SBJ/Feb. 16-22, 2009/This Week's News

NBA securing $175M for clubs

The NBA is set to borrow $175 million Feb. 26, marking one of the first league financings since the implosion of the credit markets last fall.

The money, which will be available to 15 teams, supplements an existing $1.7 billion leaguewide credit facility that uses the NBA’s media contracts as collateral to secure loans for the clubs. The NBA surveyed its teams, and 15 responded they would like to tap into the new borrowing.

While the league said it is pleased to borrow in an extremely illiquid credit market, the deal came at a cost, with interest rates up to 8.27 percent, hammering home the notion that the era of cheap money in sports is over. The 15 teams can use the money for any purpose, but covering operating losses may be high on the list.

“In this economic environment, it’s tremendous that the league can place such a facility,” said Alex Martins, chief operating officer of the Orlando Magic, which plans to borrow from the new debt. “It certainly helps us bridge the time period between now and when we move into our new events center in 2010. We’ve been operating at a $15 [million] to $20 million [annual] loss over the past half-dozen years, so it helps us.”

New NBA Debt
Amount Rate Term
$100 million 8.27 percent Seven years
$75 million 7.45 percent Five years
Source: NBA

Each of the 15 teams can borrow a maximum of $11.66 million from the debt proceeds.

The private-placement deal was arranged by JPMorgan Chase and Bank of America. In a private placement, non-banking lenders such as pension funds and insurers extend the cash, commonly at fixed rates for five- to seven-year terms and at rates higher than what banks offer for floating-rate loans.

Harvey Benjamin, the NBA’s executive counsel for business and finance, said it’s important not to compare the rates with what the NBA had been paying before the credit market collapse — about 200 to 300 interest points less for similar debt, sources said — but rather, what borrowers of similar standing are paying in today’s environment. In that light, he said, the 8.27 percent the NBA will pay on $100 million of the debt, and the 7.45 percent on the remaining $75 million, is favorable.

“It shows how the NBA is viewed by the credit markets,” he said.

Rob Tilliss, a former JPMorgan Chase sports banker who runs his own sports boutique, Inner Circle Sports, agreed that given the market conditions, the NBA’s rates are hardly extreme.

“That is an outstanding execution,” he said.

The NBA was not looking to borrow at this time, Benjamin said, but JPMorgan and Bank of America came to the league several weeks ago to say there was an opportunity to do so. The league, after polling its teams and finding a need, agreed to the deal in part because of the lack of borrowing opportunities since the fall. Benjamin would not reveal which teams plan to borrow from the placement.

Tilliss said that over the last few weeks there has been a slight opening in the credit market for investment-grade borrowers like the NBA.

The NBA deal comes in the context of a changing landscape for the leaguewide credit facilities. Once cheap sources of loans, the banks that manage the loan pools have soured on them and have been unwilling to renew at the old terms. The NFL and MLB were both unable to renew their deals late last year and termed out. That means the debt automatically converted into a fixed-rate loan and triggered amortization and slightly higher rates.

Benjamin declined to say if the NBA would term out of its credit facility in May when some of it matures, but he conceded that the league is in discussions with its banks to develop alternatives.

Of the NBA’s $1.7 billion facility, $1 billion is from short-term loans that renew annually. This would be the segment that would term out if the league were to go in that direction. The remainder, like the pending deal, consists of private placements.

The new private placement is rated BBB-plus by Fitch Ratings, the NBA said.

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