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Late last week, debt rating agency Standard & Poor’s Rating Services reaffirmed its bond rating on Louisville Arena Authority debt along with a “negative” outlook, but hinted at a ray of hope.

The BBB- rating – the lowest investment grade rating, and one step above a “junk” rating – was assigned last December.

Unlike its last assessment, the New York-based rating agency stated a higher rating is possible if S&P sees signs the special taxing district created to fund the debt will begin to meet projections, and that new management company AEG Facilities can boost operations.

For this latest summary, S&P raters cited essentially the same concerns as in December about the ability of the tax increment funding district to generate sufficient revenue to service $348 million in bonds issued in 2008 to pay for the construction of KFC Yum! Center.

For 2012, the authority was only able to pay bondholders after Louisville Metro Government paid its full $8.9 million obligation under the original bond prospectus agreement.

From the S&P summary:

Authority’s project revenue bonds for the Louisville Arena Authority Inc. (the Authority) is ‘BBB-‘. The rating reflects the arena’s reliance on the volatile tax increment financing (TIF) revenues for debt service, a weak debt service coverage ratio (DSCR), a new but very experienced arena operator in AEG Management Louisville LLC, a long-term lease with the University of Louisville for all sponsored athletic events (including the highly successful men’s basketball team), and a fully funded senior debt reserve fund. The outlook is negative.

Arena Authority officials stated last month they were confident AEG’s performance after taking over the 22,000-seat downtown arena would be sufficient to convince rating agencies such as S&P and Moody’s to upgrade the bond rating.

An upgrade would have made it easier to refinance some of the bond tranches, which reach an 8 percent yield, relatively expensive money during a period when corporate bonds typically pay less than 4 percent.

That could have concievably reduced the total arena Authority annual payments to bondholders, which increase to a total of about $24 million for 2013.

In the 6-page document, S&P raters make clear that the TIF is the major variable, and may not generate revenues matching the 2006 projections on which the bond issue was structured.

TIF projections have turned out to be far below the original bond prospectus projections, which increase each year based on the idea that KFC Yum! Center would revive the downtown area around the arena.

The S&P appraisal also states the firm will withhold judgment on AEG’s performance as arena manager until AEG has established a longer track record.

AEG took over KFC Yum! Center operations July 1, 2012 from the Kentucky State Fair Board, which had incurred operational expenses including salaries far outstripping arena revenue.

Even after AEG took over, the total operational revenue contributed to the debt payment for 2012 was zero.

Offsetting those weakness, S&P raters cited as positives the relationship with University of Louisville basketball programs in what the report terms “one of the strongest college basketball markets.”

Other positives cited are the city’s obligation to cover debt service shortfalls, as well as AEG’s national reputation as an experienced operator of arenas, stadiums and performance venues “across the globe.”

Finally, the report cites a fully funded $14.9 million senior debt service reserve and $990,000 subordinated debt service reserve as of Dec. 31, 2012.

Under AEG management, the arena has hosted far more concerts, shows, and sporting events than when it was managed by state officials, the S&P summary states.

From the final “Outlook” section:

We expect that if AEG continues to book more top-name concerts and performances, along with higher concession and merchandise sales, this will result in a quicker turnaround of the arena’s operating performance, profitability, and (debt service coverage ratio) as well as incremental increase in TIF sales tax collections.

KFC Yum! Center recently booked two top acts for December, Beyonce and Justin Timberlake.

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