Nets Arena Wins Needed Bond Rating, Mostly [Updated]
Eliot Brown Dec. 1, 2009, 3:35 p.m.
In a major boost to the proposed new Nets arena for Brooklyn, credit ratings agency Moody’s gave the proposed financing for the project an investment-grade rating, a large hurdle that developer and team owner Bruce Ratner had been struggling to overcome in recent weeks.
Moody’s sent out a press release Tuesday afternoon announcing that it had assigned a rating of Baa3, the lowest notch above “junk” grade bonds, to $500 million in tax-free bonds for the arena.
This does not appear to be all of what Mr. Ratner had hoped. Last week, a state development agency said it expected $600 million in tax-free bonds, which itself was lower than executives had initially said they wanted (the arena’s costs have been estimated between $800 million and $900 million). The less there is in tax-free bonds used to finance the project, the more expensive it gets for the development firm, Forest City Ratner, which has been scrambling to cut costs on the project for over a year.
The next (and most important) step is to actually sell the bonds to investors in the next couple of weeks. The bonds must be sold and a set of other loose ends tied up before the end of the month in order to qualify for an Internal Revenue Service deadline on the tax-free debt.
In its report on the bonds, Moody’s laid out a number of notable risks with the project: the fact that the team is relocating to a new location, that the finances of the team are poor (more than $70 million in pre-tax losses a year, according to SEC filings made by Forest City), “uncertain demand for premium seating,” and uncertainties over sponsorships, other events and ticket sales. Sports facilities traditionally take in the bulk of their revenue from a small percentage of seats and luxury boxes, meaning that the ability to sign up corporations to fill the luxury seats will be integral to making the arena a financial success.
The deal’s structure, however, is considered to be generally secure, as far as private sports deals go. The owners must give Payments in Lieu of Taxes (PILOTs)-the city is making the arena exempt from property taxes, providing hundreds of millions in savings to the developer-which pay off the debt service.
Should the project actually go forward, it would be the fifth new professional sports arena or stadium to open since 2007 in the area, all with substantial public subsidy, as is common with sports facilities. This year the Yankees and Mets opened their new ballparks; the Giants and Jets have a new stadium set to open next year; and the Prudential Center opened in downtown Newark in 2007.
There are at least three other lawsuits outstanding that, if successful, would threaten the larger Atlantic Yards project, of which the Nets arena is a centerpiece. One of those, challenging the environmental review, was dismissed by the state’s top court today.
Update: 5:15 p.m.
Standard & Poor’s is out with their rating, which, like Moody’s, is the lowest investment grade rating: BBB-. This is the rating that Forest City’s underwriter, Goldman Sachs, had been shooting to hit, as the junk bond market would presumably be much more expensive.
The S&P analysis highlights similar positives (a strong structure given the PILOT payments; expectation of on-budget construction, as the contractor is apparently responsible for cost overruns; strong liquidity) and negatives (uncertain demand; potential overcapacity; and “potential reduction in the annual PILOT payments.”)