Though leagues and teams have borrowed to weather the pandemic, strong cash flow from media deals and the return of full seasons and full stands are good for sports organizations even as interest rates continue to rise.
“[Early in the pandemic, team] Owners prepared for the absolute worst, and they prepared for something worse than what actually happened,” Steve Vogel, chief executive of US Bank’s sports finance group, said in a phone call. “Obviously there were still bad things, but relatively speaking it has given teams and leagues a fortress record. As we get into the year 22, as we slowly work through this, we’ve gotten back to normal in many ways. And that now gives teams a lot of options on how they want to allocate capital.”
Due to overall market activity, major sports have not yet been hit as hard by rising interest rates, having been offset by tightening risk premia borrowers are paying. That said, sports teams and venues of all stripes in MLB, MLS, NBA, NFL, and NHL are considered less risky in the current market than they were during the pandemic, when odds were at historic lows.
The lending rates are based on three benchmarks, depending on the term of the loan. Long-term lending uses 30-year US Treasuries, intermediate-term lending uses 10-year Treasuries, and short-term lending uses the dollar-based SOFR (Secured Overnight Financing Rate), which replaces the long-used but often manipulated LIBOR (London Interbank Offered Rate) . The daily SOFR is the rate banks pay overnight for cash advances backed by US Treasury bonds. According to data from the New York Federal Reserve Bank, SOFR is now at 1.45%, up from almost zero during the pandemic but below the pre-pandemic 1.6% rate. Both 10-year and 30-year government bonds are the highest yields since November 2018 at 3.08% and 3.2% respectively.
“Broadly speaking, prices for sports construction projects — stadiums, arenas, etc. — have gone up because of supply chain issues,” said Vogel, whose group works with more than 40 organizations from the big leagues. It has provided capital for various activities, including building new stadiums such as SoFi Stadium in Los Angeles. “Interest rates have been noticeably higher since March, but I wouldn’t say many investments have been halted as funding is only one piece of the puzzle.”
During the period of very low funding rates, teams felt more comfortable holding floating rate notes as part of their funding strategy. As interest rates rise, teams are reassessing the mix of adjustable and fixed rate debt they hold in terms of mix lengths to avoid taking on too much risk at once in the future when rates rise much higher.
Nevertheless, the market has remained constant in many respects over the past year. Sports organizations are benefiting from a return to normal attendance and strong media deals that provide cash flow that allows teams to keep debt ratios at reasonable levels even as overall debt has increased during the pandemic. Team-level data is hard to find, but the three publicly traded sports organizations offer some insight. The Atlanta Braves had debts of $700 million at the end of 2021, compared to $559 million at the end of 2019. Madison Square Garden Sports, the parent company of the NBA’s Knicks and NHL’s Rangers, had debt as of June 30 last year Debt of $385 million, compared to $54.6 million in June 2019, according to Reuters data. The Green Bay Packers’ debt increased to $156.3 million in early 2021, according to their most recent annual report, compared to $147.4 million in early 2019.
In many cases, teams left debt financing to the leagues while owners raised money in other ways, such as through stock sales, Vogel said. Major League Baseball’s total debt — league and teams — hit $8.6 billion during the pandemic. Based on information released by ratings agency Fitch, the NBA’s debt increased by $2.2 billion to $6.7 billion, primarily due to the issuance of league-level bonds in support of certain undisclosed teams. The NFL has approximately $10.5 billion in debt on its books, also based on Fitch disclosures.
It appears that the worst-case scenarios such as limited partner capital calls and difficulties in funding during the pandemic have never materialized. “From our bank’s perspective, we’ve raised more financing during COVID than any other time period,” Vogel said. “There was a view that you would have a lot of stability on the other end and the consumer would come back and the media would go nowhere. …You’re seeing really strong fundamentals, and I think that’s been true of a lot of investors in the industry.”