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August 2, 2009

Moody's says FCE's bond rating is junkier, but that doesn't affect the arena bonds--yet

Atlantic Yards Report

Norman Oder examines how credit ratings for developer of the proposed Atlantic Yards project, Forest City, might affect its ability to finance an arena.

Develop Don't Destroy Brooklyn points out:
Forest City City Enterprises [FCE], the Cleveland-based parent of Forest City Ratner which is looking to float a $680 million bond for its proposed Barclays Center Arena, was given a B3 or "junk" debt rating, with a negative outlook, by Moody's [Investors Service].

But Standard & Poor's last October downgraded its rating of FCE's senior unsecured debt to junk status, as well, from BB- to B+. (At that point, FCE stock was trading at $11.91. Now it's at $7.14, after a recent uptick.)

Any difference between the ratings? And does it affect the arena?

The answer, according to the finance blogger Gari N. Corp, is yes, but only somewhat.

Does the downgrade matter?

His response: Moody's cut FCE by a little more. B3 on the Moody's scale is like B- on the S&P scale. Which is to be expected, given the bad news out of the commercial real estate business in the period between the two downgrades.

The downgrade matters, but it isn't everything. The arena financing will need to stand and fall on the credit rating of the arena. In good times for the developer, it doesn't want a terrible project dragging on its balance sheet. In bad times, the project doesn't want the parent's troubles distracting it.

But liquidity (access to capital) is important for a developer. It might need to fund cost overruns or revenue shortfalls with additional equity, and if it can't, the project has to borrow more cash just to sit around in case lenders need it. A rating cut makes it more difficult and expensive for the developer to raise money for this sort of thing. And it does, whatever the agencies say, edge a developer closer to bankruptcy, because it can't get access to financing, because some of its debt agreements might have clauses that say the developer has to repay some of its debt at a certain level (not common these days, but it happens). The agencies don't like their ratings becoming self-fulfilling prophecies, and they'd say that a weak company will fall anyway.

I'd start getting worried when FCE's rating has a C in it somewhere.

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Posted by steve at August 2, 2009 9:21 AM