TEXT-S&P raises Yankee Stadium bonds to 'BBB'
Overview -- The financial performance of U.S. baseball park operator Yankee Stadium LLC and its owner, Yankee Stadium Holdings LLC, is strong and predictable as the former moves toward stabilized operations. -- We are raising the rating to 'BBB' from 'BBB-' on Yankee Stadium and Yankee Stadium Holdings. -- We are revising the outlook to stable from positive. Rating Action On July 31, 2012, Standard & Poor's Ratings Services raised its long-term rating and, where applicable, its underlying rating (SPUR) to 'BBB' from 'BBB-' on the New York City Industrial Development Agency's (NYCIDA) $942.6 million series 2006 payments-in-lieu-of-taxes (PILOT) bonds, $259.0 million series 2009A PILOT bonds, $25.0 million rental bonds series 2006, and $111.9 million series 2009 rental bonds issued for Yankee Stadium LLC (StadCo). At the same time, we raised our long-term rating to 'BBB' from 'BBB-' on StadCo owner Yankee Stadium Holdings LLC's (Holdings) $46.4 million bank loan. We revised the outlook on the ratings to stable from positive. Rationale The rating action reflects our view of a trend of strong operating and financial performance since the new stadium opened in 2009. Despite opening during a recession, the project has performed well, attracting more than 3.7 million visitors annually with an average ticket price of about $85. These trends combine to generate more than 2.8x coverage of all project obligations during the past three years. StadCo owns the leasehold interest and operates the 50,291-seat baseball stadium for the New York Yankees, a Major League Baseball (MLB) team, located in the Bronx, N.Y. Bond and bank loan proceeds and an equity contribution in excess of $100 million from New York Yankees Partnership (the New York Yankees baseball team, the Yankees) funded construction of the stadium. The stadium opened as expected in April 2009. The assigned ticket and suite license revenue generated at the stadium support PILOT and rental revenue payments. Bondholders are paid from gross revenue, but the stadium's operating and capital expenses must be paid before excess pledged revenue can be distributed. The stadium is owned by NYCIDA, which leased it to StadCo for an initial term of 43 years beginning on Aug. 22, 2006. NYCIDA services the debt for the PILOT and rental revenue bonds from PILOTs and rental payments received from StadCo, which is owned by Holdings (an indirect wholly owned subsidiary of Yankee Global Enterprises LLC, or YGE, a 99% indirect limited partner of New York Yankees Partnership). The rating reflects our view of: -- The Yankees' status as a well-established baseball franchise with a solid fan base in the New York metropolitan area. The team has won 27 World Championships and 40 American League pennants. -- The stadium's location in the largest media market in the U.S., with sound demographics. The team draws from the metropolitan area's population of more than 22 million, above-average demographics, and strong corporate base. -- Strong commitment to the market. The team has played in New York since 1903 and played in the old Yankee Stadium from 1923 until 2008. -- Sound cash flows, with a low break-even annual attendance of 2.75 million assuming $65.50 tickets. The break-even figure is below the 30-year annual average of 2.8 million, and in line with the average ticket price in 2008, the last year in the old stadium. The break-even analysis includes payment of stadium operations and maintenance expense. -- Sound security for bondholders, including a nonrelocation agreement in which the Yankees agree to play all of their home games at the ballpark. The nonrelocation agreement provides that the team pay liquidated damages if it attempts to relocate during the remaining 37-year term of the debt. In addition, the project's obligation to make annual PILOT payments is secured by a series of PILOT mortgages, which are similar to real estate tax liens. Partly offsetting the above strengths, in our view, are: -- A pledge of ticket and suite license revenue to support PILOT and rental revenue payments, which is subject to renewal risk. Although about 25% of the assigned revenue, specifically the club and suite licenses, have multiyear contracts ranging from three to 10 years, the remainder is not under long-term contracts and is subject to annual renewal risk. Ticket pricing is affected by such factors as economic cycles and competition from other sports teams. -- Competition from other new stadiums in the New York region for luxury amenities, which affect pricing, occupancy rates, and renewals for the suites, luxury club seats, and general seating. -- The project cannot distribute funds out of the flow of funds until all annual requirements are made. However, comparable transactions require more than 1x coverage of all requirements before distributions are made and the distributions are less frequent -- typically one to four times per year as compared with monthly or more frequently in this project. -- The possibility that the PILOT may, under specific circumstances, drop below annual PILOT bond debt service payments, causing a debt service payment shortfall but not an event of default. The PILOT payment cannot exceed the value of the site's and stadium's equivalent real estate taxes if they were subject to real estate property taxes. The real estate taxes may decline if the value of the stadium declines, the tax rate decreases, or the assessment methodology is changed. -- Long debt tenor. The remaining 37-year debt tenor on the project is longer than that of most comparably rated projects. The stadium project opened in 2009 and we believe it is moving toward stabilization. Since opening, paid attendance has trended at anticipated levels or higher, while the average ticket price has been lower because of the recession. Attendance has not been below 3.65 million annually and 88% occupancy. Generally attendance trends higher with the team's on-field performance, and we believe it is moving toward a slightly lower, stabilized level. Yankee attendance peaked in 2008 at 4.3 million in the old stadium, which had a higher capacity. It has averaged 3.69 million with 91% occupancy in the new stadium. Attendance in 2011 dropped by 3% and the number of season ticket holders, or full season equivalents (FSE), is trending downward. We believe the number of FSE and annual ticket sales will reach stabilization during the next two to three years. However, even if it reaches stabilization, we anticipate that attendance will go through at least one downward cycle during the 40-year term of this transaction. The Yankees' average ticket price remains in the top five of MLB, but the recession hurt prices. Since opening, the average ticket price has declined by a compounded rate of 1% annually, remaining around $86 since 2010. Our financial projections assume flat average ticket prices this year. We believe that MLB provides stability for the teams as the governing body through the league's constitution and various contractual agreements, including the collective bargaining agreement with the MLB Players Assn. The MLB collective bargaining agreement was extended this December until 2017. The new agreement maintains the financial and operating provisions. The ratios required under the debt service rule were improved slightly but remain at levels that we believe are high compared with corporate metrics. The league and players have not had a work stoppage since 1995, but we believe it is likely that at least one work stoppage will occur during the remaining 37-year bond term. In addition, in light of the bankruptcy filings of three MLB teams during the past three years, we reviewed the financial and legal structure for StadCo and its owner and found that the documents somewhat insulate the stadium project from the team and other baseball assets if they were to have financial problems. Furthermore, we assume that a team would remain in the stadium and continue to play during a period of financial strain or restructuring, as seen in the limited number of bankruptcies of professional teams. The project cash flow remains strong. Management's 2012 budget assumes paid attendance is flat at 3.73 million while the average ticket price is essentially flat at $86.78. Year to date, paid attendance is trending 3% to 4% lower than budget, with a strong second-half home schedule. Operating expenses are up 2.5% in 2012, indicating a more stabilized growth rate. We consider the payment of the PILOT, rental, and bank loan payments together because we see few significant limitations on distributions between StadCo and its parent, Holdings. Coverage of all PILOT, rental, and bank loan payments in 2011 was 3.4x, or 3.6x when excluding the bank loan. Based on management's 2012 budget, the projected coverage of all obligations is in line with 2011. We believe paid attendance will stabilize at lower levels. Management projects less than 1% annual revenue growth. Standard & Poor's base case assumes that attendance will stabilize at a lower level of 3.3 million and about 80% capacity. This level is between the 20- and 10-year average annual attendance of 3.1 million and 3.8 million, respectively. We assume that ticket revenue will increase at 1% annually, and exclude any postseason ticket revenue. For operating costs, we assumed costs would increase annually by 3%. Under our base case, coverage of all obligations, including the bank loan, averages 2.47x through 2016 with a minimum of 1.74x. Coverage of the PILOT and rental payments averages 2.61x, with a minimum of 2.37x during the debt's term. The minimum coverage of all obligations occurs in 2016, when the bank loan bullet maturity is repaid -- from cash flow, we assume. Liquidity We believe liquidity is adequate. The bonds and loan have a debt service reserve funded to an amount equal to the maximum annual principal and interest payments, excluding the final maturity or 10% of bond proceeds. They are funded with a combination of cash and surety bonds provided by an investment-grade provider. Additionally, a strike reserve fund is required to fund an additional six months of debt service if a collective bargaining agreement between MLB and the players' union is not in place. These reserves are available to fund shortfalls in debt service payments but may be used during a work stoppage or shortfall in the PILOT payment. For the current funding status of the reserves, see our transaction update to be published on RatingsDirect on the Global Credit Portal. We believe the project has enough liquidity to withstand a work stoppage lasting more than one year. In addition to the strike and debt service reserve funds, the suite and club seat contracts require payments to be made during a work stoppage, with credits issued for lost events after the games resume. Outlook The stable outlook reflects our view of adequate revenue from contracted sources, strong and predictable financial performance, and a stable operating expense profile. We believe that the project and the holding company have limited opportunity for a higher rating given the discretionary nature of the pledged revenue and our current assessment of YGE, the ultimate owner of StadCo and Holdings. We may lower the rating if the stadium fails to maintain the current level of revenue, if operating expenses far exceed expectations, and if the project significantly underperforms, resulting in consolidated coverage levels of less than 2x. Related Criteria And Research -- Updated Project Finance Summary Debt Rating Criteria, Sept. 18, 2007 -- Project Finance Stadiums Can Score Investment-Grade Ratings, Aug. 29, 2000 Ratings List Upgraded To From Yankee Stadium LLC $942.6 mil ser 2006 PILOT bds BBB/Stable BBB-/Positive $259.0 mil ser 2009A PILOT bds BBB/Stable BBB-/Positive $25.0 mil ser 2006 rental bds BBB/Stable BBB-/Positive $111.9 mil ser 2009 rental bds BBB/Stable BBB-/Positive Yankee Stadium Holdings LLC $46.4 mil sr sec term bank ln BBB/Stable BBB-/Positive Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.