SBJ/November 16 - 22, 1998/No Topic Name

NFL loan deal could soothe hard feelings

BankAmerica Corp. plans to lend $400 million to seven NFL teams in the aftermath of the embarrassing suspension of the league's bond offering.

BankAmerica's investment banking unit, NationsBanc Montgomery Securities Inc., which managed the suspended $600 million offering, also earlier this year sold six of these seven teams derivatives designed to protect the bonds against rising interest rates.

But because rates fell dramatically and the bond offering was suspended, these teams were left with potentially large losses from exposure to Treasury hedges.

"It's like trying to anticipate the outcome of a ballgame," Mark Brickell, a J.P. Morgan & Co. derivatives expert, said of Treasury hedges. "If rates go up, it's a good thing you agreed to the hedge. But if on the other hand interest rates fall, you would have been better off not making that promise. Nonetheless, if the team has gains from interest rate declines in other parts of their business, it offsets the loss."

The new NationsBanc financial package, which is expected to be finalized in the next few weeks, will be designed to mitigate some of the damage from the hedges. While it is unclear what the financing structure will be, the costs of the hedges are expected to be wrapped into the loans.

"The teams gambled and they lost, but all these costs have been folded into the costs of the loans so everyone will be happy," said a source familiar with the deal. "Basically this is a show of confidence in the league and ...a strengthening of the partnership."

NationsBanc declined to comment.

The bank may also have wanted to ensure goodwill with the league after the bond collapse. Some team owners had assumed the bond prices would be much lower, but in late October NationsBanc informed the league that costs would be much higher than expected. Days later, the NFL suspended the bond issue.

Indicative of the importance NationsBanc attached to the NFL deal, the decision to make the loans was made at the highest levels of the bank. Hugh McColl, the chief executive of BankAmerica, personally discussed the loans with New England Patriots owner Robert Kraft, who is chairman of the NFL finance committee, a source said. And Ed Brown, head of BankAmerica's global finance unit, has been taking part in the discussions since the bond deal was first developed.

Nine teams originally committed to the bond offering, but two — the New Orleans Saints and Dallas Cowboys — will not be part of the new NationsBanc effort.

Some teams were said to be upset because even though the bond offering was suspended, they were still obligated to pay NationsBanc for the Treasury hedges. A Treasury hedge is designed to lock in a core interest rate. When rates change during the term of the hedge, the investment bank pays the buyer the difference if the rate is higher. But if rates decline, the company, or in this case the team, pays the investment bank.

Typically that would not have been a problem because usually if a core rate such as the 10-year Treasury bond falls, so do corporate rates, or what lenders actually pay for a bond.

For example, if a company expected to pay a corporate rate 1 percent more than the core Treasury rate, but that rate dropped, the corporate rate would also be expected to fall. In this way, while there would be extra costs for the Treasury hedge, the borrowing price would be lower. But between July and October, the term period for the NFL hedges, credit spreads widened, even as the 10-year Treasury rate plummeted. As a result, teams with the hedges were doubly exposed. Not only did they owe NationsBanc for the hedges, but if there was a bond deal it would have been at high rates.

Six of the seven teams that plan to borrow from NationsBanc were also sold the hedges by the bank. What is unclear is just how much these teams owed NationsBanc for the soured hedges, though it could be substantial. The bank would not disclose the amount.

But even if just $100 million of the $600 million offering had been hedged, the nearly 1 percent fall in the 10-year Treasury rate during the hedge term could have cost the borrowers millions of dollars, experts said.

The two teams that dropped out, the Saints and Cowboys, had planned to borrow $100 million each. The Saints may borrow the money from a local bank, Hibernia Corp.

Many of the teams were planning to use the bond funds to refinance existing debt. The Patriots, however, were planning to arbitrage, or invest the funds.

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