Fitch Ratings has affirmed the 'BBB+' rating of L.A. Arena Funding, LLC's (Staples Center) $105.9 million of arena revenue-backed notes series 1999. The Rating Outlook is Stable.

RATING SUMMARY

The 'BBB+' rating reflects Staples Center's (the arena) strong strategic position as the premier sporting arena in the extremely large and diversified Los Angeles region serving three popular major sports franchises including the National Basketball Association's (NBA) Los Angeles Lakers and Los Angeles Clippers, and the National Hockey League's (NHL) Los Angeles Kings. The rating also incorporates solid financial metrics, low leverage, minimal capital needs, a somewhat diversified stream of pledged revenues with low volatility due to strong contractual agreements with escalators, and the rapid amortization of outstanding debt with no plans to issue any further debt.

KEY RATING DRIVERS

STRONG UNDERLYING LEAGUE FUNDAMENTALS: The NBA (league-wide facility rated 'A-' with a Stable Outlook) and the NHL have strong historical fan and sponsorship support demonstrated by solid attendance and viewership levels despite occasional labor disputes. NBA league economics have strengthened further thanks to lucrative new network television contracts and an economic model that includes significant revenue sharing among member teams. The NHL's three-tiered hard-salary cap structure promotes financial stability but significant disparity persists between large and small market franchises given the high percentage of locally generated revenues.

THREE MAJOR TENANTS IN EXPANSIVE METROPOLITAN STATISTICAL AREA (MSA): Bondholders benefit from long-term leases with three major sports teams that have operated successfully at the arena for over 15 years. Fitch views positively the arena's experienced and sophisticated owner and operator, Anschutz Entertainment Group (AEG), and the arena's location within the extremely large and diverse Los Angeles region, which generates a large fan base and solid corporate backing.

HISTORICALLY STABLE PLEDGED REVENUES: Pledged revenues historically have exhibited a good degree of stability due to the intermediate- to long-term nature of sizeable contracts, fee escalation provisions, a diverse group of contract counterparties with rolling contract expirations, and management's success in renewing or replacing expiring contracts. Nonetheless, as is the case with any facility of this type, the pledged revenues are inherently subject to contract renewal risk, and the sector is also vulnerable to economic downturns and related reductions to discretionary spending.

SOLID FINANCIAL METRICS: Financial metrics are solid, supported by leverage (net debt over cash flow available for debt service) of 1.60x that Fitch projects will decline further through maturity, and the Fitch-calculated debt service coverage ratio (DSCR) of 1.46x (indenture-defined DSCR is 1.51x) in fiscal 2015 that will rise significantly in 2018 when debt service is scheduled to fall by over half. Financial metrics remain strong through scheduled 2022 maturity in both the base and rating cases.

CONSERVATIVE DEBT STRUCTURE: The arena's debt is fully fixed rate and is scheduled to mature in fiscal 2022. Management regularly invests in capital improvements and has indicated there is no deferred maintenance and no major capital improvements on the horizon. There are also no plans to issue additional debt.

PEERS: The arena's leverage of 1.60x compares quite favorably to other sports arenas Fitch rates in both the 'BBB+' and 'BBB' categories. Although the arena's fiscal 2015 DSCR (all DSCRs are Fitch-calculated unless noted otherwise) of 1.46x was somewhat below average for the same rating categories, its projected average DSCR of 2.47x over the subsequent five years in the Rating Case is quite adequate for the 'BBB+' rating category, especially with consideration of the pledged revenues' historical stability. The arena's location within the extremely large Los Angeles region compares favorably to the majority of Fitch-rated sports credits.

RATING SENSITIVITIES

Negative: A substantial reduction of pledged revenues leading to DSCRs materially below 1.4x could lead to negative rating action. Given the historical stability of the pledged revenue stream and a substantial decline of debt service in fiscal 2018 that will significantly boost coverage levels, Fitch views such a decline as quite unlikely.

Positive: Fitch views the risks inherent to the facility as a single site and the discretionary nature of the sports industry as restricting upwards rating migration at the current 'BBB+' rating level absent a substantial and unanticipated gain in consolidated revenues.

SUMMARY OF CREDIT

The arena performed immaterially better than Fitch's prior expectations in fiscal 2015, with pledged revenues rising 1% to $53.1 million and debt service coverage falling slightly to 1.46x (1.51x as defined by the indenture) from 1.48x the year prior due to rising debt service. Fitch's prior base case projected revenues for fiscal 2015 were nearly unchanged from fiscal 2014. If not for a slightly delayed payment from a major sponsor, pledged revenues for the fiscal year would have been $1.4 million higher and DSCR would have increased slightly year-over-year. Instead, the delayed payment will provide a one-time boost to financial metrics in fiscal 2016.

Pledged revenues performed well in part because a significant proportion of them are tied to intermediate- to long-term contracts that expire on a rolling basis and include escalators. Consolidated revenues include not only pledged revenues, but also a sizeable portion of revenue streams that do not include such guarantees and are susceptible to the volume of events and attendees that the arena attracts, along with secondary revenues. These consolidated revenues fell in fiscal 2015, as anticipated, for two reasons. First, a competing concert venue, The Forum, had its first full fiscal year of operations, resulting in the loss of some concerts and pricing pressure. Fitch notes that, although The Forum generates some competitive pressure, the arena remains the premier entertainment venue in the region and is well-poised to absorb the anticipated continued competitive impact of The Forum on an operational and financial basis. Second, the Los Angeles Kings won the Stanley Cup in fiscal 2014 resulting in one-time additional revenues that did not continue into the following fiscal year.

Pledged revenues perform well under both base and rating case scenarios generated by Fitch, in part because of the pledged revenues' protection from volumetric volatility in concerts and attendees, as noted above. Fitch's base case scenario assumes annual growth of pledged revenues in line with contractually guaranteed escalators, inflation, and the assumption that expiring contracts will be renewed based on historical growth levels. Under these assumptions, coverage rises to about 1.55x in fiscal years 2016 and 2017, and then jumps to above 3.00x in all future years beginning in fiscal 2018 when debt service falls by over half. Leverage remains very low throughout the forecast period, falling below 1.0x in fiscal 2018.

Fitch's rating case scenario assumes similar conditions as the base case, but layers on a hypothetical recessionary scenario resulting in five years of 5% declines in suite revenues, a one-time 5% decline in advertising revenues, and lowered concession revenue growth. Under this scenario coverage is still solid at between 1.47x-1.49x in fiscal years 2016 and 2017 and rises to above 2.70x in every subsequent year through maturity. Leverage remains very low throughout the forecast period.

The Staples Center is owned and operated by the LA Arena Company and AEG. The arena seats about 20,000 for concerts and basketball games, and about 18,000 for hockey games. Staples Center opened in October 1999 at a construction cost of $375 million. The NBA's Lakers and Clippers and NHL's Kings have leases to play all home games at the arena through 2024.

SECURITY

The notes are secured by a bankruptcy-remote securitization of 101 luxury suites, on-site advertising agreements with the arena's 11 founding partners, the naming rights agreement with Staples Inc., annual contracts on 1,425 premier seats, and the minimum guarantee portion of the concession agreement with Levy Restaurants.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria

Rating Criteria for Infrastructure and Project Finance (pub. 28 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=870967

Rating Criteria for U.S. Sports Facilities, Leagues, and Teams (pub. 09 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685897

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

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Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=998704

Endorsement Policy

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