The Atlanta Spirit does not need the Atlanta Thrashers to stay put in order to fulfill its obligations to the City of Atlanta and Fulton County Recreation Authority – the owners of Philips Arena – according to an analysis by hornface.com.
However, any relocation of the Thrashers for the 2011-12 campaign may not be wise due to the possible NBA lockout.
As first reported by the Atlanta Journal Constitution, the AFCRA and Arena Operations, LLC – the branch of the ASG that operates Philips – agreed to refinance the bonds on the 12-year-old arena last year. Under the terms of the new agreement, the Atlanta Hawks, who were once tied to the arena as collateral until the bonds were paid off in 2018, were removed as collateral in the event of a default.
That obligation was replaced with a pledge by the ASG that Philips Arena would gross revenue in excess of 1.5x the max annual debt service on the bonds. If that threshold is not met, the ASG was required to post cash or a line of credit in the amount of $15 million until operating revenue exceeded that threshold for two seasons.
AFCRA and the ASG the retired the old bonds and refinanced $124.5 million of the arena’s debt in early November at an interest rate of 6.5-percent.
That would make the payment of the bonds approximately $8.1 million per year, down roughly $2 million per year from payments on the original bond issue of $147.5 million. The original bonds, which were issued during arena construction, fetched interest rates between 6.625-percent and 7.0-percent. Construction on Philips Arena began in 1997 and was completed in time for the 1999-2000 season.
With the new payments totaling roughly $8.1 million per year, Philips Arena would have to gross a little over $12.1 million per fiscal year to avoid having the ASG post $15 million in cash or a line of credit.
From an analysis of the documents, all indications are the ASG should be more than able to avoid the penalty – even if the Thrashers leave and half the sponsorships go with them to Canada.
Buried in the proposed term sheet is an interesting nugget that operating revenues “have always been sufficient to pay annual debt service amounts and to maintain and operate Philips Arena.” More importantly, the document pegs revenue at 3.10 times the debt service coverage in the “most recent fiscal year,” presumably fiscal 2009.
While that may just seem like an innocuous stray comment in the report, it provides a stepping stone to extrapolate the gross revenue of Philips Arena — a piece of information, which for obvious reasons, the Thrashers and the NHL keeps close to the vest.
With the original bonds fetching interest rates between 6.625 and 7.0-percent, the ASG was making payments bond payments somewhere between $9.7 million and $10.5 million per year. That means arena operations revenue was roughly $31 million dollars over the period discussed in the proposed term sheet.
(As a word of caution, this does not mean that the ASG profited $31 million from arena operations, which likely included sponsorship, concession and other revenue. Think of this figure as your gross salary. The ASG still has to pay down the bonds as well as pay bills on the rink in order to turn a profit, much like you would have to pay taxes on your salary).
Nevertheless, even assuming that the Thrashers accounted for 50-percent of that revenue – and it’s safe to assume that they did not with events like concerts, the circus and Atlanta Dream basketball sharing the arena with the basketball and hockey teams – the rest of the operations would account for $15.5 million of that revenue. That’s three million more than the required $12.1 million necessary to keep the ASG within operating parameters under the new agreement.
Of course, this does not mean that the Thrashers will bolt town, or that it would be wise for the ASG to sell the team to outside investors, who will move the team in time for next season.
In fact, the data cautions against a hasty move of Atlanta’s hockey team.
There is the specter of a lockout in the NBA next season, which if players dig in and refuse to cede to the owners’ demand for a hard salary cap could wipe out the 2011-12 season. If the Hawks season is cancelled and the Thrashers move to Winnipeg, arena operations may not be sufficient in fiscal 2012 and the ASG would have to fork over $15 million dollars in the form of cash or a line of credit, tying up millions in capital or interest expenses that could be used elsewhere.
Other interesting tidbits buried inside the bond refinancing agreement term sheet are:
- The Hawks are required to remain at Philips Arena for seven more seasons or pay a $75 million “early departure premium.”
- The ASG agreed to set aside $7.7 million from the bond savings for much-needed capital improvements at Philips Arena.
- A $2.3 million contribution was made to the city of Atlanta for “vehicular and pedestrian traffic management” contingency fund at Philips Arena and to fund recreation and cultural related facilities and programs for the City.
- An additional $1.2 million was set aside for to fund other recreation and cultural programs.
Once the Hawks were released as surety on the bonds, the ASG borrowed $125 million from the NBA’s Credit Facility in early December – presumably to provide liquidity, buy out rogue partner Steve Belkin and settle the ASG’s long-running ownership dispute.
Relocation of the Thrashers has been hot topic of conversation in Canada, where True North Sports and Entertainment is reportedly looking to buy a hockey team and move them to Winnipeg. Published reports suggest that if the Phoenix Coyotes remain in the desert that the Thrashers could be next in line to bolt to Manitoba’s largest city.
Thrashers officials, for now, remain publically committed to looking for owners to keep the team in Atlanta. NHL Commissioner Gary Bettman has also said that as of now, he “has no expectation other than to think” that the Thrashers will be in Atlanta next season.
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