Sunday, July 19, 2009
Financial Storm Clouds Brewing?
The potential bankruptcy of CIT Financial might go little noticed outside the financial world, but could have potentially serious ramifications for the sports world. CIT has been a major financial player in the sports world and the NHL in particular. CIT has provided, among other loans, refinancing for the $130MM loan on ScotiaBank Place, the home of the Ottawa Senators; a $200MM loan facility used by Daryl Katz to purchase the Edmonton Oilers; and was a part of the $350MM loan syndicate that financed the construction of "The Rock"- the Prudential Center, home of the New Jersey Devils. It is also believed that they are one of the lenders financing the purchase of the Montreal Canadiens by the Molson brothers. Oh yes, I almost forgot. CIT is also a lender to the Nashville Predators. The Preds currently have a $20MM line of credit with the embattled lender, and CIT was on the hook for $40MM to William "Boots" del Biaggio. That debt was used to as a portion of the proceeds to obtain his 27% interest in the Preds and is currently tied up in bankruptcy court.
The financial arrangements of these loans I have referenced are to private enterprises and therefore are not publicly disclosed. Assume for a moment, however, that these loans have a "call" provision, meaning that the lender can re-negotiate the terms of the loan after a certain period of time. This is often a standard practice with sizable loans. Some call provisions even give an out to the lending institution in that they do not have to renew the loan but can demand for the outstanding balance to be paid in full. "So what?", you might ask. Consider this- you have a loan that was issued by a healthy lender under agreed upon terms that worked for the borrower. Now you have to re-negotiate the loan after a certain period of time, but your lender is now in dire financial straits. If, and that is a big if, you can re-negotiate the loan, the terms may not be as favorable. In fact, they may not be workable at all for the economics surrounding your hockey club. Well, you say, that's fine. I will just find another lender to work with me. In today's economic and lending environment, that is much easier said than done. The potential for an owner, or owners, is to face a financial doomsday scenario- unable to refinance at agreeable terms or find another lender to step in and take over the debt. As well, imagine, if an owner is trying to sell an NHL franchise in today's market. Financing that sale for a new buyer is going to be difficult, if not impossible, and their are very few owners that have the financial horsepower to write a check for most sports franchises.
The effects of this situation with CIT, and with lending to the sports world in general, can be devastating. Team owners could be faced with finding alternative sources of financing, which I believe will be difficult. Many teams use lines of credit to fund short term operating shortfalls and cash flow needs, and will be pinched if those dry up, forcing an owner to pony up more persoanl cash (if possible). Term loans that are re-negotiated at higher rates or less than favorable terms could force teams to divert operating revenue to debt service. That operating revenue is used from everything from funding payroll to operating an arena. Quality of the product on ice and the fan experience could suffer. And in the current environment, franchise values could fall. The market value of anything is only what a willing buyer will (and can) pay. It is the ability to pay that will be in question. Remember, I said that there are very few potential team owners that have the ability to write a check for a franchise. Most rely on some form of financing, and with few lenders willing to fund these purchases, values will ultimately fall.
There is no doubt the financial landscape has changed. The impact of those changes will not be positive and will take years to play out. It remains to be seen how these changes will impact the NHL and the sports world.