Teams Hobbled by League Debt Rules Amid Low Interest Rates

JohnWallStreet
·4 min read

Interest rates are at historically low levels. The current U.S. 10-year Treasury Rate is under 1%. Well-respected sports banker Rob Tilliss (CEO, Inner Circle Sports) says because the NFL, NBA, NHL and MLB maintain low limits on the amount of debt owners can place against the value of their franchises, teams will continue to be able to access the capital markets to manage their balance sheets during the remainder of this difficult period. “Despite the costs of funds rising for banks during the pandemic, benchmark rates remain so low that teams in many instances can borrow at a lower all-in cost than five years ago,” he explained. While credit spreads have widened in COVID-19’s wake, compared to other industries that have high yield debt, the sports industry is viewed as extremely stable. But the fact that money is cheap is negligible to the pro sports ecosystem, as teams are barred from taking on debt beyond the leagues’ low LTV thresholds. In other words, teams are unable to borrow as much as they would otherwise qualify for when compared to other industries (think: telecom, oil & gas) and thus the current interest-rate environment doesn’t benefit sports franchises as much as it does businesses in highly leveraged sectors.

Our Take: To be clear, if interest rates were to rise in an inflationary period, teams taking on new debt and those with floating rate loans would end up paying more to borrow. And as Tilliss said, “[the impact] would not be insignificant if rates were to [climb] 200 or 300 basis points.” But rising interest rates aren’t expected to be a short-term issue for prospective borrowers. “With the Federal Reserve dropping rates to zero and continuing to stimulate the economy, we are going to remain in a very low rate environment for the next 18-24 months,” the CEO added. It should be noted much of the debt within the sports ecosystem –including a large portion of stadium and arena debt– is of the fixed-rate variety and therefore not subject to rate fluctuations. In addition, many teams that have floating rate loans outstanding are hedging that exposure through interest-rate swaps to take advantage of the low-rate environment.

The big four sports leagues in the U.S. are rated investment grade by the credit rating agencies, thanks in part to their large national broadcast rights deals. As a result, the leagues have been benefactors of the declining rate environment, and the NBA, for instance, offers its teams access to a league-wide fixed rate facility to manage their financing costs. In addition, clubs can borrow funds on the strength of their own credit if they remain under the league-imposed debt limits. But, Tilliss says, “typically, outside of stadium or arena projects, most teams borrow through the league facility, because the terms are more beneficial than they could get borrowing on their own.”

A second sports banker commented that following a year without fans in the building, many clubs find themselves in need of capital. To plug the operating shortfall, team owners will either make capital calls or seek additional financing. With a different point of view, the second banker told JohnWallStreet by Sportico the market for straight collateralized assets is currently not robust, at best, and at worst is closed, reasoning that with no fans in the stadium, it will be difficult to secure cash-flow-based loans without mortgaging the future, and that there’s likely not enough collateral in the team beyond the existing loan to make the lending risk worthwhile. But Tilliss said he hasn’t seen any evidence to date of lenders shying away from the sports sector. “[Inner Circle] is in the market with several transactions now and is in conversation with banks regarding financing,” he said. “The sports lending banks are open to do business.” The difference for teams looking to borrow this December versus last is simply in the terms. “The borrower is likely to pay a higher credit spread [now], because the cost of capital for banks is higher and covenants will be more restrictive than a year ago,” he added.

For what it’s worth, the second banker did issue the caveat that banking is a relationship-driven business. So, while he doesn’t see lenders being willing to finance or refinance loans backed on the team’s or venue’s current business metrics, they may still be willing to do “relationship loans” backed by the owner’s personal balance sheet (granted the owner agrees to provide some sort of operating support or guarantee). He also suggested lenders would still be open to finance stadiums or arenas yet to break ground. With construction likely to take two to three years, the targeted opening is far enough into the future that cash flow shouldn’t be affected by COVID-19.

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