SBJ/November 9 - 15, 1998/No Topic Name

Slugger's bond plan striking out

When news broke earlier this year that Chicago White Sox slugger Frank Thomas planned to raise $20 million by selling bonds secured by his future salary and endorsement fees, a major new financial option for superstar athletes appeared to be on the verge of reality.

But the Thomas deal may have collapsed, sources said, and experts now contend that player contracts are loaded with too many inhibitive conditions for athletes to sell bonds backed by their earnings.

As a result, this much-hyped merging of Wall Street and sports could be a strikeout.

The main reason for the whiff is that player contracts are commonly structured to allow teams non-payment for a variety of reasons. Contractual moral clauses, like the one invoked by the Golden State Warriors in the Latrell Sprewell case, allow the team and endorser to halt salary payments and endorsements fees in case of an ethical breach.

Many contracts also do not pay players if they are injured while participating in a non-team-related event. And, of course, players are not paid during labor discord. The current National Basketball Association lockout has sent shivers through financiers contemplating athletic bonds secured by salaries.

Also, recent global financial turmoil has left investors afraid to invest in untested securities, demonstrated by the recent suspension of the National Football League's planned $600 million bond offering.

"Where the markets are now, there is no appetite for this kind of risk," said David Pullman, chairman of the Pullman Group, a unit of Fahnestock & Co.

Pullman, who last year designed the David Bowie bonds ($55 million of notes secured by the singer's song royalties), said he passed on the Thomas deal because of all the conditions placed on athletes' pay.

Other bankers worry that an athlete paid the value of a contract up front could simply walk away from the sport.

Several bankers are now looking at ways to structure around these problems. One idea is to take several athletes and bundle their salary and endorsement commitments into a single security, thereby reducing the risk.

"I could see [player agent] Leigh Steinberg pool his athletes together," Mark Barry, vice president of ASU Enterprises, told a panel on sports securitizations last week.

This idea has been discussed before, but unless a player has an overriding business interest in receiving the money up front, secured bonds may not be worth it. Taxes, for example, would have to be paid on the entire sum right away.

Sources said Thomas wanted the money to help fund his rap music label and his charitable foundation. Others noted that another use could be to invest some of the $20 million in high-yielding securities.

Neither Thomas' representatives nor his banker, SPP Capital Partners, responded to calls seeking comment.

Barry argued that financial planners and agents need to work together to weed out problem clauses in future player contracts.

Even that approach has its detractors.

"I think companies or teams would be loath to give up on [morals and injury] clauses," said Steve Williams of Capital America Entertainment, a division of Nomura Securities.

Instead, Nomura is exploring the idea of designing contracts that set aside only part of a player's pay to be covered under the morals and injury clauses.

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