Key Takeaways
- After seeing numerous downgrades this year, a recent resurgence in positive cases of COVID-19 does not bode well for the sector, particularly as planned re-openings falter or are reversed, directly affecting large crowd venues.
- Over the next six to 12 months we will be watching the impact social distancing measures have on the sector, as well as issuers' ability to realign expenditures with drastically reduced revenues, particularly if very large sized events remain prohibited.
- A prolonged environment of weak revenue collection and further deterioration in coverage will equate to additional downward pressure on ratings.
Introduction of COVID-19's "social distancing," cancellations of major sporting events and conferences, disruptions in local commerce, and material declines in business and leisure travel have and will continue to negatively affect convention center and sports authorities' revenue streams. This, in turn, has led to significant deterioration in hospitality related revenues such as hotel taxes and other special taxes leading to deterioration in budgets, reduction in debt service coverage, and weakened local economies. In many cases it has also drastically reduced liquidity available to pay debt service. Such a notable shift in a very short period has led to deterioration in credit quality for many issuers and resulted in downgrades (see table).
Going forward, the extent to which convention and sports authorities will need to adjust budgets, shift and scale back operations, reduce expenditures, and make contingency plans largely depends on the duration of mandated limitations on crowds. However, it will also be affected by how quickly the public feels comfortable returning to large-scale events. The reemergence of large crowds, and in the meantime the ability of issuers to respond to revenue decline and operational changes will determine the depth and duration of credit pressure in the sector. In addition, given different patterns of reopening and crowd sizes by state, we expect there could be significant regional variations.
Permanent Shift In The Large-Crowd Landscape
To date authorities have made adjustments to stabilize operations--including reducing budgets, readying available liquidity, furloughing staff, retiring debt in advance of scheduled maturities, and holding off on new debt or capital plans. However, despite these adjustments we think there is potential for steep pledged-revenue declines at least through next year and likely an unstable revenue climate for many years beyond 2021.
S&P Global Economics recognizes consumer spending and business investment in the U.S. have been particularly affected by restrictions on movement and stay-at-home orders (see "U.S. Faces A Longer And Slower Climb From The Bottom," published June 25, 2020, on RatingsDirect). Long-term effects will depend on the severity of the recession, which could affect local economic profiles, including employment and spending trends. While most governments and many industries are still able to operate in the world of "social distancing," this practice fundamentally stunts the ability for the authorities to provide their service and could change it forever.
Alterations To The Competitive Landscape
Given the resurgence in cases of COVID-19 in the U.S. and its direct impact on pledged revenue streams, we view market exposure risk for convention center and sports authorities as high; previously it was low to moderate. Authorities typically have some flexibility to reduce administrative and marketing expenses in the event of a prolonged downturn, and in many cases they have built stable liquidity positions as a cushion for such challenging environments. However, the strong likelihood of a decline in revenues and prolonged below-average economic activity due to the spread of COVID-19 influences our view of market share.
We do not anticipate a significant change in competitive positions for convention center and sports authorities as it relates to demand, market share, market strength, and pricing metrics. While the global pandemic has certainly disrupted traditional operations, the influence is broad reaching and the competitive positions of the venues themselves are relative to other competitors in the sector that are similarly influenced by negative pressures.
Rating Actions
S&P Global Ratings has taken numerous negative rating actions over the past several months that have affected convention and sports authorities' bond ratings. The list below is not exhaustive and does not account for all convention center or sports authority related debt, in particular convention center debt that is supported by an associated city or county's general obligation pledge or debt that is supported solely from operating revenues of the facilities themselves.
| Recent Rating Actions On U.S. Convention Center Or Sports Authorities | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Obligor | State | Lien (if applicable) | Current rating | Previous rating | Current outlook | |||||||
|
Marion County Capital Improvement Board |
IN | Senior | A | AA- | Negative | |||||||
| Marion County Capital Improvement Board | IN | 2nd | BBB+ | A | Negative | |||||||
|
Washington State Convention Center Public Facilities District |
WA | Senior | BBB+ | AA- | Negative | |||||||
| Washington State Convention Center Public Facilities District | WA | 2nd | BBB | A- | Negative | |||||||
|
Las Vegas Convention & Visitors Authority |
NV | Senior | A | A+ | Negative | |||||||
|
Birmingham-Jefferson Civic Center Authority |
AL | Senior | A- | A+ | Negative | |||||||
| Birmingham-Jefferson Civic Center Authority | AL | 2nd | BBB+ | A | Negative | |||||||
|
Wisconsin Center District |
WI | Senior | BBB | A | Negative | |||||||
|
Harris County-Houston Sports Authority |
TX | Senior | BBB | A- | Negative | |||||||
| Harris County-Houston Sports Authority | TX | 2nd | BBB- | BBB+ | Negative | |||||||
| Harris County-Houston Sports Authority | TX | Junior (between 2nd and 3rd) | BB+ | BB+ | Negative | |||||||
| Harris County-Houston Sports Authority | TX | 3rd | BB | BB | Negative | |||||||
|
Muncie EDIT Building Corp. |
IN | Senior | BBB+ | A- | Negative | |||||||
|
Spokane Public Facilities District |
WA | Senior | BBB+ | A | Negative | |||||||
| Spokane Public Facilities District | WA | Senior plus certain city lodging taxes | BBB+ | A | Negative | |||||||
|
Greater Boise Auditorium District |
ID | Senior | A- | A+ | Negative | |||||||
| All actions listed above were taken since May 22, 2020. Rating actions are for entities whose debt is supported by special taxes and where the operating risk is associated with the particular convention center or sports authority. | ||||||||||||
Credit Pressure Landscape: If You've Seen One, You've Seen One
Understanding the complexities that surround why one authority may be in a better position from a credit perspective to manage through the current challenging environment begins at understanding the security or pledged revenues that ultimately are used to pay debt service obligations. Not all authorities are created equal and authorities can have vastly different budgets, liquidity positions, scope of operations, and revenues that support operations and debt service. One entity could have very little operations at all and is supported by general hotel taxes that are county-wide, while another is large and relies on revenue derived from operations of the facilities themselves.
The entities or authorities are typically created specifically to support and promote local culture, entertainment, and civic engagement, while at the same time spurring tourism and economic development. The debt these authorities issue to fund the construction of new facilities and updates is not always secured solely by revenues derived from operating the facilities such as ticket sales or concession sales. Often the debt is secured by special taxes, such as hotel or lodging taxes, sales taxes, or car rental fees that are derived from a much larger geographic area such as the city or county in which the facilities are located. While convention halls and sports arenas may be dark during the current challenging environment, we would anticipate that authorities' revenues would not drop to zero given the characteristics of the special taxes they receive and utilize to pay debt service as well as operations. However, given the symbiosis between the venues and visitor taxes, we still expect most of these revenue streams to be significantly affected.
This report does not constitute a rating action.
| Primary Credit Analyst: | Andy A Hobbs, Farmers Branch + 1 (972) 367 3345; Andy.Hobbs@spglobal.com |
| Secondary Contacts: | Joshua Travis, Farmers Branch 972-367-3340; joshua.travis@spglobal.com |
| Jane H Ridley, Centennial (1) 303-721-4487; jane.ridley@spglobal.com |
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