SBJ/March 11 - 17, 2002/Opinion
Sports finance not immune to 'Enron flu'
Published March 11, 2002
The dramatic collapse of Enron is one more warning sign for the already unsettled world of sports finance.
Enron Corp.'s highly publicized fall from corporate giant to Bankruptcy Court petitioner has had devastating financial consequences for creditors and shareholders, ranging from the smallest individual investor to the largest banks in North America. Professional sports felt the impact from both a financial and public relations perspective. While the scope of that impact is yet to be determined, banks and other lenders providing financing to professional sports teams are becoming more and more concerned.
Houston Astros were so eager to shed the Enron name that they paid millions.
The name "Enron" became commonplace in the world of professional sports by virtue of Enron's $100 million, 30-year naming-rights deal for the home ballpark of the Houston Astros. That deal ranks as the 10th highest in total dollars for all North American naming-rights deals to date. Revenue from naming rights has become a staple for professional sports teams developing new stadia and arenas; however, with the collapse of the technology market, teams have learned that this income is anything but guaranteed.
Less than two years after Enron Field opened its gates, Enron Corp. filed for Chapter 11 bankruptcy protection in December. Even though the company was current on naming-rights payments, the Astros agreed to pay $2.1 million to end the agreement 28 years early. When a team is willing to pay millions to get out of a business relationship that was designed as a reliable, long-term source of revenue, the implications for the industry are unsettling.
Enron Field became the fourth major league facility to see its corporate benefactor file for Chapter 11 protection, joining PSINet Stadium, Pro Player Stadium and the Trans World Dome. The bankruptcy filings by these companies, combined with concern over the drop in other revenues for many professional teams, is causing reverberations in the boardrooms of the major financial institutions providing credit to professional sports teams.
While revenues remain strong for top "brand name" franchises such as the Boston Red Sox and Washington Redskins — and banks have been willing to finance the purchase and ongoing operations of those teams — the decrease in revenue streams for many other franchises in the NHL, NBA and MLB has been troublesome.
It wasn't too long ago that we were reading about the innovative asset-backed securitizations involving the Staples Center in Los Angeles and the Pepsi Center in Denver. The owners of these facilities and the professional sports teams playing in them were able to secure large financings using the revenue streams from luxury suites, club seats, naming rights and other related sources without having to provide broader general security or personal guarantees.
Times have changed. Banks and other financial institutions no longer are falling all over themselves to provide these new and innovative types of financing. The misfortunes of Enron, PSINet, TWA and Pro Player's parent company, Fruit of the Loom, in the last few years has caused these same financial institutions to re-examine their willingness to provide financing to professional sports teams other than on a fully secured basis.
Lender concerns have been heightened as revenue from other sources — such as luxury suites, club seats, advertising and sponsorships — has been trending down for many teams. For example, as leases for luxury suites have come up for renewal, many teams are finding it difficult to re-lease these suites, or are having to lease them for amounts far less than previously.
Additionally, revenue from naming-rights deals peaked several months ago. No fewer than 14 facilities are currently on the market looking for a title partner. In recently concluded deals, teams are generally giving up much more in terms of signage, partner relationships, etc. in exchange for lower payments. Owners of several major league facilities such as the SkyDome in Toronto are reportedly finding it difficult to even find an interested party.
The unpredictability of future revenue sources may also impact the larger leaguewide credit facilities put in place by the professional sports leagues themselves. While these credit facilities are often secured by leaguewide revenue, network television ratings for all four major team sports have been falling consistently over recent years as competition from the Internet and other forms of entertainment has increased. Potentially lower revenue from leaguewide television contracts, league sponsors and advertisers will force financial institutions to monitor these credit facilities closely. Lower revenues means higher credit risk to lenders.
Apart from the financial impact of the Enron collapse, the public relations impact has been extremely troublesome to the Houston Astros and to Major League Baseball. Teams do not have the unilateral right to terminate a naming-rights contract if the other party is in Chapter 11 proceedings. Therefore, as congressional hearings continued into the Enron collapse, the Astros remained stuck with the Enron name plastered to their home ballpark.
To rid themselves of the name, the Astros were forced to negotiate a settlement with Enron and have agreed to pay Enron $2.1 million — turning what was once a valuable asset into a liability for the Astros. This lesson will not be lost on professional sports teams and the institutions financing them.
It will be many months before the full impact of the Enron collapse on professional sports can be measured, but one thing is for sure. The business of professional sport is not immune to the "Enron flu."
Jeffrey Citron (firstname.lastname@example.org) is a corporate finance lawyer and sports business consultant with Goodmans LLP in Toronto.