• Wherein I’m sure I’ll get slapped around in the comments

    by Tyler Dellow • January 13, 2012 • Hockey • 16 Comments

    There’s a fascinating story floating around today about the New Jersey Devils’ owners looking to securitize their future revenue streams from television. The gist of it would seem to be this:

    His New Jersey Devils hockey team is months late on an $80 million debt payment to lenders and is looking for a balance-sheet miracle — that is, the securitization of its long-term TV deal with the MSG Network, a move that Vanderbeek hopes will raise exactly that much cash.

    But two sources close to the situation say it appears the money-losing franchise, which has been shopping the deal with the help of Goldman Sachs since at least November, is having trouble getting the deal done.

    The Devils’ TV deal runs until 2023-24. I’ve asked around and was told that the Isles are pulling in around $20MM a year, with a small escalator, while the Devils are probably close to that number, although somewhat lower, as the company that bought the Isles’ TV rights was desperate for content. Really desperate. Say, for the sake of discussion, that the Devils’ TV deal is worth $15MM a year, with an annual escalator of like 3% or so. I’ve fiddled around with some NPV calculations, although I’m not a finance guy at all, and that doesn’t seem entirely crazy to me.

    According to that story, Vanderbeek apparently has all sorts of problems with debt associated with the Devils, who are supposedly on the brink of bankruptcy. It’s widely reporting that he’s capitalizing interest on the debt he took on to buy the team.

    I’m somewhat troubled by the sale of future revenue streams, which is what securitizing the TV contract amounts to. Say that Vanderbeek succeeds in doing this. The Devils will then have, for the next eleven years, effectively $0 in TV revenue – they’d just be signing the cheques over. How do you make up for that if you’re Vanderbeek? He either has to find new revenue streams – difficult to do when he’s already had a rink built for him – or figure out a way to significantly reduce the cash needed to fund an elite team. That second option would probably look pretty attractive. How do you do that? You drive down the players’ share of hockey related revenue in the next CBA. If the players aren’t interested, you lock them out. No hockey for hockey fans.

    I am generally pretty pro-capitalism. I think it produces good results, better results than the available alternatives. The form of capitalism that exists in North American professional sport doesn’t really appeal to me though. It starts with teams banding together and refusing to play against teams that aren’t members of a given league, with entry into that league being entirely within the control of the owners of the league. This immediately permits sort of structural monopolies to develop.

    Toronto, to pick one obvious example, could probably support a world class team along with the Maple Leafs. In the absence of a credible league though, which realistically probably means another 15 or 20 teams capable of paying NHL level wages, Toronto isn’t going to have another high level hockey team unless the NHL agrees to provide one. In refusing to play against teams that aren’t part of the cartel and controlling admission into that cartel, the consumers of hockey in places like Toronto get fleeced.

    The next stage in this is obtaining public money for arenas, which further entrenches the NHL’s position. Starting a hockey league to compete with the NHL is basically impossible without massive public subsidies now. Imagine you wanted to put a team in Edmonton that would compete with the Oilers as part of WHA2. How can you compete with a team that has received hundreds of millions of dollars in public money? It’s impossible. You’re going to be stuck with a lesser facility, generating lesser revenues and unable to afford to pay the kind of salaries that NHL teams can. The position of NHL owners becomes even more unassailable.

    The third stage, the one we’re in right now, involves the billionaires who own these teams using the monopoly that they both created and extorted from municipalities creaming off all of the excess money that’s in the game. When I say “excess money” here, I’m talking about the money that’s over and above the money necessary to maintain their position as the best league in the world. This is perhaps best illustrated by asking how much money a competing hockey league in North America could afford to pay the players. This imaginary league (as well as European leagues) is the real floor on what the NHL has to pay the players. There’s no reason that 57% of HRR is the right number. There’s no reason that 50% of HRR is the right number. Everything above whatever that right number is can be sucked out of the game by the guys who buy the teams.

    And so, if you’re Jeff Vanderbeek, maybe you look at how much you’re spending on players and figure that that number could be cut in half or something and so you can sell your TV revenue to pay off the debt you incurred in paying a price for the team that the cash flows it generates would appear unable to support under the current setup. I’m not carrying water for the Players’ Association here – as between them and the owners, I don’t really care who gets the money, I care about my interests as a fan – but it seems to me that what you have is a group of people who, through controlling the supply of elite professional hockey and the stupidity of your average voter (or Edmonton writer) who demands that they be handed subsidies, are reaping rewards that are wholly disproportionate to the value that they’re providing. We get less hockey than we might otherwise have and pay prices higher than that which we might otherwise pay.

    I’ve had it put to me in the past that “NHL Hockey” is a branded product and that there’s nothing stopping additional professional hockey teams from being created. See me getting my ass kicked in the comments here. I found the comments from Canuckland and Hockeyfan in that thread to be particularly compelling.

    Canuckland:

    Maybe if anyone anywhere could open up any NHL team, and force other teams to play against him, maybe the NHL would be swimming in NFL-like revenues. Maybe there should be 3 teams in Toronto, 2 in Edmonton, and 1 in each of Saskatoon, Winnipeg, and North Bay. But you don’t get to force NHL owners to do that, just because you personally guess they’d make more money. They get to decide how many franchises there are, and where.

    Why?

    Because they’re risking their own goddamn money, that’s why.

    Sure it’s a pain in the ass. Sure they’re acting like a cartel–in fact, I’d happily defer to your legal expertise, and stipulate (for the sake of argument) that they’re all breaking some bullshit “competition” law. But those of us who AREN’T lawyers shouldn’t be as concerned as you by what’s LEGAL. We ought to be more interested in what’s RIGHT.

    And despite its absence in the Canadian constitution, I maintain that Canadians have a right to their property–which includes NHL owners having a right to theirs.

    I suppose that, with this post, I’m basically rejecting his reasoning. The difference in how we see it, I think, is that he sees the NHL as a single entity and I don’t. I see it as thirty businesses, working together to ensure that everyone makes as much and to limit some of the countervailing features of capitalism that might act as a check on their excesses, with the result being that they can reap immense rewards that are wholly disproportionate to the value that they’re creating. While, again, I’m pro-capitalism and pro-property rights, I don’t know that the Canadian tradition has ever favoured letting those who own property work in combination to prevent the normal forces in the market from operating. I also think (and I feel on much more solid footing here) that those who suckle at the public teat have no moral complaint if the owner of said teat decides to start getting involved in their affairs.

    About Tyler Dellow

    16 Responses to Wherein I’m sure I’ll get slapped around in the comments

    1. dave
      January 15, 2012 at

      Its not a slap at all – there seems to be some check at least to the ‘owners at the trough’ vision – that being the NHLPA being prepared to play hard ball regarding the CBA (Am I presuming too much ?) and ultimately the voters in the cities involved, many of whom would ultimately have the sense to know whats best for their city’s public spending (maybe that would work best in the sun belt cities – though heck if I lived in lets say Edmonton I might personally feel a little torn…)
      But you are right – what kind of multi billionaire would it take to challenge the NHL now – for little chance of success – thats not going to happen

      But back to the Devils – what stops them just spending only to the minimum (I take it that this isnt happening at the moment ?)

      • Triumph
        January 16, 2012 at

        The Kovalchuk contract alone stops them from spending the minimum – next year, Kovalchuk gets paid over $11M, but his cap hit is only 6.66M. So unless the Devils acquire 4M worth of contracts who have salaries lower than cap hits, they’ll have to be above the floor in terms of salaries paid out.

    2. Steve
      January 15, 2012 at

      As far as having to make up for the loss of TV revenue, that would be offset by the fact that he no longer has to make interest payments on the $80mm debt.

      If the discount rate implied in the securitization less than the rate on the debt, then his cash flow over the term improves by doing this. If the discount rate is higher than the rate on the debt, then his cash flow is negatively impacted. Assuming they’re reasonably close, I’m not sure that this kind of deal is all that significant to the Devil’s future.

    3. Newalgier
      January 16, 2012 at

      There is another, plain English word for “securitizing a revenue stream.” That word is, “debt.” Replacing one form of debt for another does not generally improve your solvency.

      That’s the finance guy view.

      • Tim
        January 16, 2012 at

        Uh, no, securitizing a revenue stream is NOT debt. It IS the same kind of derivative-based nonsense that sent the economy into a tailspin, but it’s not debt.

        When you securitize a revenue stream, you sell the rights to the future revenues. In this case, MSG would (potentially) owe Vander-whoozits over $80 million. He is trying to sell the future revenue for $80 million in cash. If he is successful, he uses that cash to pay off his existing creditors, and he is then debt free. MSG pays the new owner of that revenue stream (taking Vander-bumkin out of the equation entirely) directly.

        This isn’t a debt-swap. It’s a viable — albeit stupid, as Goldman Sachs is well aware of — means of raising capital.

        • dave
          January 16, 2012 at

          and is much more common than may be supposed

    4. January 16, 2012 at

      If Goldmann Sachs can’t find you money, I don’t know who can.

    5. rpk99
      January 16, 2012 at

      The numbers don’t jive to me. If the team is solvent, old debt should be easily replaced with new debt right now and likely at lower cost than the olde debt. With the interest being tax deductible, this should be the preferred route. So the devils must look pretty much bankrupt. I would not sell $5 MM a year for the next 11 or 12 years in revenues to cover $80 MM in interest payments to secure new long term debt, debt is far cheaper than that right now on the open market on an AFIT (After income tax) basis particularly. So no one must be willing to give long term debt. Dude sounds screwed…paid too much, making too little…whens the next debt principal payment come due and what is he going to do then? I bet there is more than 80 MM outstanding here…

      • Triumph
        January 16, 2012 at

        There is, but the reporting on this issue has been shoddy at best. There’s another 80MM coming due in 2014, I believe.

    6. dawgbone
      January 16, 2012 at

      The NHL has individual franchises of it’s brand.

      Much in the same way you can’t buy a Tim Hortons franchise and drop it wherever you choose, you can’t put an NHL franchise anywhere.

      • LeNoceur
        January 16, 2012 at

        With the slight difference that the franchisees actually have the collective power (through the Board of Governors) to make changes to their own situations. Tim Horton’s franchisees don’t get a vote on “expansion” or changes to employee uniforms, or a new coffee roast. It’s not exactly a traditional franchise arrangement.

        Professional sports leagues are a bizarre arrangement wherein the owners are simultaneously competing with each other and partnered together.

    7. PopsTwitTar
      January 16, 2012 at

      (1) As an NYR who has watched the Devils struggle financially for..um..ever…allow me a moment to gloat over the team’s continuing financial struggles.

      (2) I am generally fine with a monopoly system controlling the major sports. Its easy to see that system “fleecing” the citizens of Toronto who only get to see one NHL franchise. But its just as easy to imagine that a monopoly system is necessary to ensure the quality of and availability of the product on a wide spread basis (Apple v. Android?). And the NHL does have an interest in trying to develop new markets so that, potentially, in the future, there’s a league of 20 Torontos, and not just 5 or 6. This might be utopian of me. Whether the NHL has been successful in that strategy is another issue, and, in fact, I think that the NHL’s failures in some of these other markets will actually lead to that second Toronto franchise sooner than otherwise expected. The NHL is going to need the additional revenue that might create to prop up these other situations.

      (3) But I am not in any way supportive of the ridiculous public support (whether tax breaks, access to taxpayer funded capital, whatever) that props up all of these arenas and teams, though. Your last sentence is dead on. But it is one helluva cycle to try and break. Unfortunately, hockey is now like other major sports part of the political world. And even more unfortunately, decisions made politically are often (usually?) short-sighted.

      • PopsTwitTar
        January 16, 2012 at

        BTW, does anyone else love how this further exposes the incestuousness of the NHL in general, and the intricate self-dealing that is inherent in owning a hockey “franchise” these days? The Devils want to get MSG Network, owned by Cablevision and [probably] a sister corporation to the Rangers, to allow them to basically sell their future TV revenue to pay off debts. What’s to prevent the Dolans from silently killing this deal because, in their mind, a financially struggling Devils franchise is to the benefit of the Rangers and Cablevision stockholders?

        I also would love to see an analysis of what the Devils TV contract is worth, and the advertising revenue that supports those amounts.

        • Triumph
          January 16, 2012 at

          I’m sorry, but where did it indicate that the Rangers or Cablevision would have anything to do with the financing of this deal? Because it didn’t, and they don’t.

          If a financially struggling Devils were such a boon to the Rangers and Cablevision, maybe Cablevision should’ve thought twice about paying $20MM+ for the rights to air the Devils.

          • PopsTwitTar
            January 16, 2012 at

            The article says nothing about it. I’m playing some conspiracy theorizing to highlight the fact that Cablevision, which owns the Rangers, also owns MSG Network, which is allegedly involved in a financing of the revenue is is paying the Devils. Which highlights a much bigger issue regarding the fact that the big corporations that owns these teams often have potentially conflicted roles that are not always evident on first glance. Sorry if I should have made my point more clearly.

    8. January 16, 2012 at

      But those of us who AREN’T lawyers shouldn’t be as concerned as you by what’s LEGAL. We ought to be more interested in what’s RIGHT.

      Why should I need to be a lawyer to be concerned by what’s legal? And why should my definition of what’s “right” be in opposition to what’s legal?

      In fact, if I want to talk about what’s “right”, I’d probably start by mentioning that cartel-like and anti-competitive behavior, even when within the capacity of the law, isn’t “right” as it’s an action by ownership to prevent against healthy competition – healthy competition which could result in a better product to me, the consumer.

      Consider that even a Rugby League v. Rugby Union style split of the NHL – say, over no-touch icing, or head shots, or suspension protocol, or even over lockouts – could represent a more preferable product to me, the consumer. But it’s not going to happen in North America, in part because of the entrenched system of public entitlements, and the high amount of money floating around the league.

      And regardless of whether or not Canuckland believes in the right to property – a right which I would wholeheartedly agree with – there’s nothing about that right that extends to using (or leveraging) property however one likes.

      While I’m not suggesting that you would need to have a system that allows the open joining of teams into the NHL, it’s a little silly to act like active anti-competitive practices are healthy, normal, “right”, or direcly beneficial to the consumer.

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