SBJ/February 22 - 28, 1999/No Topic Name

Rating agency backs private arena bonds

In one of the most comprehensive looks at sports finance to date, Fitch IBCA plans to issue a report later this month that strongly urges investors to be more accepting of private bonds that fund stadiums and arenas.

The report could make it easier for teams to persuade debt investors to accept lower interest rates for private sports bonds.

In the past, bond investors were reluctant to buy private sports debt without a premium rate. This caused teams to pay more in interest rates for debt than they otherwise might have paid, and it caused great problems for the NFL's ultimately unsuccessful effort last year to market its bond offering to investors.

But the myriad new revenues such as naming rights and sponsorships now generated by facilities have added a new level of security to arena and stadium bonds that previously did not exist.

"The sports-finance area has become much more sophisticated," said Daniel Champeau, an author of the report for Fitch, a rating agency that grades bonds. "It is possible to achieve an investment-grade rating for sports-facility debt ...and that is moderately groundbreaking."

Investment-grade debt pays lower interest rates than debt that is not backed by solid collateral. Historically, sports debt was rated just shy of junk-bond status, the lowest investment rating.

The report, which is now in draft form, also outlines the benefits of funding new arenas and stadiums with asset-backed securitizations. This technique, which finances construction by selling bonds backed by specific revenues like naming rights and sponsorships, has been used once: for the Pepsi Center. It has attracted criticism as being untested and costly.

Fitch, which rated the Pepsi Center deal, defended asset-backed securitizations as a valid stadium funding tool.

The report comes as several asset-backed securitization deals are percolating in the market. A $300 million deal to refinance the Staples Center's bank loan with an asset-backed securitization is expected to close in the next few weeks, a source said. In this deal, the Staples Center would sell asset-backed securitization bonds and use the proceeds to pay off the loan with BankAmerica Corp.

A similar deal is being talked about for the Air Canada Center, which was scheduled to open for play Saturday, as well as for the MCI Center in Washington, D.C.

The Fitch report takes investors step by step through the problems raised by asset-backed securitization bonds and offers its own solutions. For example, the recent NBA lockout highlighted the danger of revenue that backs these bonds drying up.

There are many ways, however, to mitigate this risk for investors, the report explained, including a reserve fund and structuring sponsorship and broadcast contracts so that fees are paid even in the event of a work stoppage.

But in the event of a longer-term lockout or strike, Fitch warned, even these measures are only short-term salves.

"The credit implications of work stoppages for transactions that are supported solely by facility-related revenues are not as clear," the rating agency concluded.

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