SBJ/20081124/This Week's News

Next on deck for credit decision: MLB

Major League Baseball is the latest sport to confront the harsh reality of the global credit crisis, with the league’s $1.5 billion credit facility set to expire Dec. 8.

The NFL last month decided to let its loan pool terminate, automatically converting it into debt with accelerated principal payments. But unlike the NFL, whose first payment is not due until 2011, if MLB does not refinance, it will have to begin making some principal payments as early as next month, finance and baseball sources said.

Jonathan Mariner, MLB’s chief financial officer, declined to comment on deal specifics.

MLB briefed its owners on the situation last week and updated the teams’ chief financial officers a week earlier. Bank of America, MLB’s lead lender, has been trying to refinance the credit facility into a seven-year loan that would push the first principal payment off to 2014, the sources said. That loan would carry rates 2 percent to 3 percent higher than what teams are charged through the current credit facility, banking sources said.

Bank of America did not reply to a request for comment.

Under normal credit circumstances, it has been easy for leagues to annually renew their credit facilities, large pools of loans secured by group collateral. More than half of MLB’s teams use the MLB facility because the shared collateral enables them to borrow more cheaply than on their own. Baseball pledges for its facility all of the contractual revenue from its national TV deals, money that typically would provide enough of a security blanket for lenders.

But these are abnormal times, when banks are not lending money, and many of the lenders that traditionally have been part of these deals have either gone out of business or been acquired by other financial institutions.

In addition, the NFL and MLB had the unfortunate timing of their credit facilities coming up for renewal at the peak of the credit crisis. (The NBA renewed in May.) The NFL could have chosen to refinance at higher rates, but it opted for the feature of its deal that converts the debt into a four-year loan instead of an annually revolving line of credit.

MLB also has that option, known as a term out, which sources expect the league ultimately to utilize. Term outs were once considered a black eye on a borrower, but in the current market, that is no longer the case. The rates stay about the same in a term-out loan; the big difference is the accelerated principal payments. A baseball team finance source said 3.4 percent of a majority of the MLB credit facility will amortize on Dec. 8, 5 percent next year, and then 20 percent increments beginning in 2010.

“There is no honeymoon period like with the NFL,” one finance source said. The NFL owes $350 million in 2011, and the remainder of its $1.4 billion loan the following year.

Sports consultant Marc Ganis, who has advised several baseball teams, said the accelerated amortization could hurt the ability of small- to midmarket teams to increase payroll. Because these clubs, which are the main borrowers from the facility, will have to take money out of cash flow to pay the principal, this will affect how much debt they can hold. Teams are not allowed to hold debt and deferred pay that is 10 times more than cash flow. So suddenly, if cash flow falls, Ganis said, expenses like deferred pay might have to come down.

“There will be less money available to pay players, especially for teams that are at or near the debt ceiling,” he said. “The top players with the top-revenue teams will not be as impacted as the small- and midsized market clubs that are much more dependent on cheap available debt.”

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