SBJ/November 2 - 8, 1998/No Topic Name

Global woe sacks NFL credit plan

Global economic uncertainties are taking their toll on America's game, forcing the NFL to suspend plans to sell bonds worth $600 million to private investors to help fund a $1.1 billion credit facility.

Turbulence in global credit markets upset the effort after it became clear that the super-low interest rates team owners were promised would not materialize.

It's an indication of how sensitive parts of the sports business have become to global financial trends. While the big money now behind sports gives teams and leagues more complex financing options, it also carries risk. Once unnoticed, distant financial turmoil today can affect sports as much as Wall Street.

The league is moving forward, however, on a bond offering of more than $500 million that it hopes to finalize this month. That offering will finally replace the league's current $340 million credit facility.

Nonetheless, the suspension of the first bond offering is a stunning turnabout. Just over three weeks ago, NFL senior executives and the league's banker, NationsBanc Montgomery Securities Inc., confidently presented the offering to potential investors. And just one week before the NFL pulled the plug, a league executive boasted about the favorable interest rates, and several rating agencies gave the deal high marks. NationsBanc Montgomery, a unit of BankAmerica Corp., did not return calls seeking comment.

New England Patriots owner Robert Kraft, who heads the NFL finance committee, said he did not hear about the problems until Oct. 19, just days before the NFL announced that the deal would be suspended.

Team owners were assured during the summer that the new facility would charge a 5.8 percent interest rate, said a source familiar with the deal. But not until the time the league backed out were owners informed that the rates would actually be around 6.8 percent.

"It was the spread over the interest rates — the spreads doubled," said Kraft. "When we were originally doing the deal, the spreads were a little over 1 percent [more than the 10-year Treasury bond]. When we were going to the markets, spreads were over 2 percent."

A spread is the difference between a core interest rate, such as the 10-year Treasury bond, and the rate bond investors charge. In the summer, the credit markets were calm. Because of international crises such as the Russian financial collapse, however, credit spreads on all debt surged to reflect the added risk. Not just sports leagues and teams, but companies of all stripes suffered increased borrowing costs.

If the NFL, backed by a war chest with $18.3 billion in eight-year media contracts, cannot easily sell bonds, what sports team and league can? "In general, it's not a great time to finance," said George Cole, a sports banker with First Union Capital Markets. "Credit spreads have really widened on all grades of credit."

Nine NFL teams had committed to borrow the $600 million, according to the offering's prospectus. The Dallas Cowboys, New Orleans Saints and Tampa Bay Buccaneers, for example, each committed to borrow $100 million, the maximum team debt allowed by the league.

Many of the teams committed to the credit facility were planning to refinance existing debt at the promised lower rates, so these organizations may not be in urgent need of funding. Thirteen teams had committed to use the $1.1 billion facility. How many will use the smaller one is unclear.

Finance committee chief Kraft downplayed the importance of the bond offering to teams' financial futures. "If people were desperate for the money, that would have been a different situation," he said.

The Patriots, for example, simply wanted the money for arbitrage, Kraft explained, meaning the team planned to borrow money at the the lower rates and invest it in higher-yielding securities.

But good news may be on the horizon. Last week, global credit spreads began to shrink slightly. Kraft said he hoped the $600 million offering would be issued in the next three to 18 months.

"I think [the credit] problems are fairly short-term," said David Moross, a managing partner with IMG/Chase Sports Capital.

The $600 million program would have sold to institutional investors notes secured by revenue from television contracts, NFL Properties, NFL Enterprises and NFL Films. It was these bonds that faced investor resistance.

The more than $500 million offering will issue securitized notes in the commercial paper market, where companies sell low-interest-rate securities. These rates fluctuate with the credit markets, so teams will be unable to lock in a fixed rate.

The notes will securitize selected league revenue, such as media contracts, making this the largest U.S. sports securitization. The structure is nearly identical to Major League Baseball's credit facility, which earlier this year sold $405 million of securitized notes into the commercial paper market.

Staff writer Liz Mullen contributed to this report.

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