should be charged with criminal malfeasance, but Jurich and UofL knew the LAA could never make money with that FUBAR contract! And personally, I think it was by design. With all of the money UofL is making, at the detriment of Jeff Co. taxpayers, they can just buy the arena when it goes bankrupt, for pennies on the dollar.

  • J. Bruce Miller

    D Randolph: The “buffoons” that you’ve described who “…should be charged with criminal malfeasance….” are the members of the Louisville Arena Authority who voted for the contract with UofL. Do you know who they are? If not, here’s a few: Dan Ulmer (UofL donor for whom the softball stadium is named); Jim Patterson (UofL donor for whom the baseball stadium is named); Junior Bridgeman (former UofL basketball All-American); Larry Bisig (local P.R. executive who’s major contract is with UofL); Larry Hayes (former UofL Board of Trustee member and the former Chief of Staff of Mayors Abramson and Armstrong); Mrs. Lindy Street (who’s husband is a member of the UofL Board of Overseers); Jim King (a UofL graduate); Mrs. Alice Houston (who’s husband was the Assistant basketball coach for years under Denny Crum); etc., etc.

    Point: the contractual agreement WAS NOT an arms-length transaction, by a long shot, sir. So your ‘charge that the contract was agreed to as a result of ‘criminal malfeasance’ is misplaced. It was NEVER a contract because the same people were on BOTH SIDES OF THE TABLE — with a goal of benefitting the local university at the cost of the public taxpayers (and to do so surreptitiously and with the acquiescence of a local newspaper who needs revenue so bad that they refuse to tell the public THE TRUTH.)

  • D.Randolph

    Apparently, my comment was misinterpreted. I was in agreement. I guess I lost you when I claimed that criminal malfeasance should be charged. However, i fully concur that this “deal” was shady at best. And, unless it’s restructured, the arena will most definitely go bankrupt.

  • J. Bruce Miller

    Mr. Randolph: Thanks for your clarification. These people who participated in this” “shady’ at best” deal need to be removed from the Louisville Arena Authority by the Governor (he appoints 10) and the Mayor (he appoints 5) — and the Governor AND Mayor need to tell President Ramsey that the UofL contract must be torn up and changed to permit co-tenants in the arena from several other BUSINESS ENTITIES THAT PAY TAXES and that UofL’s % of the gross is ONLY related to ITS OWN USE and all the other ‘favoritisms’ that are accorded to the local university need to be removed. THEN the Arena Authority needs to get in the business of filing up the arena bowl for many more nights by SPORTS BUSINESSES that bring additional patrons to the arena. Otherwise, it’s a :goner” at substantial embarrassment to the city, the state and much damage to both their credit ratings.