We haven’t digested the full report.
But Moody’s Investor Services posted first thing this morning on its website it has downgraded the $328 million in debt issued in 2008 for KFC Yum! Center. Again.
Moody’s downgraded the KFC Yum! Center debt, issued by the Louisville Arena Authority, to Ba3 from Ba2. That’s one step down in credit worthiness using Moody’s system of triple-A assigned to the safest investments, and C the riskiest.
The current rating is between “Non-investment grade, speculative” and “highly speculative.” That’s two ratings below Baa, where high-risk junk rating begins and investment grade ends. This is the second Moody’s downgrade in 18 months.
However, Moody’s analysts changed the debt outlook to stable from negative.
In the downgrade, Moody’s analysts once again cited the over-generous lease Louisville Arena Authority, the public/private entity that “owns” the arena, has with arena tenant University of Louisville Athletics Assoc.
They also cited the uncertainty as to whether the tax increment funding district around the downtown arena will ever generate sufficient revenue to make a significant contribution to debt service.
Multiple sources tell Insider Louisville the Kentucky Economic Development Cabinet has not released FY 2012/2013 TIF revenue figures per requirements of the original bond covenant. But those sources say the amount generated by additional economic activity in the TIF district will generate about $5.5 million in revenue.
That’s up almost 60 percent from $3.5 million for the preceding fiscal year. Earlier this year, the Arena Authority voted to cut the size of the TIF district to two square miles from six square miles. However, sources tell Insider Louisville state economic development officials, who control TIF regulations, never approved the change.
Kentucky Economic Development Cabinet officials did not return calls and emails for comment.
For most of its 2013 meetings, Arena Authority members including Chairman Larry Hayes, who is also Economic Development Cabinet secretary, have been extremely optimistic about finances. In a May interview with WHAS TV reporter Joe Arnold, Hayes said the financial outlook was “glowing.”
From that story:
The “phenomenal” performance of the KFC Yum! Center’s operations since it was taken over by a new operator should help convince a bond ratings service to upgrade the Louisville Arena Authority’s bonds out of “junk” status, the authority’s chairman said on Monday.
“I think we have significantly improved on the operations side,” said Larry Hayes. “In my initial discussions with Moody’s (Investor Services), I think they are very pleased at the fact that we’re going to show a pretty amazing operating profit this year, I think.”
Moody’s downgraded arena bonds to “junk” status last May citing several factors, including tax increment financing revenues falling far short of projections, generating roughly one-third of forecast revenue in the six square mile arena TIF district. The TIF is intended to be the primary source of the arena’s debt service.
The ratings upgrade would allow the authority to refinance its $349 million in construction debt under better terms, Hayes said.
“I think we’ll kind of reshuffle the deck if you will, and a percent on debt of that size is significant in terms of the payment,” Hayes said. “That’s our goal is to build a cash flow model and a plan of finance model in a go forward way.”
Hayes’ projection of a “profit” turned out to be overly optimistic. In late June, debt rating agency Standard & Poor’s Rating Services reaffirmed its near-junk bond rating of BBB- on Louisville Arena Authority debt along with a “negative” outlook.
The BBB- rating — the lowest investment grade rating, and one step above a “junk” rating — was assigned last December.
Since June, KFC Yum! Center has lost about $936,000 on events, not including the cost of servicing the bonds, which is about $1.08 million per month.
Losses by month:
The latest reported loss was $407,000 for September. With the beginning of the U of L basketball season this month, the arena is projected to have an operating profit through the rest of 2013.
However, as Hayes has noted at several Arena Authority meetings, it’s the uncertainties about the TIF district that worry bond raters.
In late 2011, Moody’s put state economic development officials on notice they must figure out some way to increase tax revenues in the tax increment financing district around the arena, which was projected to be chock full of retail, hotels and restaurants by now.
That increasing business activity was projected to generate sufficient sales tax revenue to fund the arena, along with event revenue, naming rights, advertising revenue and rent from U of L sports programs.
However, TIF revenue and events revenue have come in far below projections when the bonds were placed, and the bond repayment structured.
Several major projects have been announced including an Aloft Hotel at First and Main streets, one block east of KFC Yum! Center. That $25 million project isn’t scheduled to be completed until 2015.
Meanwhile, ESPN just ranked U of L as having the most profitable mens’ basketball program in the United States.
For the 2012/13 season, U of L basketball made a profit of $1.35 million per game, according to ESPN’s reckoning, a whopping 35 percent more than the University of North Carolina, the next most profitable program.
Moody’s rating system:
Gradations of creditworthiness are indicated by rating symbols, with each symbol representing a group in which the credit characteristics are broadly the same. There are nine symbols as shown below, from that used to designate least credit risk to that denoting greatest credit risk:
Aaa Aa A Baa Ba B Caa Ca C
Moody’s appends numerical modifiers 1, 2, and 3 to each generic rating classification from Aa through Caa.