Diamond’s Expected Bankruptcy Likely to Take Shape ‘In the Shadows’
Diamond Sports Group is widely expected to file for Chapter 11 bankruptcy during the next month, but the real action will happen beforehand. Diamond and its creditors will race against the clock to negotiate a debt solution that maximizes financial recovery and minimizes the risk of disruption to live broadcasts of more than 40 teams in the NBA, NHL and MLB.
Sportico on Friday reported Diamond planned to file for bankruptcy as early as this week, when it’s anticipated the company will miss an interest payment. But now people with knowledge of the process say the legal filing may not take place for a few more weeks.
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Insiders say that if negotiations between Diamond and its creditors prove successful—and chances are they will—the bankruptcy will take a “prepackaged” form. In it, Diamond and its creditors will have agreed on a reorganization plan that, if approved by a federal bankruptcy judge, specifies terms of the payments—who would be paid, how much, and when—and who would own a piece of Diamond going forward. Accompanying courtroom proceedings would be more collaborative than adversarial and the fallout more scripted than chaotic.
The current situation reminds one bankruptcy law expert of what is known in bankruptcy circles as “negotiations in the shadows.” Attorney Todd Zywicki, the George Mason University Foundation Professor of Law at George Mason University Antonin Scalia School of Law, explained in a phone interview that bankruptcy is often “a threat you hold in your back pocket” where a debtor essentially asks its creditors, “Why don’t we work this out voluntarily?” Both the debtor and its creditors realize the alternative is one where the creditors might not be paid in full or even at all.
When a debtor files a prepackaged bankruptcy, it can credibly tell the court, Zywicki summarized, that “all the players” have crafted a solution. General Motors adopted this approach amid the 2009 financial crisis. It reorganized through a complex Chapter 11 bankruptcy overseen by a federal judge that involved selling off assets, taking on government ownership and forming a new entity, New GM, with a clean balance sheet. During this stretch, GM paid essential bills, honored car warranties and received $33 billion in debtor-in-possession financing, which are permissible loans during a bankruptcy. Albeit in a different form, with different owners and with some creditors better off than others, GM emerged from the bankruptcy and is still around today.
Had GM—which employed nearly 250,000 people when it filed for bankruptcy—collapsed, the impact on the American economy would have been substantial and might have prolonged the recession. GM, some said, was “too big to fail.” Diamond is nowhere near the size of GM and shouldn’t expect the government’s help. However, for the sports industry, Diamond is integral. It represents a collection of 19 regional sports networks (RSNs) doing business as Bally Sports that millions of fans rely on to watch games.
Diamond’s financial woes are well documented. Owned by Sinclair Broadcast Group, Diamond is experiencing the downside of sports fans dropping cable TV for apps and streaming services. Adding to Diamond’s predicament, Sinclair purchased the RSNs in a debt-heavy $9.6 million deal in 2019.
Diamond, Sportico has learned, faces a deadline of Feb. 15 to pay $140 million in interest. But at the urging of lenders who eye the prospect of gaining equity via bankruptcy, Diamond is expected to miss Wednesday’s deadline. The missed payment would trigger a 30-day grace period before a final default is entered. Diamond would use that time to negotiate with creditors on how to move forward with a prepackaged bankruptcy filing.
A missed payment by a company preparing for bankruptcy “is very common,” Zywicki said. The company “starts to hoard cash, because once they file, there is a period where all of their money can be frozen.” Sufficient cash on hand is essential, as it’s needed to pay critical expenses such as employees, utility bills and the bankruptcy attorneys who will be instrumental in the following weeks and months.
As part of its Chapter 11 bankruptcy filing, Diamond would detail a schedule for paying back creditors and a plan on how it would continue operations—including, most importantly for fans, airing games. A trustee appointed by the bankruptcy court would oversee repayments while Diamond executives run the business and, under certain conditions, borrow additional funding. Chapter 11 is thus very different from Chapter 7, which involves liquidation of assets to repay debts.
Chapter 11 proceedings usually involve numerous filings, and in some cases last several years. In other words, Diamond’s reorganization likely won’t be swift.
The company would also need to adjust to the public nature of court proceedings, making business and contractual disclosures that could become available to the public and media. The presiding judge would likely order Diamond to provide schedules of assets, liabilities, income, expenditures, contracts and leases. Details could become public concerning Diamond’s regional sports networks’ relationship with pro teams, such as number of subscribers, viewing metrics, intellectual property rights, dispute resolution mechanisms and other sensitive issues and proprietary information.
The “big question,” Zywicki said, “is what happens post-bankruptcy.” Diamond, despite entering bankruptcy, would have some leverage. As the debtor, Diamond would assume or reject broadcasting contracts with the teams, or—more likely—try to renegotiate the terms.
Should Diamond assume the contracts, Diamond would take the contracts as they are and pay what it owes, Zywicki explained. Since Diamond is experiencing such severe financial issues that it plans on filing for bankruptcy, that option seems unlikely.
Alternatively, if Diamond rejects the contracts, Diamond would not be performing what it contractually agreed to do—and could be liable for breach of contract claims. But legal claims become part of the bankruptcy process. Teams might get proverbial “nickels and dimes” in recovery, Zywicki said, depending on a host of factors, including whether their debt is secured or unsecured and whether legal claims are discharged via bankruptcy.
“Usually it’s a hybrid” approach that ultimately works, Zywicki said. In it, the debtor “threatens to reject” the contracts, which often induces the creditors to agree to renegotiating the deals. In renegotiated contracts, the teams might accept being paid less or stretching payments over a longer period, but still receive more than if Diamond breaches.
Zywicki cautioned that market factors, especially other broadcasting options for teams, are crucial in forecasting how the teams will handle this situation. “The key,” he said, “is can the teams get more from other bidders?”
While Diamond’s situation is a major development in the sports industry, Zywicki said, the situation is not as complicated as other high-profile bankruptcies. He referenced one of Kmart’s bankruptcies that involved many thousands of creditors and suppliers—including for socks, shampoos and numerous other items sold in the store—who were owed money and how that made negotiations more difficult.
“Here,” he said, it’s largely “the teams and employee contracts” and an understanding “there is no reorganization of the company without broadcasting rights.” Teams might be willing “to share pain because broadcasting rights for RSNs aren’t worth as much” and a broadcaster working on an employment contract might be willing to “take a pay cut.” That’s because if they don’t agree to take less, their best bet is to “file a claim in bankruptcy like everyone else” and hope for the best. Zywicki added the most likely losers in Diamond’s predicament are those who lent money to finance acquisitions of RSNs.
Zywicki warned that sports bankruptcies sometimes have unique outcomes. He referenced the Pittsburgh Penguins filing for Chapter 11 bankruptcy in 1998. A major source of debt was $26 million in deferred payment obligations to superstar Mario Lemieux, who had retired in 1997 and was the team’s largest creditor. The bankruptcy process led to Lemieux becoming an owner. He also returned to the ice in 2000 and played another five seasons as owner-player. Lemieux was a big winner once again when Fenway Sports Group bought the Penguins in 2021: He reportedly made about $350 million through the sale.
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