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Rating Action:

Moody's Investors Service downgrades the underlying rating on the Kentucky Economic Development Finance Authority's Louisville Arena Project Revenue Bonds to Ba2 from Baa3; Negative Outlook

Global Credit Research - 29 May 2012

Approximately $339 million of outstanding debt affected

New York, May 29, 2012 -- Moody's Investors Service has downgraded the underlying rating on the Kentucky Economic Development Finance Authority's (KEDFA) Louisville Arena Project Revenue Bonds (senior lien only) to Ba2 from Baa3. Today's rating action concludes the review for possible downgrade initiated on December 13, 2011.

RATINGS RATIONALE

The downgrade principally reflects the lower than expected state sales TIF revenues, high operating expenses of the arena, increased dependence on the Metro Louisville's additional payments, and the weakened financial metrics going forward. The rating outlook is negative. The negative outlook reflects the uncertainty of TIF revenue growth as well as the narrow debt service coverage ratio going forward. Current near to midterm coverage ratio forecasts fall short of initial projections even after taking into account the expected growth of future TIF revenues. TIF revenues may not fully support the arena's debt service as initially projected in the near future.

The Ba2 rating is also based on the arena's performance on the Category A and B revenues which were above forecast. While the arena generated ample revenues, the operating expenses of the arena were substantially higher than the forecasted amounts, thus negatively affecting the net operating income.

The project has $319 million Series 2008-A bonds, $15 million Series 2008-B bonds and $9.9 million Series 2008-C bonds. The Series A bonds include $284 million of current interest fixed rate bonds, and $26.9 million of capital appreciation bonds. The Series B bonds are taxable fixed rate bonds. Both issues are insured by Assured Guaranty (Aa3; rating under review for possible downgrade). The Series C bonds are unrated and uninsured.

STRENGTHS:

*Strong support from the state and Metro Louisville decreases the demand risk for the arena

* Strong attendance record for the arena's anchor tenant, the University of Louisville's men's basketball team, provides stability

* Arena successfully booked large numbers of non-university events in 2011

* The contract granting the TIF can only be canceled with approval of the bond trustee

CHALLENGES:

* State sales taxes, a proxy for TIF sales tax revenues experienced significant declines in 2009, although stabilizing in 2011 and 2012

* Steady growth in TIF district sales taxes will be needed to support debt service going forward

* The TIF district exempts eight projects from payment of all or some of the taxes supporting the project. (Future projects could be added to TIF district exemptions by action of the legislative council of Metro Louisville, but not without approval by the state and the authority.)

* The increased operating expenses incurred in 2011, unless managed, could further hamper the profitability of the arena

* LAA will be required to reimburse the Kentucky State Fair Board, which operates Freedom Hall, for any loss of net income due to the new arena

OUTLOOK

The negative outlook is based on the uncertainties surrounding the arena within the next two years including the TIF growth, arena's operating expenses, and the amount of the additional payment that will be provided by the Metro Louisville.

What could change the rating - UP

Improvements on the debt service coverage, replenished reserves and greater than projected sales tax growth in the TIF district and arena revenue growth could have a positive impact on the rating.

What could change the rating - DOWN

Lower than projected growth in revenues, particularly sales taxes, shortfalls in debt service payments, and use of senior debt service reserve could result in further downgrade. Significant changes to the TIF district exemptions which impact the projected debt service coverage could also place downward pressure on the rating.

RATING METHODOLOGY

The principal methodology used in this rating was US Public Finance Special Tax Methodology published in March 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

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Esra Akyol
Associate Analyst
Public Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Maria Matesanz
Senior Vice President
Public Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service downgrades the underlying rating on the Kentucky Economic Development Finance Authority's Louisville Arena Project Revenue Bonds to Ba2 from Baa3; Negative Outlook
No Related Data.

 

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