Kentucky's Louisville Arena Authority (LAA) placed a $337 million bond issue for a new sports and entertainment arena on 3 September 2008. The financing is the first limited-recourse project financing in the US to close with a monoline wrap since the credit crunch. Indeed, it was almost derailed by market nervousness about the monolines' financial condition.

The arena will host the University of Louisville's basketball teams, and is part of a wider redevelopment for the city's waterfront. The financing therefore features heavy support from its public sponsor, in the form of direct and indirect cash contributions.

Goldman Sachs was lead underwriter, with MRBeal & Co, Ramirez & Co and Hilliard Lyons coming in as co-managers, while Assured Guaranty provided the triple-A monoline insurance policy to the bonds. Standard & Poor's gave the senior debt a BBB- underlying rating, and Moody's rated it Baa3.

The issue breaks down into three series: $308 million are fixed-rate and tax-exempt, and $21 million are fixed-rate taxable. The senior bonds priced at coupons of between 4.4% and 6.22%, and have a 2042 maturity. There is also a third series of $8.9 million of unrated taxable, subordinate fixed-rate notes, which have a shorter maturity of 2025, and priced higher than the senior debt. The weighted cost of the debt is 6.45%.

After Assured Guaranty was put on review for downgrade by Moody's in July 2008, the composition of the bonds was changed from a combination of roughly $100 million in synthetically fixed-rate notes, and a proposed $260 million at a fixed rate. Assured Guaranty had already replaced Ambac as the monoline insurer on the deal after the latter was downgraded in January 2008.

The interest payments on the debt are capitalised until April 2011, after operations begin, leaving LAA some flexibility in its debt service over the first months of the project. After full payments begin, the debt service coverage ratio will be 1.5x, rising to 1.7x by 2015. The guaranteed maximum construction cost is $249 million ($234 million in estimated capital expenditure plus a contingency fund). Only around 75% of the bond debt is needed for construction, with the rest required for debt service and other costs.

Jim Host, chairman of LAA, explains that there were additional costs to obtain a site for the arena. The 7.5-acre arena site was occupied by Louisville Gas & Electric. LAA paid LG&E $9.3 million for the land, but also shouldered the $63.1 million expense of relocating the utility to an adjacent site, and bought out the remaining office building there for $14 million. LAA covered these expenses with a $75 million funding commitment from the state, and the balance from proceeds of the bond issue. Host estimates that the cost of construction, securing the site, debt service reserve and capitalised interest is roughly $447 million.

The bonds will be paid down from a number of revenue sources. The Louisville/ Jefferson County metro government is contributing a minimum of $6.5 million and maximum of $9.8 million per year to the project until 2019 (which is calculated as $206 million minimum, $309 million maximum over the life of the debt).

The state has made a six square-mile area around the arena a tax-increment finance (TIF) district, so sales and property tax in the area will also contribute to debt service for a 20-year period, or up to $265 million, whichever comes sooner. But TIF revenue, which is at the mercy of economic conditions, is neither fixed nor guaranteed, though Moody's estimates that TIF will increase 5.5% per year over the life of the debt.

Revenues from the stadium such as naming rights, advertising, ticket sales, and retail concessions will also be used towards the debt. A sales and marketing operations company, Team Services, will be entitled to 25% of sponsorship and naming-rights revenues, or 35% if the revenues exceed $4 million, but it has guaranteed the arena a minimum revenue of $2 million, rising to $2.5 million in the sixth year of operation.

The arena will also be used to host conferences and conventions, entertainment events, and other sports. But of the arena's total projected revenue, 62% is expected to come from basketball. The University of Louisville's basketball teams do not enjoy the prestige of the professional NBA leagues, but are among the better-earning in college sports.

The facility will be managed by the Kentucky State Fair Board, which also manages the existing Freedom Hall in Louisville, the University's basketball teams' present base. Though not in direct competition with the arena, there may be some overlap in non-sporting events. LAA has to make Freedom Hall good for any loss of income as a result of competition from the new arena, measured from Freedom Hall's 2009 net income from events.

The construction is due to be complete, and the facility to open to the public, in November 2010. The project includes 717,000 square feet of new construction, for which MA Mortenson and Mathis & Son are the contractors.

The seven-storey arena will have a 22,000 seat capacity for basketball, and a capacity of between 16,000 and 17,500 for concerts and entertainment events. The premium suites will provide possibility for corporate sponsorship revenue, each bringing in between $80,000 and $100,000 per year, though the appetite for the boxes is as yet untested.

Though the University basketball teams have a historically strong fan-base, they are nevertheless still college sports teams. The amount of debt is substantially more than the funds required to construct the arena, and the costs of relocating LG&E are substantial. The publicly-owned arena has made a greater claim on the public purse than the most avaricious private team could imagine.

As such, the deal will not be a perfect guide to the fortunes of other sports projects coming to market, especially those for professional sports teams. But the project's ability to assemble a monoline wrap at all will give them hope. Goldman Sachs is likely to be next in the market with a financing for a new arena for the New Jersey Nets basketball team, which wants to relocate to Brooklyn, New York. That project, however, is currently the subject of litigation and some vocal community opposition.

Louisville Arena Authority

Status: Closed 3 September 2008
Size: $447 million
Description: Wrapped bond financing for new University of Louisville basketball and entertainment arena in Kentucky
Debt: $337 million
Underwriters: Goldman Sachs (lead); MRBeal & Co, Ramirez & Co, Hilliard Lyons (co-managers)
Monoline insurer: Assured Guaranty
Legal counsel to underwriters: Squire, Sanders & Dempsey
Legal counsel to issuer:
Greenbaum, Doll & McDonald
Bond counsel: Stoll, Keenon & Ogden