SBJ/May 28-June 3, 2012/Leagues and Governing Bodies

NFL increasing teams’ debt limit to $200M

The NFL is increasing the amount of debt its teams can borrow by one-third, to $200 million, the first significant loosening of financial restrictions in the major team sports since the 2008 economic crisis.

NFL clubs will now have the ability to tap into an additional $50 million each to use for various purposes, from player payroll to stadium construction.

“We have a very solid business model,” said New England Patriots owner Robert Kraft, a member of the league’s finance committee, on the rationale behind the increase.

Indeed, in the last year, the league struck a new labor deal that swung significant revenue to the owners and reached new TV deals with major increases. Philadelphia Eagles owner Jeffrey Lurie cited record low interest rates and strong franchise values as other factors behind the move.

“We have kept the cap the same since 2005,” he said.

In fact, two years later in 2007, the league tried to lower the debt cap to $125 million, citing turbulent financial conditions at that time. The league, however, backed away from the plan after objections from the NFL Players Association, which called it an effort to restrain player pay.

Financial experts said the league is well-positioned now for the large increase.

“The increase in the club debt level is mitigated by robust increases in the recently extended media contracts, tremendous growth in team valuations since the mid-1990s, and continued prudent financial management and oversight by the NFL,” said Chad Lewis of Fitch Ratings. “Fitch believes the average franchise sale price is between $800 million to $1 billion, which results in a conservative loan-to-value ratio.”

Owners can in some instances borrow more than $200 million, but the franchises cannot secure the additional debt. Owners can borrow more than the debt limit in acquiring their teams or building stadiums. In these instances, a holding company borrows the extra debt, with team or stadium revenue often pledged for interest repayment.

The Minnesota Vikings, for example, are committed to spending nearly half a billion dollars on a new stadium in Minnesota. The team will likely then create a stadium holding company that would borrow the excess debt. That debt is more costly because it is not secured by the franchise.

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