Quietly over the last few months, a steady stream of sports finance executives have paraded before a secretive and low-profile insurance regulatory agency to argue the financial attractiveness of NFL teams.
Their testimony is the latest episode in a more-than-decade-long quest by the professional sports business to be taken seriously on Wall Street. While that effort has helped sports teams and leagues achieve once unthought-of access to money at competitive terms, the job apparently is not complete.
The National Association of Insurance Commissioners regulates insurance companies and rates the loans these firms lend out of their investment funds. Last year, the NAIC designated as subpar insurance company loans to the Jacksonville Jaguars and New York Giants, meaning the group did not think the NFL teams were very creditworthy.
While those ratings have been appealed, if the NAIC serves notice that it does not believe NFL teams deserve a high mark, it could reverse some of the gains of the last few years by giving lenders of all stripes pause before again opening up the till to all sports teams and leagues.
"It affects the next deal that comes around, it would be used as a barometer," warned Gordon St. Denis, founder of sports investment bank Triton Sports Associates.
Before media, sponsorship and stadium riches transformed sports into a real business, lenders treated the sector as nothing more than fun and games. That is why the NAIC ratings have caused such a stir, as they reflect that old mentality. As a result, teams, banks, a credit rating agency and even the NFL have marched to NAIC offices in lower Manhattan to argue the merits of lending to an NFL team.
Frank Hawkins, the NFL's senior vice president of business affairs, met with the NAIC to explain the league's business model, and he views the dustup as yet another small step in the evolution of football's relationship with Wall Street.
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| Jacksonville has appealed to the NAIC, trying to catch a better rating. |
"We have met with the NAIC at the request of the placement agencies [investment banks] that deal in sports, as part of an educational process very similar to the one we went through with the commercial banks in 1991 and with the credit rating agencies and private-placement investors beginning in 1998," he said.
"It is a long-term process in all of those cases," he added, to ensure that the financial community "understands the strength and quirks of the NFL's business."
In 1991, few banks would lend money at favorable terms to sports teams and leagues. As the business began to grow, so did league and team finances. Today the NFL has a $1.8 billion credit facility with a consortium of banks, for example, which lends money to its clubs at very favorable rates.
In 1998 as sports teams began to borrow increasingly from institutional investors like insurance companies, these firms also had to be educated on sports' burgeoning credit strength. The credit rating agencies that grade debt also began to have regular dialogue. Fitch Ratings even has its own sports group. (Fitch also met with the NAIC.)
The problem is the NAIC looks at a sports team's balance sheet the same way it does a manufacturing company's, said Bill Prescott, the Jaguars' chief financial officer. The agency based its ratings on hard assets such as plants and inventory, Prescott said, instead of on intangible assets common to an NFL team like its brand, contractual league revenue commitments and the high sale prices other clubs have fetched.
The NAIC declined to comment.
Neither the Jaguars nor Giants paid higher interest rates because of the NAIC's actions. Instead their lenders' costs rose, which could make them less willing to lend to sports teams in the future or force them to charge higher rates, finance experts said.
The Giants borrowed $50 million combined in 1997 and 1998 from New York Life Insurance Co., and it is unclear why the NAIC only last year got around to rating the deal. The usual time frame for the NAIC to rate a loan is within one to two years.
The Jaguars borrowed $110 million in late 2001 from six insurance companies. Neither deal had a rating from a credit rating agency like Moody's Investors Service or Fitch Ratings, which for a fee rates loans and debt and whose conclusions help determine the interest rate. The NAIC usually follows these ratings, but without them, the group comes up with its own ratings.
The Jaguars, Giants and their lenders in designing their deals had agreed on an interest rate that implied a solid credit rating. The Jaguars' Prescott said his team did not think it worthwhile to hire a credit rating agency because the NFL had just sold debt with a top credit score, and the Jaguars figured they would piggyback on that grade. The NAIC obviously disagreed.
That leads a top voice in the sports finance world to this conclusion: Teams need to get credit ratings if there is any doubt regarding the NAIC, said Elliott McCabe of Banc of America Securities, the NFL's bank. He met with the insurance group to explain the league's business model.
"I would argue that any NFL team is investment grade," McCabe said, using the term for credits considered strong.
In the end, most expect a change of heart at the NAIC, which has heard appeals from the insurance lenders on the sports ratings. Sources said the group already has bumped the Giants' debt into the investment grade range. But while the NAIC also improved the Jaguars' original debt rating, these sources said, it is still a subpar grade.
"It is definitely new territory we are going into," said the Jaguars' Prescott, who, with his bankers from J.P. Morgan Chase, in the spring appealed to the NAIC to improve the team's debt grade. "We hope the NAIC takes a hard look at our unique economics."
