OREANDA-NEWS. Fitch Ratings has affirmed the 'BBB+' rating for approximately \$133.53 million of L.A. Arena Funding, LLC's (Staples Center) revenue-backed notes. The Rating Outlook remains Stable.

KEY RATING DRIVERS

The rating affirmation reflects the Staples Center's position as a premier arena in a strong service area anchored by three professional sports franchises (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 incorporates the historically strong and projected future coverage debt service coverage levels on a bondholder level and consolidated levels as well as strong contractual agreements for advertising and naming rights.

Strong Underlying League Economics: The NBA and the NHL have strong historical fan and sponsorship support demonstrated by solid attendance and viewership levels. The NHL's strong economic model including a three-tiered salary cap and solid revenue sharing along with strong attendance trends, creative marketing and growth initiatives which continue to grow overall league revenues. The NBA's solid position among sports leagues globally, strong viewership and attendance trends, and continued growth in overall league revenues is a supporting credit strength.

Three Major Anchor Tenants and Experienced Operator in Strong MSA: The notes benefit from long-term leases with three anchor tenants, the NBA's Lakers and Clippers and the NHL's Kings, all of which have been successfully operating since the arena opened. Los Angeles' economic importance and diversity supports a broad expanse of fan and corporate backing, and Anschutz Entertainment Group (AEG) demonstrates a vast breadth of knowledge and experience operating sports and entertainment venues throughout the United States and abroad.

Demonstrated Stability of Collateral: The collateral is inherently subject to revenue contract renewal risk, and the sector is vulnerable to economic downturns and discretionary spending, as with any other facility of this type. This risk is mitigated by management's robust operating history and success with suite, premier seat, and advertising and sponsorship renewals despite team performance and economic conditions. Currently, all such pledged contracts are leased on a long-term basis.

Solid Financial Metrics and Adequate Debt Structure: Leverage levels in the 2x range and declining to maturity, and Fitch rating case coverage levels averaging 2.22x adequately support the 'BBB+' rating. Though legal maturity of the notes occurs in 2026, two years after team leases expire, LA Arena Funding plans to amortize the debt to a scheduled maturity of 2021. Moreover, the Staples Center's status as one of the premier sports and entertainment venues in the U.S. and management's annual reinvestment in the facility underscore the arena's viability and attractiveness to tenants well beyond the lease terms.

Peers: LA Arena Funding's current leverage and debt service coverage ratios compare favorably to other 'BBB+' sports facility ratings and materially better than other 'BBB' and 'BBB-' dual-anchor arenas Fitch rates. The Staples Center's pricing power and demand along with strong local and regional demographics are additional distinguishing rating factors from other 'BBB' category sports facilities.

RATING SENSITIVITIES

Negative:
--Contract Renewal or Pricing Pressure: Suite, other premium seating, and advertising pricing and renewals that differ from past and projected performance leading to debt service coverage ratios materially below the 1.4x range from current levels between 1.5x and 1.6x could lead to a downgrade.

Positive:
--Upgrade Currently Not Anticipated: Given near-term projected debt service coverage and leverage metrics, positive rating migrating above the current level is not anticipated.

CREDIT UPDATE

While the Staples Center continues to hold an extremely strong market share for other entertainment events in the Greater Los Angeles Market, the nearby Forum in Inglewood has proven to be somewhat competitive for smaller concert acts and shows. Partially due to this increased competition, gross revenue fell in FY2014 by just over 3%, which coupled with an increase in debt service payments caused a decline in consolidated coverage from 2.20x to 1.82x. While pledged revenues (bondholder level) were slightly higher, cash collections, due to timing, were slightly lower in CY2014. Debt service was 1.36x, lower than FY2013 due to the aforementioned increase in debt service payment although generally consistent with historical levels.

Advertising revenues represent the largest percentage of collateral and have increased, on average, annually at 3.3% since 2009, reflecting pricing escalations in the contracts and a new agreement executed last year with American Express. Naming rights payments from Staples Center escalate at 4% until two years prior to the scheduled maturity of the notes, at which point \$34 million in debt will remain. The second largest revenue stream, suite revenues, experienced a certain degree of pricing pressure through the recession, but occupancy levels have stayed at or near 100%.

Despite some signs of competition from the Forum, Fitch emphasizes that the LA Arena Funding credit is partially isolated from a material impact on noteholders. The securitization for the notes is not subject to margin volatility and as such is not at direct risk to declines in variable revenue streams such as concessions and other event revenue.

Fitch conducted two sensitivity scenarios. Fitch's base case scenario assumes annual growth of pledged revenues due to demand remaining stable and Staples Center's strong contractual agreements. Under these conditions, coverage remains in the 1.4x range, until debt service drops in 2018, at which point coverage increased to the high 2x, low 3x range. Fitch's rating case scenario assumes similar conditions, but adopts a 5% decline in luxury suites, as well as a lower growth rate for both concessions and advertising. Coverage still averages 2.22x, and does not drop below 1.35x. Leverage also continues its evolutions towards zero under the stress scenario.

The Staples Center is owned and operated by the LA Arena Company and AEG. The arena seats up to 20,000 for concerts, 19,997 for basketball games, and 18,118 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. The Clippers lease was recently extended from 2014 through 2024. Fitch views the long-term lease extension positively since the Clippers lease was previously the only anchor team agreement that did not expire after the scheduled maturity of the notes.

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.