Sports teams and related business may be a hot area for institutional investing because of the industry’s penchant for providing both excellent investment growth and less correlation risk compared with stocks and bonds. But that only goes so far: Should the debt ceiling standoff in Washington push the government to default on its debt, sports businesses would likely get swamped in the frothy wake.
“It will almost undoubtedly provoke a fairly serious recession that will reverberate in all industries, including sports,” said Smith College economist Andrew Zimbalist in a phone call. “The ability of the sports industry, and every other industry, to sustain itself will be a function of how long and intense the debt default is.”
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While most people surely know the details, we’ll recap: The issue is that weaker April tax receipts mean the federal government will run out of the ability to issue new debt to pay its bills, probably in June, according to Treasury Secretary Janet Yellen. The House of Representatives’ GOP majority and President Biden are at odds over raising the debt ceiling to allow the Treasury to issue more debt to fund the government. The ceiling is a remnant of spending policy for World War I that has frequently become a political football in recent years.
The most obvious impact on sports if the U.S. defaults would be to send the U.S. markets lower, as investors shift assets around and out of the country.
Remember, U.S. debt—Treasury bonds—has the reputation as the safest investment in the world. Once that confidence is broken, the economic hit to the country would result in a pullback in fan appetite for tickets and merchandise as forecasts of millions of people losing their jobs come to fruition. That said, it could be argued that sports recently weathered an even more severe demand crash during the pandemic, thanks to healthy media contracts that keep cash flow coming.
But there are further trickle-down effects that could be more lasting. Treasuries are the basis of many financing deals for league and team loans as well as for financing arenas and facilities. The 30-year Treasury bond yields 3.76% today with other rates going higher from there, based on the type of risk an issuer presents. For instance, a top-rated state-backed municipal bond, like the kind often used to finance stadiums, yields somewhere between 3.9% and 4.3%, depending on the state. A top-rated corporate bond pays 4.29% out in interest, while a highly rated but not top-rated issuer, like a major U.S. sports league, pays out a bit more than that in today’s market.
Should the U.S. default, the market would demand the federal government pay more interest in the future to compensate for the additional risk of default—a risk the market simply doesn’t demand the U.S. pay today. Other bonds would then have to pay more interest in turn. An extra percentage point on a $100 million loan could cost a team an extra $20 million or so over the life of a long-term loan, and that’s if loans are being made at all.
“There could be an increase in rates, or spreads could gap out more than the Treasury market, or it could cause a dislocation in the ability to issue debt,” said one sports banker who asked not to be identified because of the speculative nature of speaking on what could result. “It’s never happened, so it’s hard to make a case about what would happen.”
The closer the government gets toward default, the more financing costs will rise, even if a default is avoided or it’s a brief period of default. Moody’s Analytics recently noted that one-year credit default spreads on Treasuries, which are a type of insurance against defaults, have already spiked above levels seen during financial crisis of 2008-2009. (Still, rates aren’t anywhere close to what was seen during the European Union debt crises of 2011, Moody’s notes).
LPL Financial in its own note this week said the last time the U.S. came close to defaulting, during a 2011 political standoff, it sent the stock market into a deep dive, with the S&P 500 dropping 19% during the period of uncertainty about default, about April to October of that year.
Default also likely surrenders the U.S. dollar’s unquestioned role as the world’s reserve currency, a status that helps to keep the dollar relatively strong, making it cheaper for American syndicates to go abroad and buy European football teams, for instance.
“The moment we default, the dollar plunges in esteem,” said Zimbalist. “The willingness of other countries to hold dollars is eliminated, or greatly reduced. Whether the dollar could recover from that, I don’t think anybody knows.”
For such reasons, the likelihood of a default happening remains low, even if it’s not exactly zero.
“Amid this brinksmanship and political toxicity, budget reforms are the most likely outcome along with a raise in the debt ceiling,” said John Lynch, chief investment officer for Comerica Wealth Management. “We look for a last-minute deal, but not without significant drama resulting in further economic and market volatility.”
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