Arena chair: KFC Yum! Center financial outlook glows, UofL helping

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by Joe Arnold

WHAS11.com

Posted on May 13, 2013 at 5:27 PM

Updated Monday, May 13 at 9:55 PM

LOUISVILLE, Ky (WHAS11) -- The "phenomenal" performance of the KFC Yum! Center's operations since it was taken over by a new operator should help convince a bond ratings service to upgrade the Louisville Arena Authority's bonds out of "junk" status, the authority's chairman said on Monday.

"I think we have significantly improved on the operations side," said Larry Hayes.  "In my initial discussions with Moody's (Investor Services), I think they are very pleased at the fact that We're going to show a pretty amazing operating profit this year, I think."

Moody's downgraded arena bonds to "junk" status last May citing several factors, including tax increment financing revenues falling far short of projections, generating roughly one-third of forecast revenue in the six square mile arena TIF district.  The TIF is intended to be the primary source of the arena's debt service.

The ratings upgrade would allow the authority to refinance its $349 million in construction debt under better terms, Hayes said.

"I think we'll kind of reshuffle the deck if you will, and a percent on debt of that size is significant in terms of the payment," Hayes said.  "That's our goal is to build a cash flow model and a plan of finance model in a go forward way."

Originally operated by the Kentucky State Fair Board, the arena has been operated by AEG since July, 2012 as part of a plan to trim expenses and return a guaranteed profit of $1.5 million in annual revenue for ten years.

At the Arena Authority meeting on Monday, the board agreed to a $1.5 million buyout of the fair board's contract, which was originally scheduled to run until 2017.

Metro Council President Jim King, a non-voting authority member, said the money would be paid to the fair board over a "long term."

After having to unexpectedly increase the city's contribution to debt service in this fiscal year, Mayor Greg Fischer's 2013-14 budget includes a $9.8 million contribution as TIF revenues are again expected to not meet original projections.

King pointed out that the city is still $10 million ahead of where it could be in total disbursements to the arena authority, because for the first few years of the financing, Louisville paid only the minimum contribution of $6.5 million.

The authority also plans to examine all of its contractual agreements at the arena, including with its primary tenant, the University of Louisville, to properly value and perhaps extend each agreement.

"When those agreements were done, nobody knew how successful we could really be on the operations side," Hayes said.  "The focus then was to get the number that could build this building.  Now, the focus is to be able to - we can see what this community wants and we can see how well we can operate this facility - now we need to take a step back and look at those kinds of agreements."

Saying the University of Louisville has "clearly good negotiators," Hayes said "we're having discussions about how they can be better partners and about how we can be better partners with them."

Under its lease agreement, the University of Louisville controls the KFC Yum! Center's scheduling, branding and virtually every revenue stream.

"They are very good business people. We need to be very good business people," Hayes said.

"Some of the contracts are open to interpretations," Hayes said and (the University of Louisville has) been very helpful in interpreting some things in a very favorable way for us."

U of L recently went out of its way to accommodate the scheduling of a March, 2014 concert by country artist George Strait on a Friday night during the men's basketball season, said Dennis Petrullo, the arena's general manager.

At its Monday meeting, the arena authority revealed other discussions with the university that would result in the arena receiving a larger share, about $250,000 per year, in signage revenues.  The authority is also considering the addition of a video board - which could include advertising - on the arena's west facade, visible to I-64 eastbound drivers through downtown.

Given the authority's experience of the facility's first three years, Hayes was asked whether the arena's current financing scheme is sustainable.

"We're probably exceeding all the numbers except for the TIF arrangement right now.  You know the whole world changed, instead of having double-digit growth over a ten year period," Hayes replied.

"The history has changed.  You had a year 2008-2009, when you were down 13 percent.  And you have some nexus issues with a large taxpayer that didn't leave the community but left the TIF area," Hayes continued.  "So, it's kind of right-sized itself."

"There is no problem with making payments as we move forward," Hayes said, "We don't have a problem, but I would hesitate to take this crystal ball and look at what the international economy is going to be in the future, and therefore the performance on that TIF."
 

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