Are Barclays Center bonds about to be downgraded?

Crain’s New York Business reports that the recent change in the Nets ownership structure required Mikhail Prokhorov to revise certain aspects of the team’s relationship to Barclays Center ... and that arena bondholders are not happy.

Crain’s reported that the big bond rating agency, Standards and Poor’s, “warned on Friday that it might downgrade the $527 million worth of bonds used to pay for Barclays’ construction in downtown Brooklyn. For now the bonds are rated “BBB-,” the lowest rung for investment grade. One step down would relegate them to junk status.”

Such a move could increase future interest rates for borrowing against the arena, which Prokhorov owns outright through Brooklyn Sports & Entertainment, his holding company. Moreover, according to Crain’s, the team may have to set aside revenues to compensate for the changes.

Specifically, according to S&P, the deal may weaken the finances of Barclays Center. Crain’s quoted S&P as saying under the new deal, Barclays will collect only 30% of food and beverage sales from Nets games, down from the previous 100%.

Underlying the change, say those familiar with the deal, is the NBA’s requirement that the arena and team financials be “unstapled,” as one source called it. The Nets lease has always favored the arena. That didn’t matter much when Prokhorov owned 100 percent of both, but with Tsai buying 49 percent of the team —and having an option to buy a controlling interest in 2021— the league wanted a more arm’s length arrangement. The lease, noted one source, is now market rate, that is, in line with other NBA leases.

Norman Oder, the critic and chronicler of the arena and Pacific Park, called the change in the way food and beverage sales are distributed a “sweetener” for the Nets, but something that would lower arena revenues.

To compensate for the change, Crain’s said the team agreed to set aside more than $300 million to make sure bondholders are paid. However, S&P said “preliminary calculations suggest that these features are not sufficient” to support an investment-grade rating for the bonds.”

Moreover, Oder reported this is the second time in six months that a major ratings agency had warned of a rating cut. In October, Moody’s noted that the eventual loss of the Islanders could affect the team’s financials.

• Barclays Center bonds are just about junk - Aaron Elstein - Crain’s New York Business
• Ratings agency S&P (citing Nets’ deal) joins Moody’s (citing Islanders) in warning that Barclays Center bonds verge on junk - Norman Oder - Atlantic Yards Report