SUNDAY EDITION | Latest University of Louisville turmoil muddles KFC Yum! Center debt plan
The new scandal has prompted the arena’s financial consultants to start preparing for a worst-case scenario: An NCAA “death penalty” that could wipe out full seasons of play, or roughly 20 U of L home games at the downtown Yum! Center.
LOUISVILLE, Ky. (WDRB) -- After months of negotiations and political wrangling, the Louisville Arena Authority seemed to have conquered the main obstacles on its way to reorganizing the KFC Yum! Center’s construction debt.
Then came September 26.
The arena’s main tenant – the University of Louisville men’s basketball program – was swept up in a federal bribery probe made public that day. A criminal complaint claimed U of L coaches were involved in a scheme to funnel at least $100,000 to recruits from a company known to be Adidas, the university’s official apparel provider.
Two days later, arena officials traveled to Frankfort to seek final state approval from the Kentucky Economic Development Finance Authority, the agency that would re-issue up to $450 million in bonds for the project.
Faced with rising bond payments in the years ahead, the arena board has worked for much of 2017 to craft new agreements with state and local governments, and with U of L, to allow it to refinance its debt. Under preliminary estimates, that plan would reduce annual payments over the next decade -- including $10 million less in some years.
But now, with less than two months before it hopes to finalize the deal, the arena authority has started preparing for a worst-case scenario: An NCAA “death penalty” that could wipe out full seasons of play, or roughly 20 U of L home games at the downtown Yum! Center.
“What we have done to address it is really just try to recalculate our numbers based on no money coming from them, less money, reduced ticket sales,” the arena authority’s chairman, Scott C. Cox, told the state board. “… People are using terms like death penalty and things like that.”
The NCAA has not given an athletic program its toughest sanctions since Southern Methodist University’s football program was forced to cancel the entire 1987 season and play no home games in 1988.
SMU was on probation for rules violations when new transgressions were found; national pundits noted that U of L is on probation for a scandal involving sex-themed parties for recruits arranged by a self-described madam.
But Cox acknowledged that U of L’s involvement in the FBI investigation has made him unsure about getting a prized “investment grade” rating on the new bonds that is key to reaping big savings.
Landing that designation from Wall Street analysts is important, Cox said, because it would let the arena authority save tens of millions of dollars in interest costs, “which means taxpayers will save a lot of money over the life of the bonds.”
Asked whether he believes such a rating is still possible, he said: “I’m not going to predict that. I would have told you last week that we would, and I would have felt very confident about it.”
Even so, Cox told the state bond panel that current interest rates still make it worth moving forward with the refinancing.
U of L agreed this summer to pay the arena authority an additional $2.42 million toward the Yum! Center’s debt each year, an amount Cox has said the school must pay regardless of any new NCAA sanctions that may be imposed.
The university also gives back to the arena money from a revenue-sharing deal that has provided more than $1.3 million in recent years. For instance, the university markets and sells the arena’s luxury suites and keeps 88 percent of the revenue, sending the rest to the arena authority.
But, even though Cox believes a “death penalty” for U of L is unlikely, he said arena officials are taking steps to show Wall Street credit rating agencies how they might overcome less revenue, including possibly changing current agreements with vendors to free up more money in the coming years.
The elected officials who appoint the nonprofit arena authority – Kentucky Gov. Matt Bevin and Louisville Mayor Greg Fischer – still support the arena’s planned refinancing, according to their offices.
Meanwhile, the uncertainty about the future of U of L basketball has prompted concerns beyond the Yum! Center.
It became part of the debate last week at Louisville’s Metro Council, which is weighing whether to borrow $30 million for a soccer stadium and mixed-use project in Butchertown. The Pegasus Institute think tank asked city officials why they are confident that “the city’s fiscal condition is strong enough to subsidize this project before this (U of L) situation is resolved?”
Speaking to a council committee last Thursday, Fischer general counsel Jeff Mosley said any effects on U of L won’t be known for some time.
“We believe that the management at the arena authority and its financial team can structure the debt and manage its schedule to address any short term revenue issues due to U of L’s potential situation,” he said.
Plans for the Yum! Center, unveiled in the mid-2000s, spurred a wave of new development in the area near Second and Main streets. A new Omni hotel and revamped Kentucky International Convention Center are expected to open next year, while work continues on the redeveloped Whiskey Row block just east of the Yum! Center.
It’s too early to start worrying about how dramatic changes to U of L men’s basketball at the Yum! Center might affect downtown businesses, said Rebecca Matheny, executive director of the Louisville Downtown Partnership. She called such speculation “wildly premature.”
“I have total faith in downtown and I also have huge faith in (arena manager) AEG in their handling of that facility,” she said.
At Bearno’s By the Bridge, across Second Street from the Yum! Center, owner George Timmering said he’s “very concerned” about how the scandal may affect the arena’s main tenant. About 400,000 people attend men’s basketball games each season.
Those games, he said, account for about 5 to 7 percent of the pizzeria’s business.
“I hate to hear the word ‘death penalty,’” he said. “But if something like that were to occur, it seems like it’s going to happen down the road. … I guess the positive thing is we’ll have a convention center that’ll be open down there to soften the blow.”