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Rating Action:

Moody's revises rating outlook to negative on Barclays Center's Baa3 PILOT Revenue Refunding Bonds; rating affirmed

05 Oct 2017

New York, October 05, 2017 -- Moody's Investors Service today changed to rating outlook to negative from stable on approximately $526.8 million PILOT Revenue Bonds, (Barclays Center Project) issued by the Brooklyn Area Local Development Corporation (PILOT Bonds), which serves as the conduit issuer. Concurrent with this action, Moody's affirmed the Baa3 rating on the PILOT Bonds.

RATING RATIONALE

The change in rating outlook to negative reflects weaker than expected financial performance for fiscal year (FY) ended June 30, 2017, owing to a drop in revenues and cash flow caused by the attendance and related ticket sales decline at the New York Islanders (the Islanders) home games held at the Barclays Center. The rating action factors in our belief that similar financial underperformance will continue for the next 12 to 18 months owing in large part to the contractual arrangements between the Islanders and the Barclays Center. Specifically, weak financial performance during FY 2017 was in large part driven by the Barclays Center's obligation to make fixed annual payments to the Islanders for an anchor tenant guarantee fee. These payment obligations, which are part of a 25-year license agreement, coupled with lower revenues stemming from attendance related underperformance for the Islanders has resulted in a net loss from Islanders' related business activities for the Barclays Center for the most recent FY, a financial performance that we anticipate continuing this season and next season unless there is a substantial improvement in attendance. As such, the Barclays Center's debt service coverage ratio (DSCR), as calculated by Moody's, declined to 1.31x during FY 2017 from 1.51x in FY 2016. In addition, the DSCR as calculated by Moody's for the current fiscal year ended June 30, 2018, is forecasted to decline even further to 1.07x. This differs from the calculation of forecasted DSCR by the arena's management of 1.35x for FY 2018 because they have bolstered liquidity by including excess cash flow that would otherwise have been distributed. In arriving at the 1.07x DSCR calculation for FY 2018, Moody's has excluded this excess cash and has reflected only cash flow from operations for that year. That said, our DSCR expectations for FY 2017 and FY 2018 were closer to 1.80x owing to anticipated stronger Islanders' related results and a completed refunding during calendar year 2016, which lowered annual debt service.

With the addition of the Islanders to the Barclays Center under the 25-year license agreement, our rating expectation for revenues and cash flow were expected to be more stable owing to benefits of having two professional teams -- the Brooklyn Nets and the Islanders -- as tenants and generating revenue from premium seating, sponsorships, rent and concessions. Moreover, the presence of two professional sports teams, from different leagues, was expected to help with the sale of corporate suites and the attraction of sponsors, and provide greater revenue certainty with the introduction of 44 known hockey sporting dates to the calendar in any given year. However, the attendance decline at the Islanders home games since moving from their former home, the Nassau Coliseum, starting with the first 2015-16 season and continuing in the 2016-17 season coupled with the Islanders ownership's inability to add to the existing fan base and build their brand in Brooklyn have impacted ticket sales, sponsorships, premium seating and concession revenues. Moreover, the Barclays Center's obligation to pay the Islanders an annual anchor tenant guarantee fee over a long-term lease has resulted in a net loss, which will reoccur in the absence of better attendance and a modification to the terms.

In that regard, the negative outlook considers the uncertainty associated with the arena's future revenues. While the license agreement between the Islanders and the Barclays Center has a 25 year term, we understand that pursuant to the terms of a side letter among the parties, both Barclays Center and the Islanders have the right, following conclusion of the 2016-2017 National Hockey League (NHL) season, to initiate good faith negotiations regarding modifications to the financial arrangements within the license agreement. If the parties are unable to reach an agreement on modifications to the license agreement, either party, through delivery of a notice no later than January 30, 2018 (an "Opt-Out Notice"), may elect to terminate the license agreement effective as of the conclusion of the fourth NHL season at the Barclays Center (i.e., conclusion of the 2018-2019 NHL season) or by April 2019. However, in the event of an Opt-Out Notice, the Islanders have the right to terminate early the license agreement effective as of the conclusion of the third (3rd) NHL season (i.e., conclusion of the 2017-2018 NHL season), which occurs in April 2018. We consider this option of early termination by the Islanders to be unlikely because it would mean that the Islanders would have to leave Barclays Center by April 2018. As such, in the absence of a change in the arrangement or in attendance, we expect financial performance for FY 2018 and FY 2019 to mirror FY 2017's financial performance.

We understand that negotiations between Barclays Center management and the Islanders have commenced to see if certain provisions of the deal could be modified. These negotiations are expected to continue until the end of the year. However, if these negotiations are not satisfactorily concluded, then Barclays Center could elect to terminate the agreement following the end of the 2018-19 season. We further understand that, if the agreement with the Islanders is terminated, the arena's management would plan to replace as many as possible of the 44 dates now dedicated to the Islanders with more profitable events, such as concerts and shows. While this incremental revenue and margin accretion would improve coverage ratios, in Moody's view, future revenues streams may be less predictable that the original expectations under the arrangement with the Islanders.

We do note the existence of strong liquidity in terms of restricted reserves that give the issuer some runway to work through modifications to the arrangements with the Islanders. We also recognize the benefits to bondholders of having a financial strong sponsor who has provided long-term financial support to the Brooklyn Nets operations.

OUTLOOK

The negative outlook reflects the belief that the DSCR will remain lower than anticipated over the next few years and considers the uncertainty around the components of the Barclays Center's revenue expectations in this timeframe. Current near and medium term coverage ratio forecasts fall short of original expectations from the time of the refunding last year. The negative outlook also reflects the uncertainty regarding the long-term standing of the Islanders at the arena and whether/if they could be replaced with other revenue generating events.

WHAT COULD MAKE THE RATING GO UP

Given the negative outlook, it is unlikely that the rating would go up in the near term. The outlook could be revised back to stable if Barclays Center were to negotiate revised terms with the Islanders such that financial performance could return to original expectations with DSCRs of at least 1.80x on a sustainable basis. If the Islanders were instead to be replaced with other events, the outlook could also move to stable, but the cash flow and margin contribution from these events would need to be higher than contemplated under the Islanders arrangement and result in higher DSCRs -- i.e., in the 2.0x range or higher -- on a sustained basis owing to the less predictable nature of these cash flows and a higher reliance on demand risk.

WHAT COULD MAKE THE RATING GO DOWN

The rating could be downgraded if the Barclays Center were to lose the Islanders as a tenant, and they are not replaced with other events, thereby negatively affecting premium seating, sponsorships or other forms of revenue, resulting in weaker DSCRs that originally anticipated. The rating could also come under pressure even if the Islanders agree to stay under revised terms, if the new terms of that agreement do not result in favorable economics to Barclays Center, and DSCRs do not return to at least 1.8x on a sustained basis. Depending on the outcome of the negotiations with the Islanders, whether the agreement is revised or the Islanders are replaced with other events, if the DSCRs are forecasted to be consistently below 1.45x, then this could result in negative rating action, and depending on the anticipated financial metrics and the nature of the revenue stream, the possibility of multi-notch rating change does exist. This is particularly the case if the Barclays Center run rate financial performance will approximate its FY 2017 results on a sustained basis.

OBLIGOR PROFILE

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 Empire State Development Corporation (ESDC) owns the Arena and land, which it leases to the Brooklyn Arena Local Development Corporation (BALDCo), the conduit issuer of the PILOT bonds. BALDCo subleases the Arena to ArenaCo, and ArenaCo is obligated to make Payments in Lieu of Taxes (PILOTs) to the ultimate owner, the ESDC, which has agreed to remit the PILOT payments to the PILOT Trustee that directs the payments to bondholders via the PILOT Bond Trustee.

The Barclays Center (the Arena) is a venue for sports and entertainment events serving as the home court for the NBA's Brooklyn Nets and the home ice for the NHL's New York Islanders. The Arena opened in September 2012 and has a capacity of approximately 17,732 spectators for basketball games and 15,795 for hockey games.

The principal methodology used in this rating was Generic Project Finance Methodology published in December 2010. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Richard E. Donner
VP - Senior Credit Officer
Project Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

A.J. Sabatelle
Associate Managing Director
Project Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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