The NFL, in the event of a lockout, might need to restructure some of its loans because of the recent ruling in the much-watched media fees case, but the impact of any adjustment would be relatively modest and certainly not as dire as it was made to sound by the federal court judge who issued the decision, financial experts said last week.
Judge David Doty’s ruling on March 1 challenged the league’s ability to draw $4 billion in fees from existing media contracts if no games are played. Some of that money is required as collateral in certain league and team loan deals.
Doty spent time in his decision noting the importance of the fees to the NFL’s debt and how that connection has ties to both the league’s past media contract negotiations and its labor considerations.
“Some of the NFL’s loan obligations include ‘average media revenues’ covenants which provide that an ‘event of default’ occurs if average annual league media revenues fall below a specified value,” Doty wrote. “The NFL worried that its creditors could argue that a default event had occurred if the NFL locked out the Players in 2011, the same year that some broadcast contracts were set to expire, and that a default would give the Players bargaining power in labor negotiations.”
While it is true the covenants exist, financial experts said that because the league has plenty of other collateral, changing the covenants should not be a problem. The covenants generally require $50 million of the media money annually as collateral. The NFL also has a $900 million lockout fund that it has accumulated, and most stadium debt has reserves that cover at least a year of interest payments.
In addition, in banking there is a notable difference between a “covenant default,” as is suggested in Doty’s ruling, and a “payment default,” which is far more serious.
It’s even possible there would not be a default at all because the covenant language describes the media fees being committed to the NFL, something that could arguably still be the case if the money is in escrow.
“I don’t think it will rise to the level of terrible concern,” said Rich Walden, a managing director with JPMorgan Chase, which lends to several NFL teams. “Whether the covenant mandate is met or there is a default may just be a pricing opportunity.”
In other words, even if the banks determine a covenant default occurred if the media fees flow into escrow instead of directly to the NFL, the league could always, for an extra fee or slightly higher rate, amend the covenant to meet the new reality, subject to lender approval.
Neil Begley, who rates stadium deals for Moody’s Investors Service and until 2007 rated the NFL, called what Doty described a non-issue.
“It would take one day for the agent bank to go out to the member banks to get a waiver or amendment to solve that,” he said. “Covenants are easily waived.”
What concerns creditors is the ability to pay, he said.
Chad Lewis, who runs the sports group for Fitch Ratings, said, “From a bondholder’s perspective, if they are comfortable they are going to get paid, they may waive the covenant.”
The NFL could begin to feel a crunch from Doty’s decision if a lockout extends into a second year. The league has not budgeted to use those media funds until year two of a lockout. As a result, the Doty decision forced Standard & Poor’s to halve its estimate of how long the stadiums and teams it tracks could last in a work stoppage.
On Feb. 28, S&P estimated two years. The next day, Doty ruled, and the day after his decision, S&P revised its estimate to a year.
