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Volume 20 No. 42
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Strong outlook cuts borrowing cost for NBA

Imagine putting your house on the market and getting 10 times the asking price.

For the NBA, that’s the rosy scenario that’s unfolded as it refinances $300 million of bonds, which make up part of the league’s credit facility. Investors, drawn to the league’s bullish economics of labor peace, lucrative media deals and a coveted young demographic, responded with 10 times demand.

While the league theoretically could borrow $3 billion based on that demand, it conservatively will take in $374 million. But the interest rate, 3.6 percent, is far lower than what sources close to the league say is the equivalent of 5.5 percent when the original bonds were sold seven years ago.

The highest demand for a bond offering the league had ever seen previously was six times, two years ago. One finance source described 10-times demand as what was seen during the Internet craze of the early 2000s for technology companies, though to underscore how high the demand is, not that it is unwarranted.

“This transaction evidences the strong support of the NBA by the investor community based on the continued strength of the league’s business fundamentals and steady appreciation in underlying asset values,” said Jason Cahilly, NBA chief strategic and financial officer. He declined to comment on terms.

Macro credit trends also help leagues like the NBA. Investors, like the insurance companies that are buying the NBA’s bonds, are looking for secure credits that will pay even a few percentage points more than the minimal returns available on government bonds.

The league has $3.5 billion in its credit facility, from which two-thirds of its teams borrow from for a variety of team expenses. The sum is made of different debt pools, including the $300 million that will roll over in June in the new $374 million debt sale. About 25 percent of the $3.5 billion are bank loans, and the remainder are bond sales to private debt investors.

The bank loan rates can change with market conditions, while the bonds are a fixed rate. So the new $374 million bond guarantees the 3.6 percent rate over 15 years.

Bank of America and JPMorgan are the NBA’s banks.

A source close to the NFL said it had seen 10 times demand for its debt recently. Leagues like the NFL and NBA have per team debt limits ($250 million per club in each of these), so while it’s nice to have debt buyers offer so much, it’s not necessary.

“This shows you the banking community’s confidence in the NBA with the league’s new TV deal that has tripled revenues, the new CBA and the league’s improved economics,” said Sal Galatioto, a sports investment banker. “There are a lot of positives around the NBA. When banks put their money where their mouths are with attractive rates, it shows you that the NBA is tracking in the right direction.”