Research Update:

Brooklyn Arena Local Development

Corp. 'BBB-' Debt Rating Affirmed,
Placed On CreditWatch Negative
Primary Credit Analyst:
David L Lum, San Francisco + (415) 371-5013; david.lum@spglobal.com

Secondary Contact:
Trevor J D'Olier-Lees, New York (1) 212-438-7985; trevor.dolier-lees@spglobal.com

Table Of Contents

Overview

Rating Action

Project Description

Rationale

CreditWatch

Other Modifiers Update

Ratings Score Snapshot

Related Criteria

Ratings List

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 20, 2018 1

Research Update:
Brooklyn Arena Local Development Corp. 'BBB-'
Debt Rating Affirmed, Placed On CreditWatch
Negative
Overview
• We are affirming our 'BBB-' senior secured issue-level rating on $526.77
million Brooklyn Arena Local Development Corp.'s (LCD) 2016A, 2016B, and
2009 series debt, and placing the project on CreditWatch with negative
implications.
• The sale of a minority interest in the Brooklyn Nets basketball team
included revisions to the Nets License Agreement, which does not require
lender consent and reduces the share of revenues allocated to the arena.
To bridge the gap in revenue loss, a reserve account was established with
a portion of the sale proceeds (estimated to be $345 million). A top-off
mechanism was also created to utilize residual cash flow that would be
otherwise distributed to the sponsors back to the project in the event
the debt service coverage ratio (DSCR) falls below 1.38x based on the
arena's calculations.
• Our preliminary view of the net impact of the changes is that the reserve
size and mechanics of the top-off provisions, along with our own
operating assumptions for the arena and methodology for calculating DSCR
(which differs from the project), may lead to a decline in coverages well
below our previously forecast minimum DSCR of 1.35x.

Rating Action
On April 20, 2018, S&P Global Ratings affirmed its 'BBB-' rating on Brooklyn
Arena Local Development Corp.'s (LDC) $493.7 million 3.6%
payment-in-lieu-of-taxes (PILOT) revenue refunding bonds (series 2016) due
July 15, 2043, and the unrefunded portion of Brooklyn LDC's $511 million PILOT
revenue bonds (series 2009) due July 15, 2047. Furthermore, the series 2016
bonds include an insured serial bond component supported by an insurance
policy from Assured Guaranty Municipal Corp. (AA/Stable).

We are placing the credit on CreditWatch with negative implications based on

our preliminary assessment that the changes implemented as part of the Nets
sale may weaken DSCRs. We will confirm this view following the finalization of
our revised financial forecast and our review of the revised project
documents.

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 20, 2018 2

Research Update: Brooklyn Arena Local Development Corp. 'BBB-' Debt Rating Affirmed, Placed On CreditWatch
Negative

Project Description
The project, known as Barclays Center, is an enclosed multipurpose arena that
is the home of the Brooklyn Nets of the National Basketball Association (NBA)
and the New York Islanders of the National Hockey League (NHL). The
Brooklyn-based arena began construction in 2010 and opened on Sept. 28, 2012.
Brooklyn Events Center, the arena operator, makes PILOTs payments assigned to
the trustee as security for the bonds. Arena revenues from luxury suite
premiums, signage and advertising, naming rights, concessions, a share of club
and regular seat ticket sales, and merchandise support the PILOT obligations.

Rationale
On April 11, 2018, the sale of a 49% minority share in the Nets from Mikhail
Prokhorov to Joseph Tsai was completed. Mr. Prokhorov remains owner of the
remaining 51% majority stake in the team and 100% owner in the arena, which we
rate under our project finance criteria.

As part of the sale, the Nets License Agreement was modified, reallocating the
share of revenues between the arena and the team. For example, previously the
arena would retain 100% of food and beverage revenues. With the agreement
modifications, the project will retain only 30% for Nets games. To mitigate
the loss of cash flow available for debt service, the project set up a reserve
account prefunded with $327.8 million on April 12, 2018, and transferred an
additional $17.2 million to Brooklyn Events Center LLC. The initial proceeds
are dictated under a reserve account control and security agreement to be
invested in a portfolio of corporate securities rated at least 'A-'. The
initial proceeds and interest earnings assumed to be 3.6% by management are
projected to release a total of $521 million from 2018-2044 to support arena
debt service payments.

The reserve agreement also provides additional potential support if the

arena's DSCR falls below 1.38x, based on management's net debt calculation,
which differs from our DSCR calculation applied to project financings. This
mechanism is similar to a 12-month backward- and forward-looking lock-up test
for distributions. After each fiscal year close, if the project's cash flow
available for debt service (CFADS) plus revenues from the new reserve are not
enough to maintain a 1.38x net DSCR, a portion of any excess cash flows
(distributions) are to be transferred to the reserve account. Under
management's forecast, these top-off revenues are expected to contribute
roughly $153.6 million from 2026-2046. The top-off revenue arrangement is
clearly delineated in the reserve agreement, which is overseen by the NBA, in
that it is a party to the reserve agreement and has responsibility to direct
excess cash flow to the project rather than distributed to the owners. We are
assessing whether the creation of the reserve and top-off features creates a
counterparty dependency on the NBA to perform. We do not have a view of the
creditworthiness of the NBA.

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 20, 2018 3

Research Update: Brooklyn Arena Local Development Corp. 'BBB-' Debt Rating Affirmed, Placed On CreditWatch
Negative

In a separate improvement for the project, Brooklyn Events Center LLC, the
arena operator, and the LDC amended the arena lease agreement on April 10,
2018. Under the terms, the project will be reimbursed for certain operations
and maintenance (O&M) related costs not previously reimbursed. These annual
savings range from $0.9 million-$9.8 million over the life of the debt,
creating stable cash flow to service debt.

We are confirming details of this change to update our financial forecast,

which will also incorporate an update of our assumptions. Since our last
rating review, the Islanders announced they will exit their arrangement to
play in the arena in 2022. In addition, the lease with the Islanders has been
modified to release the arena from an onerous guarantee payment following the
2018-19 season. Beginning with the 2019-2020 season, the Islanders lease
arrangement is a more typical NHL lease without an onerous guarantee by
Brooklyn Events Center LLC. Our preliminary view is that we are likely to
adjust down some of management's key operating assumptions. We would also note
that our project finance criteria do not provide for interest earnings assumed
available for debt service. Finally, we may re-evaluate our view of the
project's transaction structure given the ability of the NBA, the owners, and
the arena to amend the Nets License Agreement, which governs the allocation of
revenues between the arena and the team.

At this juncture, our view is that the reserve account, top-off mechanism, and
O&M reimbursements will not lead to DSCRs calculated under our project finance
methodology that support ratings at the current level. Under our previous
forecast, the minimum DSCR of 1.35x offered little cushion for a 'BBB-'
rating.

Liquidity
We view liquidity as neutral. The bonds have a debt service reserve funded at
an amount equal to the maximum annual principal and interest payments, and a
strike reserve funded at an amount equal to the maximum semiannual principal
and interest payment. We believe the project has enough liquidity to withstand
a work stoppage lasting more than one year.

CreditWatch
The CreditWatch negative placement is a result of the sale of a minority
interest in the Nets made public April 12. The sale amended the Nets License
Agreement, which diverts to the team some revenues formerly flowing to the
arena. While the sale provides for a reserve account and an additional top-off
feature should arena revenues fall below 1.38x, our preliminary calculations
suggest that these features are not sufficient to support the current credit
profile. We expect the amendments could result in lowering DSCRs below the
minimum of 1.35x we were previously expecting in 2041.

Our CreditWatch negative placement highlights the sensitivity of the forecast

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 20, 2018 4

Research Update: Brooklyn Arena Local Development Corp. 'BBB-' Debt Rating Affirmed, Placed On CreditWatch
Negative

to the assumptions we make regarding future operations, the cash flows that
implies, interest earnings that can be relied upon to meet debt service, and
whether excess cash flow in the waterfall will be sufficient to satisfy the
top-off requirement. We expect to resolve our CreditWatch within the next 90
days, while we continue to receive additional information.

We could lower the rating, potentially multiple notches, after assessing the
transaction's changes and revising our financial forecast considering the
reduction in revenue against other features in the sale that were inserted to
provide credit support. A downgrade would be warranted if ratios fall
consistently toward 1.3x against our former expectation of 1.35x.

We could remove the rating from CreditWatch negative if we conclude the sale's
provisions (to establish a reserve account and provide additional support to
substitute for lost revenues) provide for forecast DSCRs that fall toward the
top of the 1.2x-1.4x range under our calculations.

Other Modifiers Update

Other modifiers have no impact on the project rating.

Ratings Score Snapshot

Construction Phase SACP (Senior Debt): N/A

Operations Phase SACP (Senior Debt)

• Operations Phase Business Assessment: 5 (1=best to 12=worst)
• Market Exposure: Low
• Preliminary Stand-Alone Credit Profile (SACP): bb+
• Downside Impact on Prelim. SACP: +1 notch
• Liquidity: Neutral
• Comparative Analysis Assessment: N/A
• Operations Phase SACP: BBB-

Modifiers (Senior Debt)

• Parent Linkage: Delinked
• Structural Protection: Neutral
• Sovereign Rating Limits: AA+
• Senior Debt Issue Rating: BBB-

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 20, 2018 5

Research Update: Brooklyn Arena Local Development Corp. 'BBB-' Debt Rating Affirmed, Placed On CreditWatch
Negative

Related Criteria
• Criteria - Corporates - Project Finance: Key Credit Factors For Social
Infrastructure, Accommodation, And Entertainment Project Financings,
Sept. 16, 2014
• Criteria - Corporates - Project Finance: Project Finance Transaction
Structure Methodology, Sept. 16, 2014
• Criteria - Corporates - Project Finance: Project Finance Operations
Methodology, Sept. 16, 2014
• Criteria - Corporates - Project Finance: Project Finance Framework
Methodology, Sept. 16, 2014
• General Criteria: Country Risk Assessment Methodology And Assumptions,
Nov. 19, 2013
• Criteria - Structured Finance - General: Counterparty Risk Framework
Methodology And Assumptions, June 25, 2013
• Criteria - Corporates - Project Finance: Project Finance Construction And
Operations Counterparty Methodology, Dec. 20, 2011
• General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009
• Criteria - Insurance - Bond: Standard & Poor's Methodology For Setting
The Capital Charge On Project Finance Transactions, Sept. 12, 2007

Ratings List
Ratings Affirmed; CreditWatch/Outlook Action
To From
Brooklyn Arena Local Development Corp.
Senior Secured BBB-/Watch Neg BBB-/Stable

Certain terms used in this report, particularly certain adjectives used to

express our view on rating relevant factors, have specific meanings ascribed
to them in our criteria, and should therefore be read in conjunction with such
criteria. Please see Ratings Criteria at www.standardandpoors.com for further
information. Complete ratings information is available to subscribers of
RatingsDirect at www.capitaliq.com. All ratings affected by this rating action
can be found on the S&P Global Ratings' public website at
www.standardandpoors.com. Use the Ratings search box located in the left
column.

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 20, 2018 6

Copyright © 2018 by Standard & Poor’s Financial Services LLC. All rights reserved.

No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be
modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of
Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party
providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or
availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use
of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS
OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM
FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY
SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive,
special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by
negligence) in connection with any use of the Content even if advised of the possibility of such damages.

Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact.
S&P’s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any
investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The
Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making
investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from
sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives.

To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P
reserves the right to assign, withdraw or suspend such acknowledgment at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the
assignment, withdrawal or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result,
certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the
confidentiality of certain non-public information received in connection with each analytical process.

S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate
its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com
and www.globalcreditportal.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional
information about our ratings fees is available at www.standardandpoors.com/usratingsfees.

STANDARD & POOR’S, S&P and RATINGSDIRECT are registered trademarks of Standard & Poor’s Financial Services LLC.

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 20, 2018 7