OREANDA-NEWS. Fitch Ratings affirms the 'BBB' rating of Harris County - Houston Sports Authority, TX's (the Authority) approximately $65.9 million taxable revenue refunding bonds for the NRG Stadium Project (NRG Stadium). The Outlook is Stable.

KEY RATING DRIVERS

The rating reflects the diverse, though potentially volatile, pledge of revenues generated from NRG Stadium (which support the Houston Texans' lease payment and other pledged revenues), the premier stadium facility in Harris County and broader southwest Texas. The facility is home to two solid core anchor tenants, the Houston Texans (Texans) National Football League (NFL) franchise and the Houston Livestock Show and Rodeo (HLSR or the Rodeo), both exhibiting strong financial positions and low leverage.

Solid Anchor Tenants: The Texans' viability is supported by the strength of the NFL's economic model, including long-term national television contracts with investment-grade counterparties; robust revenue sharing; a historically conservative operating profile; stable attendance and viewership levels; and a collaborative working relationship with the NFL Players Association. Fitch considers HLSR's long history and stable-to-growing attendance and educational grant funding even during the downturn as further credit stabilizing factors.

Demographics Mitigate Sector Vulnerability: Harris County's demographics provide a solid backbone supporting NFL game and HLSR event attendance and sales. Fitch considers the sports and entertainment sector's inherent vulnerability to economic downturns as limiting the rating to the 'BBB' category despite the resilience of attendance at both HLSR and Texans events through the recession.

Diverse, Potentially Volatile Collateral: Lease payments from the two tenants and a wide array of tax revenues from stadium events support payment of debt service. However, contractually obligated income (COI), though available to support the lease payments, does not expressly secure the bonds as in most sports facility standalone financings, leaving debt service coverage more susceptible to fluctuations in gameday revenues.

Strong Debt Structure: The debt is fixed-rate and fully amortizing to a short-dated maturity. Structural features including a 2.0x additional bonds test and 1.5x debt service coverage ratio covenant are strong and provide downside protection.

Healthy Financial Metrics: Historical coverage of the lease payments from both tenants remains exceedingly strong and both entities exhibit very low leverage and high liquidity. Cash flows supporting the bonds demonstrate low leverage and strong coverage even under scenarios of no growth in tax revenues.

Moderate Infrastructure Risk: Both tenants collaborate on capital investment, and over $3 million in required annual capital and maintenance deposits ensures minimum reinvestment. As both tenants require different capital needs at different points in the year, cohesion could be a risk moving forward, though Fitch notes historical reinvestment has been significant.

Peers: Both NRG Stadium and Sun Life Stadium (South Florida Stadium, LLC, bonds rated 'BBB' / Stable Outlook) in Miami, FL, home to the NFL's Miami Dolphins and University of Miami's football team, benefit from two core anchor tenants. The NRG facility is newer and this transaction shows lower leverage though Sun Life is currently undergoing a large renovation and demonstrates a longer successful operating history.

RATING SENSITIVITIES

Negative - Texans and Rodeo Financial Health: Material and sustained deterioration in the financial condition of the Texans or HLSR could lower Fitch's opinion of the tenants' ability to make the lease payments.

Negative - Tax Revenue Volatility: Fluctuations in tax revenues driven by attendance declines or depressed economic conditions could also lead to negative rating action if debt service coverage remains only marginally above 2.0x for a sustained period.

Positive - Positive Migration Unlikely Soon: Given susceptibility to gameday-type revenues, positive rating action is unlikely in the near term until leverage migrates closer to 2.0x.

CREDIT UPDATE

Fitch currently rates various league level issues of NFL at 'A+' and various team level notes and revolving loan facility at 'A'/Stable Outlook, reflecting the NFL's position among other professional sports league in the U.S. The NFL's strong underlying league economics are supported by the NFL's structure, which promotes financial stability and competitive balance through a high percentage of revenue sharing and supplemental revenue sharing. The NFL's strength is further evidenced by the popularity of the sport, which maintains a robust and stable domestic fan attendance and strong viewership base. The current collective bargaining agreement (CBA) between the NFL and NFL players union that extends through 2020 provides for a lengthy period of labor relations stability. The "hard salary" cap in the CBA also injects more cost certainty to teams. Strong forecasted league-managed revenues, primarily national television contracts, provide the NFL with solid projected debt service coverage ratios and low leverage.

Texans and HLSR financials show a very strong ability historically to cover the amount of the lease payments from net operating revenues. Average earnings before taxes, depreciation, amortization and lease payments (EBITDAL) in the case of the Texans since fiscal year 2010 (ended March 31) have been sufficient for coverage of the lease payment by well above 15x and well above 5.0x when combined with other debt service payments. In the case of the Rodeo, average EBITDAL has covered lease payments and other debt service by an average of 3.9x from fiscals 2011-2015 (ended August 31). Both entities also show very low leverage (as measured by net debt-to-EBITDA). Each entity demonstrates an ability to continue paying their lease and other debt obligations in the medium term even under scenarios which stress historical levels of attendance, revenue, and expense growth.

Though fluctuations in gameday revenues and attendance represent risks to this transaction, historical paid attendance at Texans games has never fallen below 98% capacity, and turnstile attendance stands at approximately 88% of those totals on average - trends consistent with other investment-grade sports facilities Fitch rates. The majority of the Texans' revenue is driven by the national broadcast revenues generated at the league level mentioned above. Average lengths of premium seating contracts for the Texans are six years, which when combined with the broadcast revenues provide a core COI base from which to derive the lease payment. Advertising revenues are also driven by multi-year contracts and benefit from diverse counterparties from multiple categories. EBITDA margins are projected to be between 20% and 30%, consistent with Fitch's 'BBB' corporate medians.

Likewise, Rodeo attendance shows similar resilience, with paid attendance growing through the recession at a 4.7% CAGR since 2008. HLSR, the largest rodeo in the United States, has existed since 1932. It is a Texas non-profit corporation and 501(c)(3) organization. The show and rodeo benefit from over 30,000 volunteers annually, and currently over 2,000 students in Texas benefit from HLSR's scholarship programs. For the fiscal years ended August 31 from 2011 to 2015, donations and contribution revenues continued to grow over 30% and HLSR youth and educational program contributions grew over 20%. Like the Texans, the Rodeo also benefits from a vast array of lucrative and multi-year sponsorships providing solid core COI to support the lease payment.

Combined with the lease payments, from 2007 to 2014, the surcharge and tax rebate revenues have covered prospective maximum annual debt service (MADS) on average by a factor of 2.4x and at a minimum of 2.1x. For the surcharge and tax rebate revenues, Fitch's base and rating cases assumed no growth scenarios above levels consistent with historicals. As a result, debt service coverage does not fall below 2.4x through the life of the bonds. Even under a sensitivity scenario which assumes each tax and rebate revenue item is no more than its historical minimum, coverage is no lower than 1.9x. Surcharge and tax rebate revenues are subject to year-over-year volatility due to an accounting timing issue.

The bonds were issued to refund certain obligations of the Authority owed to the County, Harris County Sports & Convention Corporation (HCSCC), and the Texans; funding a debt service reserve fund at MADS; funding a repair and replacement account, which is annually required to maintain $2.50 million per the terms of the leases; and paying the costs of issuance of the bonds. The bonds mature on Nov. 15, 2031, compared to the expiration of the leases with both the Texans and the Rodeo of Aug. 1, 2032.

SECURITY

The stadium bonds are secured by annual lease payments from the Texans in the amount of $4.01 million; annual lease payments from the HLSR in the amount of $1.50 million; a $2.00 surtax charged on each ticket sold to Texans, Rodeo, and County events; a $1.00 surtax charged per vehicle parking for Texans, Rodeo, and County events three hours before and three hours after the event; and cumulative 2% rebates of the respective sales taxes imposed on all ticket, concession, and other sales at NRG Stadium events remitted by the city of Houston and the Metropolitan Transit Authority of Harris County. The bonds will also be secured by any payments pursuant to the Non-Relocation Agreement between the Texans and HCSCC, who manages the stadium and in turn leases the facility from the Authority. Both the Texans and the Rodeo lease the stadium from HCSCC.