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‘Insufficient Funds’: Arena debt document reveals struggle to pay KFC Yum! Center bonds

by Terry Boyd

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There are two schools of thought on KFC Yum! Center financing.

In fact, they’re more than different financial projections: They’re more like alternate universes.

Louisville Arena Authority members see nothing but smooth sailing as the arena, pried from Harold Workman’s hands, controls costs under AEG Facilities while booking top global acts such as Beyonce under the management of Los Angeles-based AEG Facilities.

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Denis Frankenberger

The second school – including businessman Denis Frankenberger – see an arena on the verge of default due to the structure of the bond issue, which dates back to the pre-Great Recession days of 2006.

This school argues the $348 million debt servicing for the riverfront facility  – $100 million above the next most expensive proposal – is threatened by wildly optimistic projections for the Tax Increment Financing district created to fund the project, as well as an overly generous lease that gives University of Louisville Athletic Association 90 percent of basketball revenue.

That two-pronged problem equals a default as early as next year, according to the critics.

The reality? Actual empirical data cuts both ways.

This was apparent earlier this month when Standard & Poor’s maintained their one-step-above junk rating for arena bonds and “negative” outlook while acknowledging AEG Facilities management could turn around financing.

But, the fundamental truth of truths is that at this point, three years in, neither arena revenue nor the TIF revenue begin to approach 2006 projections, which set in stone debt servicing. The question is, “Are those are the hard realities for the next 30 years?”

For the short term, with little chance of meeting original revenue projections, evidence is mounting that KFC Yum! Center bond repayment is a struggle, with bondholders often waiting for the Louisville Arena Authority to pull together payments weeks or months behind schedule.

The latest clues come from a June 17 letter to Louisville Arena Authority bondholders from bond trustee U.S. Bank notifying them that interest payments had been made, but acknowledging complications.

It appears payments ultimately were made by pulling money out of at least one non-revenue reserve fund because there was insufficient revenue from operations, according to the letter.

In its rating of KFC Yum! Center debt June 27, Standard & Poor’s analysts noted the Arena Authority has fully funded its $15 million senior debt service reserve, as well as the reserve for the subordinated debt.

Should the Arena Authority be forced to start drawing on those reserves, S & P officials wrote, they would consider further downgrading their rating of KFC Yum! Center bonds.

This year, Arena Authority officials and Kentucky State Fair Board members dodged that bullet by arranging for the Fair Board to forgive the Arena Authority about $5 million in debt due at the switch to AEG Facilities from the State Fair Board.

Frankenberger, former president and CEO of Advance Machinery Co., wrote in an email that had the Arena been forced to pay the debt,”without question the Authority would have been (forced) to tap its reserve funds to meet debt service, resulting in further downgraded bond ratings. As it is, the Authority had to re-tap its maintenance and renovation account once again.”

The Fair Board forgiving the arena debt, which was part of the original management contract the Fair Board had for KFC Yum! Center, allowed the Arena Authority to meet its debt obligation this year. But barely.

According to the bond trustee letter, the most recent interest payment was June 1, when U.S. Bank paid $9.4 million to due to holders of the 2008 Senior Bonds during 2012.

The trustee letter makes clear the authority was able to meet its debt obligations only because Metro Government agreed to pay its full obligation of $9.8 million, though this was not unexpected:

Following the allocation of funds in the TIF Revenue Fund, the Metro Revenue Fund, and the Arena Revenue Fund that occurred on or before November 28, 2012, and payment of the principal and interest due on the 2008 Senior Bonds on December 1, 2012, there were insufficient funds remaining in the Senior Interest Fund to pay the June 1 interest payment. To make the June 1 interest payment on the 2008 Senior Bonds, the Trustee transferred $3,266,600 from the Metro Revenue Fund that was received from Louisville/Jefferson County Metro Government (“Metro”) on May 24, 2013 (representing the balance of the maximum amount of Guaranteed Payments due in 2012 from Metro under the Metro Contract).

But the letter also states funds were transferred from the arena’s Operations and Maintenance Account to cover the interest owed to subordinate bondholder, who get paid after senior bond holders.

As of May 30, 2013, there were insufficient funds in the Subordinate Interest Fund to make the interest payment due on the 2008C Bonds on June 1, 2013. Accordingly, pursuant to Section 5.5 of the Loan Agreement, the Corporation transferred the amount of$408,375.00 from the Operation and Maintenance Account to the Trustee for purposes ofmaking the June 1 interest payment on the 2008C Bonds.

All previous debt payments have been wire transferred to the trustee over a week before they were due, according to sources. The trustee insists in placing all funds in accounts first to pay the Senior Interest debt with none going into the Subordinate interest fund until  the Senior interest debt is fully funded.

Finally, the report notes that KFC Yum! Brands transferred the $1.35 million naming fee six weeks late.

The end game? When will revenues meet projections?

Here’s how the debt schedule is structured. There are three main revenue streams: money from the TIF district, money from arena operations and a guarantee Louisville Metro Government will pay up to $9.8 million to cover any shortfall.

The total debt service of $22 million on the bonds due in 2012:

• TIF revenue $ 3.5 million (projected to be $8.2 million)

• Naming rights and sponsorship revenues 4.5 million

• Suites/premium seating 1.4 million

• The city 3.3 million (above its minimal legal obligation of $6.5 million)

• Interest income .7 million

• Event revenue 0 (net of event expenses through June 30, 2012. Projected to be $7 million)

Next year, event projections remain at $7 million while the TIF projection rises to $10 million, then to $12 million in 2015.

The arena lost $158,000 in May, the latest month for which data is available, when there were two big events – a Taylor Swift concert, and a 2-day reception for His Holiness, the Dalai Lama.

The arena should begin to show an operating profit again this fall when basketball season returns in November, and a string of top concerts begin, stretching into December.

The US Bank bond trustee letter suggests that if the Arena Authority officials and their supporters are wrong, the arena will have to tap into the reserve fund as early as November, when the next payments are due to bondholders.

Frankenburger points out the arena, under AEG management posted in 2012 almost the same operating loss – $17.4 million – as it did under Fair Board management, $18.5 million for 2011.

If the Arena Authority has to tap the reserve funds, the rating agencies are likely to downgrade the bonds, which would all but eliminate the possibility of refinancing the bonds for a lighter debt load.

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