Public Finance

May 13, 2002

www.fitchratings.com

Tax SupportedNew Issue Memphis and Shelby County

Sports Authority, Tennessee

RatingsNew IssuesSenior Lien Revenue Bonds,

Series 2002A .................................. AA–Subordinate Lien Revenue Bonds,

Series 2002B................................... NR

Outstanding DebtCity of Memphis, Outstanding

General Obligation Bonds .............. AAShelby County, Outstanding

General Obligation Bonds .............. AANR – Not rated.

AnalystsJames Gilliland1 212 908-0575james.gilliland@fitchratings.com

Richard Larkin1 212 908-0875richard.larkin@fitchratings.com

Issuer ContactTiffany BrownManaging Director1 901 543-5338

New Issue Details$113,370,000 Senior Lien Revenue Bonds,Series 2002A (non-Alternative Minimum Tax[AMT]), and $93,620,000 Senior LienRevenue Bonds, Series 2002B (non-AMT),are scheduled for a negotiated sale the week ofMay 13 via a syndicate led by GoldmanSachs.Purpose: Bond proceeds will be used to payfor a portion of the arena construction costs,pay the costs of acquiring land for the arenaproject, pay architectural, engineering, andlegal costs, fund the debt service reserve fund,and pay costs of issuance.

� OutlookThe Outlook for these hybrid project revenue tax-supported bonds isStable at ‘AA–’. The arena will be constructed for Memphis’ newNational Basketball Association (NBA) franchise, the MemphisGrizzlies, and benefits from a non-ad valorem pledge from the deepand diverse revenue base in the City of Memphis and Shelby County.This investment-grade rating reflects the credit strength of Memphisand the County of Shelby, both rated ‘AA’ by Fitch Ratings, and thelikelihood that each would appropriate non-ad valorem revenuesnecessary to replenish the Memphis and Shelby County SportsAuthority’s (the authority) debt service reserve fund (DSRF), ifnecessary, pursuant to the interlocal agreement.

� Rating ConsiderationsThe ‘AA–’ rating reflects the credit strength of the general obligationbonds and adequate liquidity levels of the City of Memphis and ShelbyCounty. Although the back-up pledge to replenish the DSRF isunconditional, it does not constitute a full faith and credit of the city orcounty. Liquidity is strong, with general fund reserve levels in fiscal2001 of $61.5 million and $39.3 million, respectively. Both the cityand county practice prudent reserve requirements, and this ratingassumes a solid commitment by both in the event of revenue shortfalls.Subordinate bondholders, representing roughly $24 million at issuance,do not benefit from the city/county back-up but have rights to a rangeof excess pledged revenue.

While pledged revenue cash flow is expected to be significant, thecurrent financial forecast calls for slim but adequate debt servicecoverage averaging 1.12 times (x). Fitch believes there is an optimisticand speculative element to the arena-based revenues that is likely torequire subsidies from the back-up pledge in future years. However,Fitch does not believe that a worst case cash flow scenario wouldsignificantly affect the city or county’s financial positions at theircurrent rating levels. If the Grizzlies leave Memphis before or after thedate of the early termination right, the Grizzlies’ corporate parent,Hoops LP (Hoops), is required to pay a lump sum approximately equalto the outstanding principal of the series 2002A bonds. If Hoops isunable or unwilling to meet its early termination payment, both seriesof bonds will continue to be supported on a pro rata basis by remainingpledged revenue and the back-up pledge. Issuance of additional senioror subordinate bonds for the arena or for another non-arena project, ora change in the city or the county’s general obligation credit rating willtrigger a review of this credit.

The arena will be home to the Memphis Grizzlies of the NationalBasketball League and is expected to host roughly 50 other non-NBAevents annually. The site is located in downtown Memphis’

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tourism development zone (TDZ), immediatelyadjacent to the city’s historic Beale Street area.

� Strengths• Non-ad valorem revenue back-up pledge of city

and of county.• Deep diverse economy of city and county.• Adequate reserve levels at city and county to

comfortably cover worst case cash flow scenario.• Strong city council support for bonds.

� Risks• 40% of projected cash flows are speculative

arena-based activity.• Relatively new NBA franchise.• Authority is not a single-purpose facility.• Subordinate bondholders have rights over certain

excess pledged revenues.

� SecurityThe 2002 bonds are secured by the trust estateconsisting of: a senior lien on the pledged revenues;all right of the authority in the interlocal agreementamong the authority, Shelby County, and the City ofMemphis; and the moneys and securities in the fundsand accounts (excluding the rebate fund subordinatebonds) created under the indenture.

Pledged Revenues: Pledged revenue consists of sixseparate revenue streams in addition to thecity/county back-up pledge. These six revenuestreams are the seat rental fees, the sales tax rebate,countywide car rental taxes, citywide hotel/motel tax,countywide hotel/motel tax, and an annual $2.5million Memphis Light Gas & Water (MLGW) waterdivision payment in lieu of tax.

City/County Back-Up Pledge: If there is a pledgedrevenue shortfall in any year and the DSRF is drawnon, the city and county, via the interlocal agreement,pledge to replenish, by appropriation, legally usablenon-ad valorem revenues.

Subordinate Lien Pledged Revenues: Subordinatelien bondholders are secured only by the seat-use fee,the sales tax rebate, and the car rental surcharge afterthe senior bonds are made whole. In the event there isa surplus in any year of these two revenue streams,all surplus revenues will be used to redeemoutstanding subordinate lien bonds, to the extent thatthere is not a deficiency in the reserve funds of seniorbonds.

Security Under Early Termination Right (ETR):If Hoops executes its ETR under the use andoperating agreement (see page 3), the series 2002Abondholders will cease to be secured by the sales taxrebate revenue and will be redeemed by Hoops’ earlytermination payment, which is structured to besufficient for full repayment of the series 2002Abonds. The series 2002B bondholders will be securedby the remaining pledged revenues. If Hoops isunable or unwilling to meet its early terminationpayment, both series of bonds will continue to besupported on a pro rata basis by remaining pledgedrevenue and the back-up pledge.

Flow of Funds: All revenue will flow through thefollowing funds: the revenue fund; bond fund; rebatefund; DSRF; capitalized start-up costs reserve fund;and surplus fund.

Within the revenue fund are two separate accounts.These include the revenues available for seniorindebtedness account and the revenues available forsenior and subordinated indebtedness account. Seniorbonds must be made whole before subordinate bondsare redeemed, but as long as there are senior orsubordinate bonds outstanding, any revenues (salestax rebate and car rental) in the surplus fund shall befirst directed to redeem subordinate bonds asdetermined by the authority as necessary, and anyexcess revenues shall be deposited back into thesurplus fund. Final maturity of subordinate bonds is2037.

Once subordinate bond and reserve bond funds arefulfilled, moneys in the surplus fund shall be directedin the following priority: to reimburse the city andcounty for any replenishment to the DSRF; fordeposit in the capital improvement reserve fund; toredeem senior bonds; and any lawful purpose by theauthority.

DSRF: The DSRF will be funded at issuance withthe lesser of 10% of series 2002 par amount,maximum annual debt service requirement, or 125%of average annual debt service requirements.

Additional Bonds Test: Additional parity bondsmay be issued to accomplish any purpose of theauthority if: all funds and accounts in the indenturehave proper balances; the authority, city, and countyare all in compliance with the covenants of theindenture; additional bonds are issued only forconstruction costs of the project or an additionalproject or that additional bonds will be issued for

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refunding purposes; or revenues available for seniorand subordinate debt service are not less than 1.10xdebt service coverage for the first five full years afterissuance. The first $20 million of additional bondsissued to complete construction of the arena areexempt from this test.

In the event that the authority issues a substantialamount of additional bonds for any project other thanthe arena project, Fitch will review this rating.

� Memphis and Shelby CountySports Authority

The authority is a nonprofit corporation of the cityand county governments organized in 2000 pursuantto Chapter 67, Title 7 of the Tennessee CodeAnnotated. The purpose of the act is to promoterecreational opportunities via construction anddevelopment of amateur and professional sportsfacilities for the people of Tennessee.

The authority is governed by a board of directorswith seven members who are appointed by the cityand county mayors and are confirmed by the citycouncil and county commission. Under the act, theauthority has broad powers regarding the arenaproject, including the issuance of the series 2002bonds. The series 2002 bonds are limited obligationsof the authority, payable solely from pledgedrevenues under the indenture.

� Arena ProjectThe arena is expected to have 18,500 seats, including2,500 club seats and 64 luxury boxes with 14 seatseach. A parking garage with 1,800 spaces will beconstructed on arena grounds. Construction isexpected to begin in the summer of 2002 and becomplete in time for the 2004–2005 NBA season.Construction will be administered by the MemphisPublic Building Authority (PBA), and the PBA willown the arena on behalf of the city and county andwill lease it to the city/county. Hoops will beresponsible for operating the arena and assuming anyoperating surpluses or losses.

The arena is expected to have roughly 95 eventsannually, 45 of which are NBA games. TheUniversity of Memphis (U of M) basketball programwill continue to play home games in its current arena,the Memphis Pyramid, and no other sports tenant inany major league is expected to play in the arena.

On April 11, 2002, the Memphis City Council voted13-0 to approve the resolution authorizing thepledged revenues to pay series 2002 bondholders. OnMay 8, 2002, the Shelby County Commissionersvoted 11-2 to authorize the pledged revenues. Therewas no referendum to the voters of Memphis andShelby County concerning the arena project, as thereis no property tax involved in the financing. Thearena project is being financed by a $20 million statecontribution, $12 million each from the city andcounty, $202 million senior lien revenue bonds, androughly $21.1 million of privately placed subordinatelien revenue bonds.

Memphis Arena Project Agreement: Thisagreement (project agreement) between the city andcounty and Hoops was executed on June 29, 2001and governs the financing, development activities,and construction of the arena. Pursuant to theagreement, the city/county will pay for theconstruction of the arena and will fund a $10 millioncapital improvement reserve fund (CAPX fund). TheCAPX fund will remain at $10 million until Hoopsdraws on it for future infrastructure improvementsthat must be approved by the city and county, atwhich time surplus revenues from pledged revenues,if available, will replenish the fund to $10 million.The CAPX fund balance will be used to pay the finaldebt service requirements. Also pursuant to theproject agreement, Hoops will receive the $3.75million balance in the capitalized start-up costsreserve fund as reimbursement for start-up costs ifthe new arena is not ready for the 2003–2004 season.This $3.75 million will be funded at issuance.

Memphis Arena Use and Operating Agreement:This agreement (operating agreement) betweenHoops and the city and county, executed on June 29,2001, stipulates each party’s rights and operatingcovenants relating to the operation of the arena.Effective on the commencement date, the initial termof the operating agreement is 25 years, during whichHoops is obligated to maintain the arena as theGrizzlies’ home arena. Hoops has the right to extendthe term of the operating agreement for fiveconsecutive five-year terms afterwards. Under theoperating agreement, all income and revenues of thearena shall be the property of Hoops and Hoops shallbe responsible for all costs of operation, occupancy,and management, including operating losses. Hoops’payment for use of the arena is represented by the$1.15 seat use fee to the city/county on all public paidevents at the arena. The city/county will maintaininsurance for the arena, and Hoops is responsible for

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routine maintenance and cleaning. The city andcounty together will meet with Hoops to discussscheduling of future events at the arena and at thePyramid, and Hoops must consent to certain events tobe held at the Pyramid to limit competition to thearena.

ETR: Under the operating agreement Hoops mayexercise an ETR to sell or relocate the Grizzlies toanother city after the 17th full NBA season if a“shortfall season” occurs and specified shortfalls inthe sale of seats, club seats, and suites at the arenacontinue into the immediate succeeding NBA season.Assuming the arena is ready for the 2004–2005 NBAseason, the ETR may not be exercised before the endof the 2020–2021 NBA season. The series 2002Abonds mature in 2028, and the series 2002B bondsmature in 2029.

A shortfall season is defined as one in which averageattendance at the arena for NBA games is less than14,900, the 64 largest suites available for public saleare not sold in full, or the number of club seasontickets sold is less than 2,500. If after the occurrenceof a shortfall season, shortfalls occur in any of theaforementioned sales during the next season, the“second shortfall season,” Hoops may give notice tothe city/county of the shortfall and second shortfallseason, at which time the city/county or members ofthe community have 60 days to cure such shortfallsfor the second shortfall season by purchasing thenumber of seats or suites necessary to cure theshortfall. If no such shortfall is timely cured, Hoopsmay relocate the team to another city after the secondshortfall season. If Hoops chooses to relocate theGrizzlies to another city after this time, Hoops isobligated to pay a termination fee that will be equalto the outstanding principal of the series 2002Abonds.

Interlocal Agreement: Under the interlocalagreement, the city and county agree to make up anyshortfall in DSRF, by appropriation of non-advalorem revenues, split 50%/50%.

� Pledged RevenuesSales Tax Rebate Revenue: Existing statelegislation provides for the capture by the local sportsauthority of any state and local sales tax revenues(state sales tax of 6% and local option sales tax of2.25%) levied on ticket, concession, NBA novelty,and parking revenue generated at the Pyramid and atthe new arena from NBA events but not U of M

events by the team in Shelby County, beginningOct. 9, 2001 and lasting for 30 years. This revenuewill be available only as long as the Grizzlies are thehome team at the arena. In the event the state rate forthe sales and use tax should change while theauthority is receiving these revenues, the TennesseeDepartment of Revenue is required by statute toadjust rates to provide substantially the sameeconomic benefit to the authority. The sales taxrebate revenues are expected to account for 30% oftotal base case cash flows.

Seat Rental Fees: The $1.15 per seat rental fee iscollected by Hoops for every sporting, entertainment,exhibition, or performance at the new arena. Allevents at the Pyramid excluding U of M games, untilthe arena is opened, are subject to the $1.15 fee.Under the operating agreement, Hoops remits this$1.15 per ticket to the city and county, which remitsit to the trustee. The seat use fee revenues areexpected to account for 8.2% of total base case cashflows.

MLGW Water Division Payment in Lieu of Taxes:Pursuant to an agreement between the city and thewater division of MLGW, the city will receive $2.5million annually after 2003. The MLGW PILOT isexpected to account for 11.7% of total base case cashflows.

Car Rental Taxes: A 2% countywide surcharge onrental cars rented for 31 days or less applies until thebonds are fully paid. Exemptions include rental carsunder contract for customers whose vehicles arebeing repaired and for rental car transactions inwhich an entity whose principal business is the saleor service of motor vehicles. Car rental taxes areexpected to account for 15.7% of total base case cashflows.

Citywide Hotel/Motel Tax: The city currentlycollects a 1.75% room occupancy tax. A portion ofthe tax has been dedicated through 2016 to thepayment of Memphis’ downtown Cook ConventionCenter (CCC). After 2016, all taxes are available forthe series 2002 bonds. The citywide hotel/motel tax isexpected to account for 14.3% of total base case cashflows after 2016.

Countywide Hotel/Motel Tax — TDZ Sales TaxIncrement: Current countywide hotel/motel tax paysdebt service for Memphis’ outstanding CCC generalobligation bonds, although this revenue is notspecifically pledged to these bonds, and the city

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receives an annual rebate of the incremental statesales tax within the downtown TDZ that willsubstitute the hotel/motel tax revenue in to pay theCCC bonds. The TDZ was established in 1999 andincludes the heart of Memphis’ downtown centralbusiness district, including the entire Beale Streetarea. The first TDZ rebate was in 2001, and the TDZpayment will permit a county hotel/motel tax to applyto series 2002 bondholders via assignment from theinterlocal agreement. The countywide hotel/motel taxrevenues are expected to account for 20.3% of totalbase case cash flows.

� City/County CreditUnder the interlocal agreement between the City ofMemphis, Shelby County, and the authority, executedon April 16, 2002, if pledged revenues areinsufficient to meet debt service requirements in anyyear, the city and county shall each separatelyreplenish the DSRF at a 50%/50% split from legallyavailable non-ad valorem. The maximum amount ofthe city and county’s obligation for the series 2002bond is $115.0 million, and per the interlocalagreement, both the city and county shall bereimbursed from pledged revenues, if necessary.

In the event DSRF replenishment is necessary, thetrustee will notify both the city and the county of theshortfall. Both the city and the county’s fiscal year-end occurs on June 30, and the authority’s series2002 bonds are payable on Nov. 1 annually. As such,the city and county shall have four months to fill theDSRF by the deadline of Oct. 31 of each year.

In fiscal 2001, the city appropriated roughly $180million of local non-ad valorem revenues, and thecounty appropriated roughly $59 million of non-advalorem revenues. Liquidity levels are strong at thecity and county level, with general fund reservelevels in fiscal 2001 were $61.5 million and$39.3 million, respectively, as well.

Fitch rates both the City of Memphis and ShelbyCounty’s general obligation property tax bonds ‘AA’.For a detailed credit analysis, see Fitch Research on“Memphis, Tennessee,” dated Oct. 21, 2001, and“Shelby County, Tennessee,” dated Nov. 5, 2001,available on Fitch’s web site at www.fitchratings.com.

� Projected Arena Cash FlowsOf these six revenue streams, two (sales tax rebateand seat use fees) are tied to the profitability of the

arena, three are non-arena-related tax pledges, andone is contractually obligated income (COI) from acity agency. The arena’s principal cash flow risk liesin the arena-based revenue forecasts, which arelargely dependent on the future performance of theGrizzlies franchise and the fan support that the teamgenerates. Base case cash flows call for arena-basedrevenues to account for an average of 34% of totalrevenues available for debt service throughout the lifeof the bonds.

While pledged revenue cash flow is expected to besignificant, the authority’s financial forecast calls forslim but adequate debt service coverage averaging1.12x. Fitch believes there is an optimistic andspeculative element to the arena-based revenues thatis likely to require subsidies from the back-up pledgein future years. Assumptions for these are based onfully leased luxury suites, fully leased club seats, androughly 80% of sell-outs for regular seating throughthe life of the bonds. If the Grizzlies leave Memphisbefore or after the date of the ETR, the Grizzlies’corporate parent, Hoops, is required to pay a lumpsum approximately equal to the outstanding principalof the series 2002A bonds. If Hoops is unable orunwilling to meet its early termination payment, bothseries of bonds will continue to be supported on a prorata basis by remaining pledged revenue and theback-up pledge.

Under a stress case scenario under which Fitchassumed arena-based revenues to be roughly 80% offorecast at 2003, decline to 50% of forecast by 2010,and see the Grizzlies execute their early terminationright in 2022, as well as stressing the tax-backedrevenues to 80% of their forecast through the term ofthe bonds, Fitch estimates the city and county wouldeach have to appropriate roughly $200,000 in 2004and increase slowly and steadily increase this to $1.5million each by 2022 and $3.5 million afterwards,assuming no termination payment from Hoops. WhileFitch believes the city and county’s respective non-advalorem budgets would be able to sustain theseincreases at their rating levels, a major risk despitethe interlocal agreement, is future appropriation riskfor non-essential assets. However, Fitch does notbelieve that a worst case cash flow scenario wouldsignificantly affect the city or county’s financialpositions at their current rating levels, and this ratingassumes that the city/county would be willing toappropriate amounts necessary to replenish theDSRF.

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