Banks that are owed money by the Ottawa Senators won't be paid in full once the team is sold to Canadian billionaire Eugene Melnyk, an outcome that could hurt other NHL teams' ability to secure financing.
"It's obviously a concern whenever secured creditors can't be paid in full," said Bill Daly, the NHL's executive vice president and chief legal officer. "It's an unfortunate result of there just being too much debt on the franchise."
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| Eugene Melnyk’s Ottawa Senators bid has been approved by a Canadian court. |
The Canadian Imperial Bank of Commerce and FleetBoston Financial Corp. are the secured creditors of the Senators, meaning their loans to the team get paid back before those of other, unsecured lenders.
Melnyk got court approval to buy the team for $72.6 million ($100 million Canadian). But the Senators, who filed for bankruptcy protection in January, owe about $115 million.
Some of the sale price will go toward paying about $1.5 million in back taxes, and $10.5 million will go to the NHL, which lent the Senators money last year. Another $23.2 million in debtor-in-possession financing that Canadian Imperial and Fleet supplied the team this season will be repaid in full, said Robert Caporale of Game Plan LLC, which brokered the sale of the team.
But the banks will take a loss on other loans.
Canadian Imperial will get back only two-thirds of an additional $29 million it is owed, said Rob McLeod, a company spokesman.
With Melnyk's offer to buy the team being the most lucrative, the banks had little choice but to approve the proposed terms of the sale.
"It's a black eye for everyone that this has occurred," said James Weinstein, senior vice president at Sumitomo Mitsui Banking Corp. "It means that lenders will have a tough time looking at less profitable franchises until the collective-bargaining agreement is renegotiated in the near future and a new economic model comes to hockey."
The league's labor deal expires in 2004.
Gordon St. Denis, president of financial consulting firm Triton Sports, said that all lenders will hit NHL teams with much more rigid terms in any future loans.
"I think it will have an impact," he said. "Financial institutions are really going to have to look very closely at the overall leverage that the franchise might have, and that the venue might have, as well."
Daly said he thinks banks will make a distinction between the Senators and other teams, because league-imposed debt limitations keep other clubs from being credit risks. The Senators already were carrying too much debt when Gary Bettman became NHL commissioner a decade ago, and they've spent the last 10 years unsuccessfully trying to dig themselves out.
"Ottawa was a unique situation, so I don't anticipate it will have a material impact on other teams," Daly said.
The only other known instance of a bank taking a loss on a secured debt to a major league sports franchise was Bank of America, which sold off loans to the Pittsburgh Penguins at less than their full value when the Penguins filed for bankruptcy protection in 1998. Once the Penguins emerged from bankruptcy protection, all the secured creditors still on board were paid in full.
Several bankers said NHL teams are already having trouble getting financing, and that nearly a half-dozen teams have gotten the cold shoulder from banks recently because of the clubs' shaky finances.
Melnyk's agreement to buy the Senators also calls for an adjustment worth $5.76 million to cover deferred compensation to players such as Alexi Yashin, who is owed more than $2 million. That money will come off the cash price Melnyk is paying for the team, meaning he actually will buy the club for $66.8 million. In addition, Melnyk will get to keep all the profits the Senators earn from the second, third and potentially fourth round of the Stanley Cup playoffs.
The Senators, who had the NHL's best record during the regular season, are guaranteed at least six home games from those rounds, as they are currently in the third round. That will earn Melnyk an estimated $3 million.
The transaction is contingent on him working out a deal to buy the Corel Centre, which owes many times its worth to Covanta Energy Corp., a U.S. company that is also in bankruptcy protection. Melnyk is expected to pay about $21.8 million for the arena and get approval from Covanta, which is owed about $150 million for the arena. Covanta is also owed money by the team but, as an unsecured creditor, will not collect on that debt.
Melnyk, founder and CEO of the Toronto-based pharmaceutical company Biovail, did not return phone calls seeking comment.
