Fitch Ratings has assigned an 'A-' (EXP) rating to the National Basketball Association's (NBA) league-wide revolving facility borrowings in an amount up to $1.5 billion (privately placed through its affiliate Basketball Funding, LLC) and an 'A-' (EXP) rating to the NBA's approximately $350 million of senior notes (privately placed through its affiliate Hardwood Funding, LLC).

Fitch has also upgraded the NBA's outstanding $787 million league-wide revolving facility (expected to be refinanced with the new facility detailed above) (issued through Basketball Funding, LLC) to 'A-' from 'BBB+' and the NBA's outstanding $1.57 billion senior notes (issued through Hardwood Funding, LLC) to 'A-' from 'BBB+'.

The Rating Outlook is Stable.

Rating Rationale

The 'A-' ratings reflect the underlying core economic model of the National Basketball Association (NBA), which reflects a solid revenue sharing mechanism and a collective bargaining agreement (CBA) which fosters competitive balance through its soft salary cap. The upgrade reflects the material reduction in overall leverage on the notes and facility stemming from the NBA's recently renewed television contracts, which saw the average annual value of the national TV contracts increased approximately 3x. The league's recent strong attendance record through uncertain economic times in the U.S., solid viewership and formidable international growth are additional supporting factors driving the upgrade.

KEY RATING DRIVERS

Solid Underlying League Fundamentals: The NBA has a strong economic model that includes equal distribution of multi-year national television contract revenues and significant revenue sharing among member teams. Debt service is supported by large contractual revenue streams from investment grade counterparties. The current collective bargaining agreement (CBA) between the NBA and NBA Players Association includes solid core elements that promote financial stability and competitive balance. Domestic fan attendance and viewership remain stable and the league continues to grow its existing large international fan base.

Long History of Television Contracts: The NBA's current television contracts run through 2016 with Walt Disney Company (Disney rated 'A' with a Stable Outlook by Fitch) (ESPN & ABC) and Turner Broadcasting System (Turner, subsidiary of Time Warner rated 'BBB+' with a Stable Outlook) (TNT/TBS). On October 6th, the NBA announced expanded partnerships with both Turner Broadcasting System, Inc. and the Walt Disney Company. Under the new nine-year television rights agreements, ABC and ESPN and TBS will televise NBA games beginning with the 2016-17 season running through the 2024-25 season. The new contract represents a roughly 3x increase in average annual rights fees inclusive of payments made to support NBA marketing initiatives for WNBA and the NBA Development League.

Positive League Oversight and Governance: The league maintains significant resources and has demonstrated a willingness to step in and aid 'distressed' franchises. For example, the NBA successfully assisted the New Orleans Hornets (now New Orleans Pelicans) during ownership issues and ultimately bought the team and facilitated a sale at a higher valuation. The league's role in the recent Los Angeles Clippers sale is further illustrates the league's ability to deal with ownership issues.

Strong Liquidity and Coverage but Team Exposure: Structural provisions ensure timely payment of debt service, as national television revenues flow into an account established by the NBA to meet debt service obligations, including funding of interest and labor contingency reserves, before distribution to the participating teams. The risk of individual team bankruptcy causing disruption in debt service payments is mitigated by the agreement of all NBA teams to allow a bankrupt team's national television revenues to continue to flow to the lenders to cover debt service and the league's oversight and governance.

Refinancing Risks Expose Teams to Potentially Higher Costs: The bullet maturities associated with the notes and the necessity of bank renewals associated with the revolving facility expose the teams to potentially higher interest costs. This risk is partially mitigated by the league's recent effort to increase the ratio of long-term fixed-rate debt-to-revolving facility borrowings and take advantage of the current low interest rate environment.

Peers: The NBA's leverage under the facility is materially lower and now more consistent with the other 'A' category ratings including the NFL (G-3/G-4 programs rated 'A+' with a Stable Outlook and NFL Leaguewide [Football Funding and Football Trust rated 'A' with a Stable Outlook]) and MLB (Club Trust Securitization rated 'A' with a Stable Outlook). The NFL's Football Trust and Funding currently have leverage around 2.0x ($200 million in league allowed debt under the facility divided by $100 million per team national television contract (not including DirecTV)) and MLB's current leverage is also around 2.0x but additionally benefits from the securitization features.

The NBA's national television contract length run similar to those of the NFL, MLB and NHL while the CBA is similar to the NFL and NHL (MLB's expires in 2017). The NBA's soft salary cap is slightly weaker than those of the NFL and NHL but is slightly stronger than that of MLB, where player salaries have some restrictions but owners can elect to go above predetermined levels by paying a 'tax'.

RATING SENSITIVITIES

Negative: A significant decline in national television contract rights fees, which given the current trend is unlikely, could negatively impact the financial profile and metrics of the facility.

Negative: A further increase in the league permitted debt per team in the near-term would increase leverage on a per-team basis inconsistent with the current rating.

Positive: Given near-term projected leverage under the borrowing program, additional near-term positive movement is unlikely. A material reduction in leverage under the facility could potentially move the rating positively.

Transaction Overview

The NBA expects to issue senior notes and increase the bank revolving facility as part of the NBA's increase in club allowed debt. The NBA recently increased the secured club debt limit to $200 million from $125 million. An additional $15 million of unsecured debt is permitted at the club level and $35 million of holdco debt is permitted under the NBA's policy and is similar to the old debt parameters. The bank revolving facility is expected to be a 5-year facility and the notes are expected to have staggered maturities depending on market conditions.

The NBA continues to demonstrate very strong viewership and game-day attendance trends. The 2012 - 2013 season was the second most-viewed full regular season and the 2013-14 season was the third-most viewed complete NBA regular season in the history of all three networks (ABC, ESPN, TNT). Further, NBA viewership is up 23% over the past ten years (1,959,000 vs. 1,591,000). The 2013-14 Regular Season on ABC, ESPN, ESPN2, NBA TV and TNT reached 87.8 million unique viewers, while the finals on ABC (Spurs vs. Heat) averaged 15.5 million viewers per game with a 9.3 household (HH) US rating reaching 68.3 million unique viewers.

Attendance for the 2013-14 season was generally flat over the 2012-13 season and the 21.4 million attendance figure was just below the league's historical high point of 21.8 million in the 2006-07 season. Importantly, net gate receipts were up 5% and full season plans were up 7% showing continued pricing power and fan loyalty. Additionally, the NBA achieved over 90% capacity for the 10th straight season.

Leverage associated with the facility has historically ranged between 4.0x - 4.5x. Under the new television contracts and team debt limits, overall leverage will decline. In 2016, the first year of the new contracts, teams are expected to receive $68 million resulting in leverage of 2.93x. Under the terms of the new television agreement, the contract is geared to increase around 5% annually. Given this, leverage is expected to migrate downward to around 2.0x in 2025 when the annual television revenue per team is projected at approximately $101 million.

The NBA's 10-year CBA signed in December 2011 includes options available to both sides to opt out after notice, effective June 30, 2017. The CBA includes a 'soft' salary cap/'tax' system enhanced by an escalating tax aimed at augmenting on-court parity and controlling payroll expenses. For the 2012-13 seasons, the tax rate was set at $1 for every $1 in salary over the tax level. Beginning with the 2013-14 season, tax rates for incremental spending above the tax level have increased as follows:

-- $0 - 5 million over tax level - $1.50 for $1;

-- $5 - 10 million over tax level - $1.75 for $1;

-- $10 - 15 million over tax level - $2.50 for $1; and

-- $15 - 20 million over tax level - $3.25 for $1.

Rates increase by $0.50 for each additional $5 million above the tax level.

Fitch views the collective bargaining and revenue sharing agreements positively as they aim to improve individual team financial strength and improve on court competitive balance. In Fitch's opinion, greater competitive balance and growing competition amongst teams drives greater fan interest.

The revolving facility and notes are parity obligations secured by participating teams' national television contract revenues and other assets. The NBA currently has 30 teams in major metropolitan areas in the U.S. and Canada, of which 20 participate in the league lending facilities.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

-- 'Rating Criteria for U.S. Sports Facilities, Leagues and Teams' (Aug. 9, 2012);

-- 'Corporate Rating Methodology' (May 9, 2014).

Additional Disclosure

Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=975135

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