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Volume 20 No. 45
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New NBA debt terms reflect investor confidence

The NBA has completed a $2.3 billion financing package that will continue to keep league-backed loans flowing to its teams.

Significantly, the new debt has longer maturity terms and better interest rates than the previous financing package of the same amount. Those characteristics underscore the rising investor confidence in the NBA, buttressed by labor peace and the expectation of major new TV deals for the league on the horizon.

“It is a combination of a favorable [collective-bargaining agreement], people see labor peace, people see the value of NBA as media content, and the upcoming media contract,” said Sal Galatioto, an investment banker and lender to NBA teams through his Galatioto Sports Partners.

The NBA this summer will begin talks on a new round of media contracts (see related story, Page 4). The current agreements do not expire for three more seasons, but the environment is considered by leagues and teams to be ripe to strike new deals.

The league, with its new CBA agreed to in fall of 2011, also greatly reduced financial losses for many teams — the result of both changing the split of revenue shared by the league and the players, and increasing subsidies paid by high-revenue teams to struggling clubs. Previously, with many clubs hemorrhaging tens of millions of dollars annually, lenders were not quite so bullish.

“Our teams’ strong financial and operating fundamentals, coupled with historically attractive debt markets, have enabled them to reduce their interest-rate expense and risk to uncommonly low levels, while also smoothing and substantially extending their schedules of future debt maturities,” said Jason Cahilly, NBA executive vice president of strategy and chief financial officer. “These results attest to the high level of confidence the lending community has in the NBA’s continued financial strength and core asset value.”

As part of the financing, agreed to earlier this month and led by JPMorgan Chase, the NBA shifted more debt into long-term, fixed-rate loans. Of the $2.3 billion total, about $1.6 billion is now longer-term loans, or notes, instead of floating-rate debt that must be renewed more frequently. The floating-rate debt portion dropped from $812 million to $676 million, while the longer-term piece rose by a commensurate amount.

The floating-rate debt expires in five years, but the long-term fixed-rate debt was sold to debt investors in eight-, 10- and 15-year tranches. That 15-year length is the longest term the NBA as a league has ever been able to sell.

“If you are willing to take longer-term debt, it shows you have more confidence in the outlook of the league,” Galatioto said.

Each team can borrow up to $125 million from the league-backed loan pool. The $2.3 billion figure suggests that about 20 or more teams use it, presuming that not every team is in at the full amount.

Teams can borrow $50 million more from other sources before reaching the league-mandated team debt limit of $175 million.