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LOUISVILLE, Ky. (WDRB) – Arena officials defended the KFC Yum! Center's financing plan on Monday, saying the project has enough money to make bond payments despite a second Wall Street downgrade in as many months.
Credit rating agency Standard & Poor's lowered its opinion of $339 million in outstanding arena debt last month because its analysts believe the Louisville Arena Authority will have less revenue than previously thought to cover the payments.
"There is no question that we're perfectly set up for making debt service and things along that line," said Alex Rorke, senior managing director of municipal securities for Hilliard Lyons, the arena authority's financial adviser. "The rating agencies have not questioned the ability to make debt service."
The S&P action followed a similar downgrade by Moody's Investors Service in November and has re-ignited a debate about the arena's financing – a plan that relies on multiple revenue sources, including a tax-increment financing district that was falling well below projections before arena officials voted to shrink it last September.
The new two-square-mile district will capture a portion of any annual increase in sales and property tax revenue that otherwise would go to government coffers and return it to the arena authority, which must use the money for debt. The original TIF was six square miles – the largest allowed under Kentucky law.
Arena authority officials expect the new district to produce enough revenue to meet debt payments in the near future, although they have not shared any long-term TIF estimates. The TIF provided $5.7 million for arena debt in 2013, up from $3.5 million in 2012, but still millions of dollars below the nearly $10 million predicted when the construction bonds were sold in 2008.
"We wanted the district to be more relevant to the performance of the arena," Metro Council President Jim King, D-10th District, told reporters after Monday's arena authority meeting.
King, an authority member, said he believed that activities farther away from the Yum! Center were "dragging the TIF performance down."
State officials haven't formally ratified the new TIF even though the arena authority has begun receiving payments based on the smaller district. Rorke said he expects to have "all the documents and agreements in place within the next week or so."
S&P and Moody's now consider the arena bonds to be below investment grade, or "junk." Both rating agencies have given the bonds a "stable" outlook.
Rorke said the downgrades have no "practical impact."
But the rating agencies' actions have attracted the notice of some elected officials in Louisville and Frankfort who remain concerned about the arena's finances.
Shortly after S&P's decision, Louisville Metro Council member Dan Johnson called for a review of the arena's lease agreement with the University of Louisville, whose men's and women's basketball teams are the building's main tenants.
"This report is disturbing and gives the impression that the arena could default because it may be unable to pay bond debt. Now is the time to review all aspects of the arena's operation, including the lease with the University of Louisville," Johnson said in a statement.
Johnson, D-21st District, is a longtime proponent of bringing a National Basketball Association franchise to Louisville and raised concerns about the arena's lease with U of L as far back as 2007 because he believed the deal might shut out a professional team.
While the arena financing has struggled because of lower-than-expected TIF revenue, U of L has seen its basketball revenue climb since moving to the Yum! Center in 2010 after decades of playing at Freedom Hall at the Kentucky Exposition Center.
U of L's basketball revenues have jumped by millions of dollars a year – to an estimated $24.3 million in 2013-14 -- due in part to an agreement that allows, for example, U of L to sell and keep proceeds from 88 percent of the suites at the arena.
Moody's analysts wrote in their report announcing the November downgrade that the arena authority's revenue-sharing agreement with U of L "limits the authority's profit upside."
The analysts noted that the arena authority receives only 10 percent from men's basketball ticket sales. And an October agreement between the authority and U of L that will provide more signage revenue for arena debt is not a long-term solution, according to the Moody's report.
"Given the ascending debt-service payments, (the arena authority) could face financial distress in the coming years unless there is organic growth, another adjustment to TIF, or a restructuring in the revenue-sharing agreements," the analysts wrote.
But Louisville Metro Council member Kelly Downard, who serves on the arena authority's finance committee, said it would be premature to change the U of L deal now.
"If the worst came to worst there would be a time for that," said Downard, R-16th District. "But I don't think we're there yet."
Downard said whether the lease is overly favorable to U of L is in the "eyes of the beholder. We've got an anchor tenant that's stable and will be there forever. That's worth something."
Downard said he was disappointed in S&P's downgrade but believes arena critics should give the new TIF time to work.
"The TIF's got to catch up. I think there's no question," he said.
The arena bonds were issued by the Kentucky Economic Development Finance Authority, and some members of the Kentucky legislature's capital projects and bond oversight committee have concerns about whether the TIF can be changed.
Rep. Chris McDaniel, R-Taylor Mill, said he and Rep. Jim Wayne, D-Louisville, met with the committee's staff to find out whether the arena authority followed the law and its bond agreements in altering the TIF.
McDaniel also said more research needs to be done to determine if the authority can avoid making payments to compensate the Kentucky State Fair Board for business lost when U of L stopped playing at Freedom Hall.
Wayne said the issues haven't yet been taken up by the full committee, which meets next week. The committee chairmen, Sen. Chris Girdler, R-Somerset, and Rep. Kevin Sinnette, D-Ashland, did not respond to requests for comment.
Meanwhile, Kentucky state auditor Adam Edelen, a Democrat, said he has spoken with critics and advocates of the arena's financing, including Wayne and Louisville Mayor Greg Fischer. Edelen said he is "deeply concerned" about the lagging performance of the project's financing plan, but he isn't sure whether an audit fits with his office's mission.
"An audit doesn't change the math," Edelen said in an interview.
"What I have to calculate as the taxpayer watchdog is what meaningful contribution would an audit make to that process?" he said.
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