Tom Hicks' Southwest Sports Group, which owns the Texas Rangers and Dallas Stars, is in default on $135 million of debt because of steeper than expected financial losses at the teams, four well-placed sources said.
Southwest did make a principal payment last week but has been unable to meet internal financial requirements obligated under the loan from J.P. Morgan Chase. Last year, the Rangers, reeling from poor performance on the field and at the gate, lost $35 million on a cash basis, and including interest costs, nearly $50 million, the sources said.
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Most loans, in addition to requiring regularly scheduled interest and principal payments, also call on borrowers to maintain certain levels of financial performance, often measured through cash flow and revenue. It is here that Southwest Sports Group stumbled, signaling just how poorly Hicks' sports empire has fared financially and another sign of the ailing sports economy.
"The default is a technical default that has existed only since June 15 ... and is not a principal or interest [payment] default," said one of the sources, a person familiar with the situation who requested not to be identified. "Tom Hicks is in the process of refinancing that loan."
A spokesman for Hicks declined to comment, as did J.P. Morgan and Bank of America, one of the banks in the financial syndication of the $135 million loan.
Mitchell Ziets, a sports investment banker, said that Hicks' problems may not be unique. In cases where a sports entity suffers steep attendance drops while carrying a lot of debt, he said, more teams may run afoul of financial performance requirements.
When Hicks, who founded the leveraged buyout fund Hicks Muse Tate & Furst, bought the Stars in 1995 for $84 million, he envisioned it as the centerpiece of a Texas sports empire. In 1998, he bought the Rangers, the lease to the ballpark and 270 acres around it for $250 million.
The Rangers reached the playoffs in 1998 and 1999 but have been mired in last place ever since. The club signed shortstop Alex Rodriguez to an astonishing 10-year, $252 million contract in December 2000, the largest player deal in history.
Despite Rodriguez's star power, the Rangers fell fast in the attendance race, dropping 23 percent at the gate since he signed, while payroll rose 48 percent and was the fifth-highest in MLB heading into this season (see chart). This year, the team is aggressively trying to trim salaries and last week traded away outfielder Carl Everett and his $9.15 million annual salary, though the Rangers reportedly will offset some of that.
At the same time, the economics of pro hockey are reeling, with most teams bleeding money while a labor disturbance looks likely before the 2004-05 season.
Last September Hicks announced that he would sell the Stars and his 50 percent interest in the American Airlines Center. But after apparently finding no takers at the right price, said to be around $250 million, he pulled the team off the market several months ago.
Just before he disclosed he would try to unload the Stars, sources said Hicks won a financial amendment from his banks to temporarily lower some of the loan's financial hurdles.
That amendment expired June 15. With the Stars and their debt still sitting on Southwest Sports' balance sheet, the company went into default that day.
Now the company will look to cure the default through the refinancing, and perhaps by aggressively slashing the Rangers' payroll. The Stars' payroll, ranked fourth in the NHL last season, could take a hit, too.
