NEW YORK - Moody’s Investors Service rated the bonds for New York City’s controversial Atlantic Yards basketball arena at a notch above junk, according to a rating report released today. Moody’s assigned its Baa3 rating with stable outlook to the Brooklyn Arena Local Development Corp.’s offering of $500 million of bonds.
The issuer plans to sell the bonds, which are backed by payments in lieu of taxes, to partially finance the construction of the Barclays Center, a $1.06 billion, 18,000-seat complex that will be the future home of the New Jersey Nets National Basketball Association franchise.
The Moody’s report cited as credit positives the security of the PILOT bond structure, the strength of New York City as a media market, the non-relocation agreement with the Nets, an operating support agreement with Russian billionaire Mikhail Prokhorov, sponsorship agreements, and an equity structure that has $424.4 million invested in the arena.
Credit challenges include the weak financial position of the Nets, construction risks, and uncertain demand for the venue and sponsorships.
Under the operating support agreement, Prokhorov will enter into an agreement with the NBA that makes him the primary obligor for operating expenses, including debt service of the Nets, according to the report. A source familiar with the deal said that the agreement does not pertain to debt service on the bonds. Prokhorov is expected to be a majority owner of the basketball franchise.
The underwriter, Goldman, Sachs & Co., has been in talks with Assured Guaranty Ltd. about insuring the deal.
The arena and the property under the arena will be owned by a New York State entity and leased to ArenaCo, a subsidiary of developer Forest City Ratner Cos. ArenaCo will make payments in lieu of taxes to the issuer.
The project has been mired in controversy over its use of eminent domain to seize private homes and businesses on behalf of the developer, which has included the arena as a key component of a larger $4.9 billion development mostly consisting of high-rise apartment towers. The project faces several lawsuits from opponents, but in the most important case, the New York Court of Appeals, the state’s highest court, ruled last month that the state had the right to seize the property.
Along with the PILOT bonds, approximately $146 million of subordinate corporate bonds are expected to be issued by the parent company of ArenaCo., according to the Moody’s report.
Last week the issuer, which is a subsidiary of the Empire State Development Corp., approved the issuance of up to $825 million of bonds for the arena.
The Brooklyn Arena Local Development Corp. has to sell the PILOT bonds by the end of the year because of changes to Internal Revenue Service rules.
