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Patrick Johnston: Major credit ratings agency sounds alarm about COVID shutdown’s impact on NHL finances


The National Hockey League, like other professional sports circuits, could be headed for choppy financial waters in the wake of the COVID-19 pandemic — even if teams are able to resume playing games in front of their fans, according to the world’s fourth largest credit rating agency.

A DBRS Morningstar report released last week — “When Will the Coronavirus-Drive Sports Shutdown Affect Credit Ratings?” — warns that “even with a return to full stadiums within six months, certain factors could precipitate revisions to the base-case forecast, which could pressure ratings. The coronavirus’ effect on the global economy could affect sponsorship renewal values, premium seating and ticket sales, as well as concession, merchandise, and parking revenue.”

A summertime resumption of even a portion of the NHL season — the most hopeful concepts suggest playing in empty stadiums, with fans only able to watch via TV — would help diminish losses, but in the long run is far from a true fix for team finances.

For leagues like the NHL, National Basketball Association and European soccer, the good news is their seasons were mostly complete. Most of the money earned from broadcasts, sponsorships and ticket sales was already in the bank. The money lost is a reflection of the truth that the North American leagues make a mint in the playoffs.

No playoffs will surely hit the near-term bottom line.

For the NHL, a cancellation of its remaining schedule would mean, by most estimates, losing out on $1 billion in revenue. It’s a big number, but even in a league that’s already heavily built on credit , teams would be able to weather the loss in the short term.

It’s the long-term picture that bears watching, said Michael Goldberg, DBRS Morningstar’s senior vice-president, sports finance and a co-author of last week’s report.

Even if the NHL were forced to call off the rest of the 2019-20 season, it’s the 2020-21 season that would have a bigger impact on the NHL’s credit situation, Goldberg said in an interview.

There are two questions for next season, he said, when determining the ability of teams to finance their operations: Is it even possible for leagues to return to a normal playing schedule next fall — or whenever it is they can actually begin play — and how will the pandemic affect things like ticket prices and sponsor revenues?

“Our ratings will probably be more longer viewing,” he said. “If there’s a delay to start next season, as a lot of teams have to borrow to pay for salaries and other costs, the debt held by the franchise will increase.”

And as teams add debt, the overall financial picture for a sports league changes. In the NHL, it’s plainly evident that some teams, like the Vancouver Canucks or the Toronto Maple Leafs — both with deep-pocketed owners — would be in a better position to deal with short-term cashflow concerns, than others, like the Florida Panthers or Arizona Coyotes.

Well-heeled owners also generally can draw from their own accounts as well as turn to low-interest loans from banks. Both scenarios are more challenging for teams that have low revenue.

Ticket revenue for Florida and Arizona is so weak, they already are reliant on outside financing, be it via their owner’s own pockets and credit lines, or from the league’s media revenues and credit pool.

The NHL maintains a $1.7-billion line of credit, from which teams can borrow up to $100 million at rates lower than they’d likely get from the bank.

While other leagues limit how much debt a team can carry — nominally no more than $350 million in the National Football League (though both the L.A. Rams and Las Vegas Raiders have been allowed to exceed that figure in recent years) , $325 million in the NBA, MLB uses a formula based on annual revenues — the NHL is a little more flexible in how it regulates team debt. Sports Business Daily reported six years ago that teams are generally allowed to carry a debt load worth half the team’s value; there is nothing to suggest this has changed, though Goldberg suggested the league doesn’t care a great deal.

Just look at the ownership history of the Coyotes to get a sense of how leveraged NHL owners can be. When Alex Meruelo bought the team last year, Forbes reported the team’s enterprise value at about $300 million, but said the team was carrying an equivalent amount of debt, while also losing $50 million per season.

So while teams will have work-arounds for potential early-season cashflow questions, the debt they add just to finance early-season operations won’t disappear.

Tom Mayenknecht of Vancouver-based Emblematica Brand Builders says this is a real worry.

“Given everything that’s going on, there are a few pressure points including enterprise value, which is a reflection of revenue,” he said in an interview. “The lower they are (in enterprise value), the more liability that teams take on. It will affect their credit ratings and that will affect their ability to borrow.”

Any team adding debt changes the overall picture for the league, Goldberg said.

“If debt in the league, as a whole system, is higher, this is a negative for the whole league,” he said. More debt means more challenging interest charges in future financing efforts.

In the end, the assessment offer by Goldberg and his associate Frederic Gosselin paint a firm story, the ability to sell tickets, beers and hot dogs, in the end are what matters most:

“We believe that negative rating actions would be warranted if the season is cancelled and a portion of next season is potentially at risk. The NHL’s broadcasting contracts are less valuable than the leagues noted above and, therefore, the league could not sustain a return without fans for an extended period of time without ratings pressure.”

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