Fitch Affirms STAPLES Center 'A' Rating

Business Wire, March 3, 2003

Business Editors

NEW YORK--(BUSINESS WIRE)--March 3, 2003

Fitch Ratings today affirmed the 'A' rating on the L.A. Arena Company, LLC's $304,420,000 arena revenue-backed notes, series 1999. The Rating Outlook is Stable. The L.A. Arena Company is the obligor for all debt service payments. Security is the assigned revenue rights from the STAPLES Center naming rights agreement with Staples Inc., from its ten corporate founding partner agreements, two concessionaire agreements, premier seat revenues, its ticket-sales contract, and luxury suite license revenues of 101 of the STAPLES Center's 160 luxury suites. The notes were issued in 1999 and proceeds were used for construction costs of the STAPLES Center, establishment of debt service reserve funds, and other issuance related costs. Final targeted maturity is 2021 and final rated maturity is 2026. Bear Stearns, Morgan Stanley & NationsBanc Montgomery Securities were the original underwriters of this bond transaction.

The long-term debt rating for the arena revenue-backed notes reflects the STAPLES Center's economically diverse service area, solid attendance levels and adequate financial results since its opening in 1999. A significant aspect of the 'A' rating is the enhancement provided by the debt structure and targeted principal payment schedule versus the final rated maturity, and the element of securitization of pledged revenues of this issuance. Traditional project finance transaction structures do not benefit from this structure.

Home to the National Basketball Association's (NBA) Los Angeles Lakers, Los Angeles Clippers and the NHL's Los Angeles Kings, the Staples Center is a state-of-the-art, multipurpose sports and entertainment facility that commenced operations in 1999, and holds 20,000 for NBA games and 19,000 for NHL games. There is essentially no material venue competition for the STAPLES Center in the Los Angeles metropolitan area. In 2002, there were a total of 211 events at the STAPLES Center, including the WNBA's L.A. Sparks, the Arena Football League's L.A. Avengers and multiple concerts and other family events.

As a new facility, the STAPLES Center has overcome construction-related risks inherent to large-scale projects, despite $37 million in cost overruns for which subordinate loans were taken. These loans are being retired by excess revenues before any cash is swept to equity holders. Since opening, the arena has had strong revenue generation and has made all of its interest and targeted principal payments on time and in full. The debt service reserve fund has one full year of required interest payments -- funded through cash and a letter of credit -- and each luxury suite maintains one-half year of payments as a deposit against breach of contract. Interest coverage in FY2002 was approximately 1.55x while total debt service coverage was 1.31(x).

Founding partner revenue contracts, pledged to bondholders, are signed with the following companies: Anheuser-Bush Inc., Toyota, Inc., United Airlines (UAL), the L.A. Times, McDonalds, Pacific Telesis Group (Pac Bell), Sempra Energy, Bank of America, Pepsi-Cola (Pepsi), and DIRECTV, Inc. The STAPLES Center has signed separate concessionaire agreements, for a combined minimum annual guarantee total of $3 million, with Levy and Aramark. Additionally, attendance levels at the STAPLES Center have been solid in its opening years -- driving premier seat revenue and luxury suite revenue -- as the Lakers have won the NBA championship three consecutive years and generally sell out, while the Kings and Clippers attendance during this season has averaged about 15,500 and 14,500, respectively.

Specific credit risks include the NHL's collective bargaining agreement expiration on Sept. 15, 2004, prior to the 2004-2005 season and the lack of a long-term lease with the Clippers. While Fitch believes it is unlikely that the Clippers will move to a new venue at the end of its contract, the Clippers are also important to maintaining an 'A' rating. Finally, UAL's bankruptcy filing is likely to cause UAL not to resign its founding partner contract in 2005, but to date, UAL is current on its STAPLES Center payments. Overall credit risks include the standalone, non-recourse status of the debt, its single asset base and fairly narrow stream of pledged revenue, as single site venues are subject to risks such as severe weather, fire, among others, which in conjunction with the new appreciation for the threat of terrorism in the U.S., pose additional credit risks. Renewal of luxury suite contracts -- the bulk of pledged revenue -- represents additional risk as the average length of relevant contracts is materially shorter than the tenor of the debt. There are 101 suites under 5, 7 and 10-year leases. Given the current sluggish U.S. economy, renewal risk of revenue agreements with corporations is heightened for many sports facility credits.

The current economic underpinnings of the NHL are weak as compared to, for example, the NFL (senior unsecured rating of 'A+'). Fitch Ratings will review the STAPLES Center's rating and other sports facility ratings where NHL teams are among the primary tenants at the end of the 2002-2003 NHL season. The prospect of a work stoppage in the NHL is viewed negatively by Fitch Ratings and, as such, is likely to put downward pressure on NHL-related ratings.