Fitch Affirms LA Arena Funding (Staples Center) at 'BBB+'; Outlook Revised to Stable

NEW YORK--(BUSINESS WIRE)--

Fitch Ratings has affirmed its 'BBB+' rating on LA Arena Funding LLC's (Staples Center or the arena) approximately $201 million outstanding revenue-backed notes.

The Rating Outlook has been revised to Stable from Negative Watch.

A new 10-year collective bargaining agreement (CBA), with options by both sides to opt out after six years, between the National Basketball Association (NBA) and the National Basketball Players Association (NBPA) has been ratified, and the season began on Dec. 25. Each team will play 66 regular season games (normally 82 regular season games), and the NBA All-star, Playoffs, and Finals met or are currently expected to meet their usual schedules.

On Oct. 6, 2011, Fitch placed the NBA's leaguewide borrowing facilities and the arenas with an NBA anchor tenant on Rating Watch Negative when the league announced the cancellation of the first two weeks of regular season games. Fitch revised the Negative Watch to a Stable Outlook on Dec. 12, upon the successful ratification of the new agreement, and similarly has elected to place L.A. Arena Funding's notes back to a Stable Outlook. For more information related to the new CBA as well as aggregate attendance and TV viewership at the league level, please see Fitch report '2012 Outlook: U.S. Professional Sports -- Labor Peace and Revenue Stability Drive Sports Forward in 2012', dated Dec. 16, 2011.

KEY RATING DRIVERS

--Strong Underlying League Economics: The NBA and the NHL have strong historical fan and sponsorship support demonstrated by solid attendance and viewership levels despite labor disputes.

--Three Major Anchor Tenants and Experienced Operator in Strong MSA: The notes benefit from long-term leases with three anchor tenants, the NBA's Lakers and Clippers and the NHL's Kings. All tenants have been successfully operating since the arena opened, and the Los Angeles metropolitan statistical area (MSA) surrounding the arena is marked by strong wealth levels and demographics. Anschutz Entertainment Group (AEG) has a vast breadth of knowledge and experience operating sports and entertainment venues throughout the United States and abroad.

--Demonstrated Stability of Collateral: The collateral is inherently subject to revenue contract renewal risk and the sports and entertainment sector's vulnerability to economic downturns and dependence on discretionary spending, as with any other facility of this type. Management has demonstrated a robust operating history and success with suite, premier seat, and advertising and sponsorship renewals despite team performance and economic conditions.

--Solid Financial Metrics and Adequate Debt Structure: Leverage levels and Fitch rating case coverage levels relative to peers adequately support the BBB+ rating. Though legal maturity of the notes occurs in 2026, two years after both the Lakers' and Kings' leases at the Staples Center expire, LA Arena Funding plans to amortize the debt to a scheduled maturity of 2021. Moreover, the Staples Center's status as one of the premier sports and entertainment venues in the US as well as management's demonstrated annual reinvestment in the facility ensures the arena's viability and attractiveness to tenants well beyond the lease terms.

WHAT COULD TRIGGER A RATING ACTION

--Failure of the NHL to renew the collective bargaining agreement and/or the cancellation/postponement of regular season games.

--Suite, other premium seating and advertising renewals different from both historical levels and projected levels to the extent that debt service coverage ratios are incommensurate with a BBB+ rating.

--The entrance of another major sports franchise within the MSA that could potentially impact current high demand for luxury seating and corporate sponsorship, though Fitch notes that large portions of principal amortize within the next few years.

SECURITY

The notes are secured by a bankruptcy-remote securitization of 101 luxury suites, on-site advertising agreements with the arena's 11 founding partners, the naming rights agreement with Staples Inc., annual contracts on 1,425 premier seats, and the minimum guarantee portion of the concession agreement with Levy Restaurants. Fitch does not view the bankruptcy remote nature of the pledged revenues as a credit positive given its continued exposure to the arena's business risks.

CREDIT UPDATE

Similar to concerns expressed by Fitch before the NBA lockout, the pending renegotiation of the current NHL CBA is seen as a potential risk in this transaction. Absent an agreement prior to the end of the 2011 - 2012 season, the Kings may experience less interest by fans and a decreased willingness to pay, occurrences which may have an adverse effect on LA Arena Funding's revenue sources. Nevertheless, the structure of the majority of existing luxury suite and premier seat leases allows the Staples Center to meet an annual 150 event requirement if a lockout or a reduction in games occurs. Moreover, the majority of any refund resulting from a lockout would be payable by the arena's sports tenants.

Fitch also notes that despite the NBA lockout and approximately 20 missed NBA events at the Staples Center, arena management budgets approximately 220 events before the end of this fiscal year, well above the 150-event threshold. Thus, no revenue contracts will be required credits, and, currently, aggregate contractually obligated revenues required to be paid before the next principal payment provide 1.6 times (x) principal and interest. Using this year as a base and accounting for the NBA events that will occur next season, the Staples Center would still host nearly 200 events next year even in the event of a full-season NHL lockout.

Outside the league level, Fitch views positively the strong revenue profile of LA Arena Funding, most of which is contractually obligated and has limited exposure to variability in attendance levels. Fitch does note however that attendance at NBA and NHL events at the Staples Center since 2001 has remained very stable, averaging approximately 95% and 87% of capacity, respectively. Furthermore, ownership's breadth of knowledge and experience operating sports and entertainment venues is seen as a credit positive.

Similar to gross coverage of the notes, on a consolidated basis, LA Arena Funding is projecting earnings before interest, taxes, depreciation and amortization (EBITDA) which would provide 1.65x coverage of fiscal 2012 principal and interest payments. In terms of gross revenue, LA Arena Funding earned more in fiscal 2011 on a consolidated basis than any other year previously, and consolidated coverage of debt service equalled 1.9x, approaching pre-recession levels and compared to 1.6x the year before and 1.7x budgeted. Previous declines in consolidated coverage levels were the result of reductions in non-pledged revenue sources and increases in operating and maintenance expenses.

In its base scenario, Fitch assumes that revenues increase moderately as the Staples Center exhibits solid pricing power and demand remains stable. Under this scenario, Fitch estimates the current debt service coverage ratio of 1.6x based on pledged revenues will remain constant despite an increasing targeted debt service profile. Fitch ran a stress scenario that contemplated reduced revenue contract renewal levels as a result of sustained reduced demand and decreased pricing power for six consecutive years, a scenario which Fitch views as unlikely considering the robust operating history but which nevertheless demonstrates the resilience of the pledged revenue streams. Coverage under this scenario never falls below 1.24x and averages 1.93x through scheduled maturity.

The Staples Center is owned and operated by the LA Arena Company and Anschutz Entertainment Group. The arena seats up to 20,000 for concerts, 19,997 for basketball games, and 18,118 for hockey games. Staples Center opened in October 1999 at a construction cost of $375 million. The NBA's Lakers and NHL's Kings have leases to play all home games at the arena through 2024. The NBA's Clippers have a lease to play all home games through 2014.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Rating Criteria for Infrastructure and Project Finance' (Aug. 16, 2011);

--'Rating Criteria for U.S. Sports Facilities' (Aug. 15, 2011).

Applicable Criteria and Related Research:

Rating Criteria for Infrastructure and Project Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648832

Rating Criteria for U.S. Sports Facilities

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648556

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