The NBA has increased the amount of debt clubs may borrow by more than 40 percent, to $250 million each, and will soon look to add roughly $1.5 billion to its league-backed loan pool, taking that facility to nearly $4 billion.
The moves are fueled by the new TV contracts the NBA signed with ESPN and Turner that will nearly triple
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SBJ Podcast Archive:
From Oct. 6: Media writer John Ourand, NBA reporter John Lombardo and Executive Editor Abraham Madkour discuss the NBA's massive new media rights agreement.
the sport’s annual rights fee to $2.66 billion annually over nine years. Those contracts take effect in 2016.
The league expects teams to use the added debt for venue enhancements, operations and refinancing.
The increase means the NBA now has a higher debt limit for its clubs than the NFL, which caps its teams at $200 million. MLB pegs its amount to a team’s cash flow; the NHL sets its limit at half of a franchise’s estimated value.
“We believe the substantial long-term investment-grade cash flows under the U.S. national TV renewals, combined with substantial underlying franchise asset values, provide a solid foundation for the new levels,” said Jason Cahilly, the NBA’s chief financial officer.
The higher debt amounts for teams represent a remarkable change from just a few years ago, when leagues were worried teams were overly leveraged, which prevented them from at times fielding the best teams possible. The recent surge in TV revenue, favorable labor deals, and improvements in the U.S. economy overall have contributed to higher tolerance for debt at sports leagues, including the NBA.
“In talks with a host of teams over time, one of the biggest issues the leagues have had is too much debt,” said Mitchell Ziets, a venue and finance adviser to sports teams. “Given where [franchise] values have gone and now with the TV contracts, [the NBA] going up to $200 million secured seems like a rational position to be in.”
Of the new $250 million limit for clubs, the NBA will allow teams to secure $200 million against the franchise, with the remaining $50 million borrowed by a holding company. Previously, teams could secure $125 million against the club and $175 million total, when including a holding company’s opportunity.
The NBA last increased its debt cap on teams in 2008.
Rob Tilliss, a sports adviser with Inner Circle Sports, which is currently handling the sale of the Atlanta Hawks, said there were arguments made at the league to raise the debt ceiling even higher.
“People were saying the $175 million was pretty conservative,” he said. “Some people wanted a larger increase.”
The move should not greatly affect franchise values. In the past, higher debt amounts have fueled more robust team-sale prices because buyers could borrow more. However, with franchise prices soaring in the NBA, the type of buyer who could purchase a franchise is no longer one where another $75 million of debt is the crucial difference in affording a club, Tilliss said. Today’s buyer, he said, has to write a sizeable equity check.
Twenty of the league’s 30 teams currently use the leaguewide credit facility, which is at $2.4 billion. The facility uses the NBA’s TV contracts as collateral to offer low-interest loans.
An additional $75 million for each of the 20 teams translates to $1.5 billion. That does not mean each of the teams will borrow, just that the lending capacity is available in case they want to.
The league’s banks are JPMorgan Chase (lead banker), Citigroup and Bank of America.
The NBA declined to comment on the plan to add to the credit facility, but a source confirmed that the league would engage with the banks to add significantly more borrowing space needed to accommodate the higher debt caps.
As part of that move, the league is also in talks with Fitch Ratings about increasing the NBA’s credit rating in the wake of the new TV deals. Fitch currently rates the NBA at BBB+. A higher rating would mean lower interest rates for teams.
Whether the new debt ceiling is too high for Fitch is unclear, but the rating agency did write in a statement after the new TV contracts were unveiled, “Should the NBA permit an incremental increase that materially reduces overall leverage, positive ratings migration may be warranted. To the extent that the NBA elects to increase the per team borrowing level in a manner that produces leverage ratios consistent with historical levels, Fitch will likely keep the ‘BBB+’ rating as is.”
