Securitization era opens for athletes
Frank Thomas didn't want to wait to collect millions in deferred compensation. So in 1998 he tried to securitize his contract, turning it into instant cash.
Using a securitization in his battle to turn millions worth of promises into immediate money may have been ahead of its time. Last month, while the White Sox slugger's complaints about deferred pay made headlines, the first securitization of a player's future pay was executed, opening new options for professional athletes and their compensation.
NDH Capital, a small Greenwich, Conn., financier, working with Hanleigh Cos., a sports insurer, used guaranteed future income of an athlete as collateral to fund an immediate cash payment.
"I don't believe players or their agents are aware of what can be done," said Scott Haber, president of NDH.
Turning deferred salary into instant cash could revolutionize how athletes manage their money. If a player, for example, has an immediate financial need that cannot be met by annual salary payments, he or she could tap into deferred salary through a securitization.
"This could be desirable if the player runs into unforeseen problems, or the team or league runs into unforeseen problems," said Brian Goldberg, the agent for Ken Griffey Jr., who took roughly half his $116.5 million contract with the Cincinnati Reds in deferred money. "It is a nice safety net," because the deferred money is rock solid even if the team isn't.
The NDH case involved William Andrews, who last played in the NFL in 1986 for the Atlanta Falcons. The former Auburn standout still was owed $5 million in deferred compensation that he would have received in $200,000 annual payments over the next 25 years.
NDH took this commitment and sold it in the form of a bond to the insurance company, which in turn paid Andrews $2 million. The $2 million is 40 percent of the $5 million that Andrews had coming over the next 25 years, but the former athlete gains the ability to invest and grow the income.
In the Andrews case, NDH created an annuity. Sold by life insurers, an annuity is a contractual promise to pay a fixed amount of money over a set period of time. A few hundred thousand dollars spent to buy an annuity today can translate into a final payout of millions of dollars.
When a team agrees to pay a player deferred salary, commonly it buys an annuity to guarantee the future payments. As a result, the NDH transaction is based on the credit of the insurer, and not the team that pays the contract, Haber said.
This ironclad guarantee is not available with regular salary, because contracts normally have covenants, such as morals clauses, that can interrupt or bar payments if the player violates the terms. In the NFL, most contracts are not guaranteed. Once the money is paid from an annuity, however, such problems disappear, Haber said.
Some of those issues obstructed Thomas three years ago when he tried to securitize his contract. That proposed deal received a lot of publicity then, but it fizzled out after the financiers could not negate clauses in the contract that would have eliminated his salary if, for example, Thomas voluntarily retired or went on strike.
Glenn Dorr, vice president of the Montvale, N.J.-based Hanleigh Cos., said he has tried to insure against these problems, including Thomas' proposed deal in 1998. While it was possible to eliminate most problems, Dorr said it was not 100 percent foolproof.
Now Dorr plans to market the NDH deal to athletes and their agents. He has already tried to contact Thomas, whose contract defers $23 million to be paid in installments over two decades, as well as pitcher Randy Johnson, who along with nine other Arizona Diamondbacks agreed to defer portions of their salaries to help out the financially ailing club. Dorr also pointed out that the NDH deal could be used to securitize disability payments.
Still, there are financiers who are betting that an entire contract can be securitized. David Pullman securitizes royalties payments for entertainers. He is best known for crafting the $55 million Bowie bond, which took future royalty payments for David Bowie songs and gave the singer the cash up front.
He applauded the NDH effort but said he still thinks an athlete's entire contract can be securitized, not just deferred money. How? By pooling enough contracts to mitigate the risk.
And what about Thomas, who was quoted last month as saying, "I don't know if I want to wait till I'm 52 or 54 to receive" the deferred money? Would he want to be known for the Thomas bonds? Calls to Thomas' foundation, Big Hurt Enterprises, were not returned.