New York, December 01, 2009 -- Moody's Investors Service has assigned a rating of Baa3 to the proposed
issuance of $500 million of PILOT Revenue Bonds, Series 2009
(Barclays Center Project) by the Brooklyn Arena Local Development Corporation.
The funds will be used to help finance the construction of the Barclays
Center, an 18,000 seat capacity Arena to be built in Brooklyn,
NY, which will be the home facility of the New Jersey Nets and will
be used as a venue for other entertainment and sporting events.
The outlook is stable.
The Brooklyn Events Center, LLC (ArenaCo) is a special purpose entity
created to manage the construction, operations and maintenance of
the Barclays Center (the Arena). The Brooklyn Arena Local Development
Corporation (BALDCo) will lease the Arena from the Empire State Development
Corporation (ESDC), which will be the fee owner of the Arena premises
and the Arena. ArenaCo will sublease the Arena facility from BALDCo.
ArenaCo will be obligated to make Payments in Lieu of Taxes (PILOTs) to
BALDCo, which has agreed to remit the PILOT payments to the PILOT
Trustee. The PILOT Trustee, which owes a fiduciary duty to
collect PILOTs in full, will direct payments to bondholders via
the PILOT Bond Trustee.
The rating reflects the security afforded by the PILOT bond structure,
the strength of New York City as a media market, the non-relocation
agreement, the Operating Support Agreement, the significant
amount of existing contracted sponsorship support, the large equity
component of the financing structure and the solid coverages that support
debt service. The rating also considers the challenges presented
by the relocation and the current weak financial condition of the Nets,
construction risks (although the potential for cost overruns and delays
have been largely mitigated by the Guaranteed Maximum Price, contingencies
and schedule LDs built into the Design Build Contract) and the uncertain
demand forecasts for premium seating, sponsorships, ticket
sales and other sources of revenue for a new sports and entertainment
venue of this kind.
The obligation to pay PILOTs is a contractual obligation of ArenaCo,
and PILOTs do not reach bondholders through a traditional project finance
structure. Rather, the obligation to pay PILOTs is secured
by the contractual obligation to pay as well as the requirement that the
PILOT Trustee, which controls the PILOT mortgage, foreclose
on the Arena in the event of non-payment of PILOTs. In such
a scenario, the current owners of ArenaCo (who are also owners of
the Nets, the anchor tenant) would be dispossessed of the Arena.
The sources of revenues that will satisfy the obligation to pay PILOTs
will be primarily earned from premium seating licenses and sales,
sponsorship agreements, the naming rights agreement, Nets
license fees, concession revenues, ticket revenue from non-basketball
events, and green building and other ticketing fees. As an
entertainment venue that distributes media content, the Arena's
location in New York City, which is a major media market,
is a credit strength. There is a population of approximately 8
million people in the New York City metropolitan area, which equates
to 2 million per major league franchise, counting the NY Yankees,
the NY Mets, the NY Knicks and the Nets. The strength of
the media market is projected to result in demand for Nets basketball
games and for other entertainment events, which in turn would drive
the all important premium seating and sponsorship revenues. The
financing structure also benefits from a 12-month cash funded debt
service reserve and a 6-month strike reserve.
The rating also reflects the presence of a professional basketball team
as the anchor tenant, which is a central factor to the successful
sale of corporate suites and the attraction of sponsors. Corporations
can entertain at professional sports events, and corporate sponsors
are interested in not only the local exposure, but are also interested
in the national exposure realized from appearing on national television
during basketball games. Thus, Moody's believes the
Arena will benefit from having the Nets as the anchor tenant in order
to achieve the projected levels of revenue from premium seating and sponsorships.
While there is some execution risk in the relocation of the Nets from
the current arena in New Jersey to the Barclays Center, in Moody's
view the transformation and long-term commitment of the Nets to
the new Arena should be achievable. There are three main elements,
one fundamental and two structural, that work together to keep the
Nets in the Arena through the term of the debt. First, the
strength of the New York City media market provides strong economic incentives
to both the Nets and ArenaCo to support the success of the project.
The Nets are more likely to enter into a more profitable local television
distribution deal in NYC than elsewhere. Therefore, there
is little economic incentive for the team to relocate. Second,
the Nets, along with the City of New York, BALDCo and ESDC
have entered into a non-relocation agreement, the term of
which matches the term of the debt. Third, as a protection
against insolvency at the Nets, Mikhail Prohkorov will enter into
an Operating Support Agreement with the NBA, whereby he will agree
to be the primary obligor for operating expenses, including debt
service, at New Jersey Basketball, the owner of the Nets franchise.
Moody's believes that the three elements protect against the relocation
of the franchise to a different geographic location for the term of the
The financing structure of the Barclays Center Project has a substantial
equity component of approximately $424.4 million (40%)
of the approximate $1.06 billion in total funding sources.
The funds are being contributed to the Barclays Center Project by New
York City ($131 million) and the sponsors/developers, Forest
City Enterprises Inc. and affiliates as well as Mikhail Prokhorov
($293.4 million), in the form of additional rent.
The $131 million from New York City demonstrates strong municipal
government support for this project.
In addition, the rating reflects solid cashflow coverages that support
debt service. Under the base case, the project produces 10-year
average debt service coverage ratios of 2.85x on the senior (PILOT)
debt and 1.91x on a consolidated basis (senior plus subordinated
debt). The coverages remain strong even under various downside
ArenaCo has already entered into sponsorship arrangements that will lead
to considerable contracted revenue generation for the initial years of
operation. The highest profile deal is the naming rights agreement
with Barclays Capital that will generate substantial annual revenues for
ArenaCo. Considering only the contracted revenue to date,
the PILOT debt service coverage in the first full year of operations would
be approximately 0.95x, and consolidated coverage would be
0.63x. Moody's notes that this level of contracted
revenue has been achieved even before groundbreaking, and we expect
that more sponsors will sign up once construction has commenced.
Contracted revenue is defined as revenue generated from suites sales that
have been executed or are currently in contract, sponsorships that
have either been executed or are in contract negotiations, and minimum
guaranteed annual rent paid by the Nets to ArenaCo.
It is anticipated that approximately $146 million of subordinated
bonds will be issued by the parent entity Brooklyn Arena Holding Company
LLC (HoldCo) to ArenaCo. The subordinated bonds are being issued
by a separate legal entity and paid solely out of distributions made by
ArenaCo to HoldCo. The HoldCo debt does not cross default to the
PILOT bonds, has no acceleration rights and has limited remedies
that do not interfere with the operations of ArenaCo.
The stable outlook is based upon the expectation that the Arena will be
completed on time and within budget and the expectation that the ArenaCo
will achieve projected revenues.
For further information on the transaction, a detailed Pre-Sale
Report will be available on Moody's website in the near future.
The ratings are predicated upon final documentation in accordance with
Moody's current understanding of the transaction and final debt sizing
consistent with initially projected credit metrics.
Brooklyn Events Center's ratings were assigned by evaluating factors
we believe are relevant to the credit profile of the issuer, such
as i) the business risk and competitive position of the company versus
others within its industry, ii) the capital structure and financial
risk of the company, iii) the projected performance of the company
over the near to intermediate term, and iv) management's track
record and tolerance for risk. These attributes were compared against
other issuers both within and outside of Brooklyn Events Center's
core industry, and Brooklyn Events Center's ratings are believed
to be comparable to those of other issuers of similar credit risk.
Brooklyn Events Center, LLC (ArenaCo) is a special purpose entity
created to construct, lease, operate and maintain the new
Arena and related parking facilities. The revenues of ArenaCo will
be primarily derived from the premium seating licenses and sales,
sponsorship agreements, the naming rights agreement, concessions,
Nets license fees, ticket revenue from non-basketball events,
and green building fees.
Richard E. Donner
VP - Senior Credit Officer
Infrastructure Finance Group
Moody's Investors Service
Moody's assigns Baa3 to Barclays Center Project Bonds
Chee Mee Hu
Infrastructure Finance Group
Moody's Investors Service