Wednesday, March 23, 2011

Baseball's synchronized dive into debt.

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National writers have tackled issues related to the McCourt ownership with varying degrees of success. Certainly, folks like Yahoo! Sports' Tim Brown, ESPN the Magazine's Molly Knight and Sports Illustrated's Lee Jenkins have added a whole lot to the discussion through their reporting and insight. Joining their ranks are Forbes' Monte Burke and Nathan Vardi, who have written an excellent article detailing the massive debt loads shouldered by, among other franchises, the New York Mets and Los Angeles Dodgers. Of debt in baseball generally, they write: 
[Bud Selig], derisively known as “the Steroid Commissioner” for the blind eye he turned toward the artificial bulking up of the players throughout the 1990s and early 2000s, now faces the possibility of becoming known as “the Debt Commissioner” for the ballooning of franchise IOUs under his tenure and for letting teams sidestep league rules on debt limits. [...] MLB has a rule that prohibits teams from operating at debt levels greater than ten times operating income (Ebitda), but it’s enforced arbitrarily and is easy to get around. 
Let's take a break and reflect on what "enforced arbitrarily" means: the Commissioner can circumvent the rules to offer a life raft when he desires, but has written authority to deny the same if he so wishes. That, in a nutshell, looks like what has happened with the Dodgers this offseason. Going on: 
FORBES estimates that the Dodgers’ value has nearly doubled to a current $800 million under his ownership. But the debt increased, too, and now stands at 13 times Ebitda, a problem that came to light in late 2009 when Jamie McCourt filed for divorce. [...] [W]hat’s clear from the court documents is that Frank McCourt used the team as collateral to rack up $459 million in debt from 2004 to 2009.
Over that period McCourt took $108 million of the money in personal distributions and funneled it into the couple’s real estate purchases.
Now, we've known about this for a while. But one thing we haven't touched on too heavily is what the debt load means. While the ratio of debt to equity has decreased over time--which was just about a given, seeing as how the McCourts put little to no cash into the purchase of the Dodgers--it can still swallow revenue whole. Debt service appears so great as to leave little cash for the club to use or other purposes.
You'll also recall the Dodgers' practice of monetizing ticket sales revenue, in which the club took a cash payment up front in exchange for pledging future ticket revenue as security for that loan. It's, in many ways, similar to what Frank McCourt attempted to do with the Dodgers' TV rights. Both the financial information revealed through the divorce and the types of financing mechanisms the club has pursued indicate that there just isn't much free cash floating around.
Concerning the financial health of Major League franchises, Rob Manfred, an MLB vice president, had this to say to Forbes: “Nobody outside the game knows what was done or not done with respect to any individual club ... I don’t think anyone outside the game is in a position to make a judgment as to how the debt-service rule has been administered." I particularly enjoyed Craig Calcaterra's response at NBC's Hardball Talk:
Really? No “you’re wrong,” or “baseball ownership is healthy?” Forbes comes to you and says that it’s writing a story about how teams routinely circumvent the debt ceiling rules and are doing so at tremendous risk and peril, and you’re really going with “how would you know?” 
Yikes!
The problem with Manfred's response, as I see it, is what we do know. We know about the Dodgers. And the Mets. And the Rangers. And, to a lesser extent, teams like the Diamondbacks and Padres. I would like to think that somewhere--perhaps down the street from me in Minneapolis?--there is a franchise doing things the right way. But I think it's pretty telling--and plenty ominous--that only bad news ever comes from exposing an MLB franchise's books to daylight.
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15 comments:

  1. FORBES article does not describe the doomsday scenario that many hope for!

    FORBES estimates that, under McCourt, the Dodgers’ value has nearly doubled to a current $800 million. But the debt increased,... up to $459 million in debt from 2004 to 2009.

    if they purchased the team with $ 15 million in cash, then the debt started around $ 400 million. Debt was reduced by Fox land (say to around $ 200 million), then replaced during the subsequent years.

    so looks like they borrowed about $ 225 million, of which $ 150 million went in to physical upgrades at the Stadium.

    The other $ 75 million for the ridculous lifesyle is, in fact, ridiculous but...

    ...the Dodgers doubled in value
    ...they are highly profitable
    ...the media seems to hope/indicate they are broke. $ 400 million in current value is far from broke.

    Bottom line is winning and once this divorce stuff is settled, assuming Frank does not make the same lifestyle mistakes again, the Dodgers have a very bright future ahead...

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  2. Why do so many pretended learned writers, bloggers and posters around the Internet continue to pretend that they understand the MLB CBA Debt Test? Anyone who ever talks about the relevance of Debt to Equity Ratio is clueless. All that matters is Redefined Debt to EBITDA (Earnings Before I Tricked the Dumb Accountant). When the new MLB Agreement is signed it had better include a new definition of Debt that includes intraspousal divorce settlement Debt, and eliminates so many of the types of Debt that are spcifically not included in the definition of MLB Team Debt or the credibility of baseball will no longer exist.

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  3. You're talking net worth, and you would be right. But Forbes is talking cash flow and that's what will be the McCourts downfall. They're hemorraging cash because of their debt burden. Basically, they've run their business like the average American home buyer from 1999 to 2005...and that's not good.

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  4. At 13 times EBITDA, the debt would have to be at a weighted average interest rate below 7.7%, just to have cash flow to cover interest payments.

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  5. The MLB CBA Allows "Debt" to be 10 times EBITDA and when the debt multiple exceeds 10 times then Bud gets to supervise team finances and therefore operations. Of Course Frank has created some Debt that in the past was contracturally exempt from the CBA definition of Debt, like Camelback. One of the issues is when does the non-Debt become Debt for Bud's purposes of limiting Dodger operations? Hopefully soon!

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  6. The rumored 20 year deal with Fox will allow Frank to keep the Dodgers and prevent Bud from objecting to the deal if Jamie accepts a $500,000,000 settlement and the immediate amount of increased tv revenue is %50,000,000 or more in 2011.

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  7. It is my opinion that if this deal happens, and the Dodgers do not get a new owner and their own cable channel, the team will be stuck in relative mediocrity for another 10 years. I believe this to be true because we will be stuck with a mediocre owner. If he wins this, he goes right back to his life long spending habits. There will be a new bimbo on the scene soon and it will be business as usual.

    I will wait for someone to conince me I am wrong. In the mean time, I do not give one dollar to McCourt. I have been a fan since '59, but if this guy remains, I am done.

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