Marlins Among 7 Teams out of Compliance with MLB's Debt Guidelines

[mystikol87]

http://sports.espn.g...tory?id=6621842

 

Report: Debt issues cast wider MLB net

The Los Angeles Dodgers and New York Mets are widely known to be in financial hot water.But seven other major league teams, including the Philadelphia Phillies, Chicago Cubs and Texas Rangers, are out of compliance with MLB rules regarding debt, the Los Angeles Times has reported, citing three anonymous sources familiar with a confidential briefing presented at last month's owners meetings.

 

The report casts a wider shadow over the financial footing of some of baseball's biggest teams even as the league rakes in a combined $7 billion annually, a revenue stream that has doubled in eight years, according to the report.

 

And with so much money rolling in, in an era commissioner Bud Selig often has referred to as a "golden age," it also calls into question how much of baseball's luster has been overleveraged.

 

The violations in question concern debt-service rules intended to limit a club's debt to 10 times its annual revenue, according to the Times. Other teams named in the owners' briefing were the Baltimore Orioles, Detroit Tigers, Florida Marlins and Washington Nationals.

 

Selig's predecessor, Fay Vincent, called the prospect of so many teams in violation of the debt rules "troublesome," the Times reported. Selig declined comment to the newspaper.

 

Three of the teams named are no stranger to fiscal controversy. The Mets, who recently said they were $427 million in debt and could lose $70 million this season, have fallen on hard times in the wake of the Bernie Madoff scandal; the Dodgers have been appointed an oversight trustee by Selig as owner Frank McCourt deals with a contentious divorce; and the Rangers emerged from bankruptcy court last summer before advancing to the World Series.

 

"You've got to be thinking, with two of the premier franchises in trouble and a major-market team that has just come out of bankruptcy, what else is out there?" a prominent sports investment banker told the Times. The banker declined to be identified because of his work within MLB, the report said.

 

McCourt has questioned why Selig has taken action toward the Dodgers but stopped short with any other team.

 

"I can't say I haven't heard people in baseball talk about that, but there is a lot of deferral to Bud on this one," Chicago-based sports business consultant Marc Ganis told the Times.

 

There are many gray areas in the way teams' finances are reported. For example, while a team may list its facility debt one way, another club may file it under a separate financial accounting category.

 

The Phillies have sold out Citizens Bank Park throughout the season. But a team's ability to fill seats does not correspond directly with its ability to turn a profit.

 

The debt rules aren't specific as to how the commissioner's office should enforce them, though a number of options are listed, according to the report. Among the possibilities are ordering a team to raise equity, requiring expenditures to be approved by MLB in advance and suspending a team's owner.

 

Rob Manfred, MLB executive vice president of labor relations, would not confirm the number or identity of teams to the Times.

 

"To take a snapshot of the number of non-compliant clubs at a point in time can be very misleading," he told the newspaper. "With one or two exceptions, we see how teams are going to be compliant again in the short term, so we're not worried about them.

 

"We are not concerned about the overall economic condition of the industry," Manfred said.

 

Information from ESPN The Magazine's Buster Olney was used in this report.

[Admin]

How can they be in compliance when all of that money goes into Loria's pocket?

[mystikol87]

I blame Wes Helms.

[Dr Beinfest]

I blame Wes Helms.

 

 

dis.

[Entendu]

Soooooo uhhhhhhhh, someone has to be lying. Either we had more money to give for the stadium or we didn't. Either way, this is funny. Or am I misunderstanding this?

[Dr Beinfest]

Soooooo uhhhhhhhh, someone has to be lying. Either we had more money to give for the stadium or we didn't. Either way, this is funny. Or am I misunderstanding this?

 

 

Oh, come on. They're businessmen. Of course they had money. You do what's best for your business. If you can make someone else pay for it, you do.

[Entendu]

Soooooo uhhhhhhhh, someone has to be lying. Either we had more money to give for the stadium or we didn't. Either way, this is funny. Or am I misunderstanding this?

 

 

Oh, come on. They're businessmen. Of course they had money. You do what's best for your business. If you can make someone else pay for it, you do.

 

Apparently they didn't from what this report says. At least that's what I think it says.

[Dr Beinfest]

I dunno, I'm just blabbing. I hardly read it. I don't have the patience, at the moment

[EricWiener]

It is total debt vs. revenue, and since the Marlins just took on massive debt, but are a year away from increased revenue as a result of said debt,,,,,

[...]

Either we had more money to give for the stadium or we didn't. Either way, this is funny. Or am I misunderstanding this?

 

 

The Marlins $155 million total contribution was made up of $120 million in cash for construction (of which $90 million was borrowed) and $35 million in rent. Rent is $2.3 million per year and increases by 2% each year. How that totals only $35 million over 35 years is beyond me.

 

The $90 million that was borrowed for construction is probably why the Marlins are on this list.

[EricWiener]

Either we had more money to give for the stadium or we didn't. Either way, this is funny. Or am I misunderstanding this?

 

 

The Marlins $155 million total contribution was made up of $120 million in cash for construction (of which $90 million was borrowed) and $35 million in rent. Rent is $2.3 million per year and increases by 2% each year. How that totals only $35 million over 35 years is beyond me.

 

The $90 million that was borrowed for construction is probably why the Marlins are on this list.

 

 

 

 

2009 dollars?

[...]

2009 dollars?

 

Sort of. More like 2012 dollars, but not exactly.

 

If you use a 2% discount rate (convenient, as it equals the annual rent escalation) to arrive at net present value, the $2.3 million a year, increased 2% each year for 35 years is worth 35 x 2.3 = $80.5 million. Nice and simple.

 

And obviously not what they did. In reading the contracts, it seems that they set the NPV of the rental stream at $44 million and then allocated $9 million to "help cover County ballpark project related costs." Hence the $35 million figure. Close enough for government work.

 

Now, to arrive at a NPV of $44 million you have to assume a discount (interest) rate of 5.837%. Which is not even close to current reality, it's just a rate they pulled out of a hat. Most likely because they wanted the result to be $44 million. Why would they want the result to be $44 million? I have no idea other than perhaps pure expedience, that is, it's the number that made everything add up.

 

Just for the record, the total rent (not adjusted for inflation) the Marlins will pay over the 35 years is $115 million.

[...]

To go a bit further on the interest/discount rate point, using today's 30-year T-bond rate of 4.23%, the NPV of the rental stream is $55.6 million.

 

Going back to March of '09 when the deal was approved, that rate was about 3.7%, resulting in a NPV of about $60 million.

 

Any way you slice it, the $44 million estimate was quite conservative. However, the current low-rate environment isn't going to last forever, so it remains to be seen whether they were too pessimistic or not.

 

More likely, as I said, the number was pulled out of a hat to make everything add up, and they really don't have an opinion about future interest rates and really don't give two sh!ts about it one way or the other as none of them will be in their current office in 2020 or 2030 or 2047 when any erroneous estimate made back in 2009 might come home to roost.

 

Our government at work.

 

:lol

[SilverBullet]

The strange thing is, the article basically says "These 7 teams are out of compliance... BUUUUT we know most of them will be just fine so we're really not that worried about it."

 

So, my question is, why bring this up if you know it'll work out? Seems like another stupid way to incite controversy.

[FutureGM]

Yeah, I'm not surprised that they had to borrow a good deal for the stadium. Hopefully once we're earning all of the revenue at our stadium for once, this will change.

[Rabbethan]

Either we had more money to give for the stadium or we didn't. Either way, this is funny. Or am I misunderstanding this?

 

 

The Marlins $155 million total contribution was made up of $120 million in cash for construction (of which $90 million was borrowed) and $35 million in rent. Rent is $2.3 million per year and increases by 2% each year. How that totals only $35 million over 35 years is beyond me.

 

The $90 million that was borrowed for construction is probably why the Marlins are on this list.

 

 

 

They were probably on the list before 2007 too, as they had to borrow a ton of money just to get the team and were basically bleeding cash until the "market correction".

[Matty]

EDWIN OUT!

[...]

They were probably on the list before 2007 too, as they had to borrow a ton of money just to get the team and were basically bleeding cash until the "market correction".

 

Hard to tell. They easily could have been borderline in-or-out-of-compliance for years.

 

As of 2009, the Marlins show debt (for MLB-regulatory purposes) as:

 

Deferred comp 4.6 million

Pension 5.8

Related party note 14.1

MLB credit 56.9

Expos note 21.2

Revolving note 21.0

Construction 25.1

 

That totals 148.7 million.

 

http://cache.deadspi...amarlinspdf.pdf

 

Eliminating the stadium-related debt of 25.1 million, they were at 123.6 million, which would be supported (for MLB purposes) by EBITDA of ~12 million a year. Less interest paid of say, 4 million, they would be compliant with only about 8 million of actual tax-return earnings. Less the apparently stadium-related revolving loan of 21 million which appeared in '09, they were at 102.6 million which would be supported by about 6 million of actual tax-return earnings. So, it's hard to say.

 

Looking forward, and assuming no other significant changes in debt structure, by the end of 2010 the construction debt was likely near the full 90 million, bringing the total to 213.6 million, or, in the alternative 192.6 million (if the revolver was stadium-related,) but that's irrelevant to my following point.

 

The "debt agreement" with the MLBPA (sort of a side agreement, not part of the actual, formal contract, see pages 180-188 http://mlb.mlb.com/p...cba_english.pdf) says that the 15:1 (debt to EBITDA) ratio only applies to clubs with stadium debt after the stadium opens. Which is next year, so the 10:1 ratio still applies to the Marlins for another 10 months.

 

Clearly, when MLB says they can see how some clubs on the list will be in compliance soon they count the Marlins as one of those clubs. In 2012 when the stadium opens the Marlins' permissible debt ratio changes to 15:1 and earnings will vastly improve with the new revenue streams from the stadium. The Marlins will obviously be off the list.

 

Much more interestingly, and what's been overlooked by the idiot media reporting that the Marlins are currently on the non-compliant list and what it means is this: The Marlins' EBITDA earnings in the most recent MLB reporting period (probably 2010) HAD TO BE less than 21.3 million. And less than 19.3 million if the revolver was stadium-related and total debt is only ~193 million.

 

Why? Because 213 million is more than 10 times the maximum allowable ratio of debt to EBITDA, or the Marlins wouldn't be on the list in the first place. Perhaps their EBITDA earnings were a lot less than 21.3 million, but they were without doubt less by some amount.

 

Worse, EBITDA (earnings BEFORE interest, taxes, depreciation and amortization) is not a real-world accounting measure of profit, it's a measure of pure cash flow thrown off by a business.

 

In the real world, businesses actually do have to pay taxes and interest. Depreciation and amortization are non-cash tax return items, but at some point in the future a business does actually have to come up with cash to replace their depreciated and amortized assets.

 

The Marlins operate as a limited partnership, so taxes are passed through to the partners (Loria, et al,) but their interest expense in '09 was 4.8 million hard, cold smackers.

 

Which is an average interest rate of 3.2% on 148.7 million, probably due to very low rates on the MLB credit facility, the related party note (the related party being Loria) and the Expos note. The revolving note is almost certainly from a bank, the construction loans are almost certainly also from banks, and they, like the players with deferred comp agreements aren't giving them any breaks on interest rates.

 

On the now-higher debt amount of about 214 million, that 4.8 million of hard, cold interest expense rises to at least 6.9 million; probably significantly more as Miami-Dade borrowed for the stadium at about 7% and the Marlins aren't able to issue tax-free municipal bonds and had to borrow at taxable market interest rates, in their case probably ~10%. So their current interest costs are somewhere between 6.9 and perhaps 13.4 million per year. Maybe more. Ouch.

 

Which means that their real '10 earnings could not possibly have been more than about 14 million, were probably closer to 8 million at best and quite likely were much lower than that.

 

Yeah, that evil Loria is pocketing tons of money. What a crook!

 

:lol

 

Sorry to disappoint all of the Loria-bashers out there. And I defy any of the bashers to dispute any of the facts, or, for that matter, any of the reasonable assumptions in the above shredding of the case that Loria is somehow milking the franchise for cash and neglecting its needs.

 

:lol

[...]

After digging a little further into the notes to the Marlins '09 financials, it seems that the facts are even worse for the media who totally missed this.

 

Turns out that 39 million of the Marlins' debt is exempt (see note Z in the Marlins' financials) from the 10:1 (and 15:1) MLB rule. Which means that the 214 (or 193) million mentioned above is really 175 (or 154) million.

 

Which changes the EBITDA required (by MLB) to support it to 17.5 (or 15.4) million.

 

Which means the Marlins' real '09 tax-return earnings (which include actual interest expenses) couldn't have been more than 10.6 (or 8.5) million, or at the bottom end of my estimates 4.1 (or 2.0) million.

 

Yup, that Loria, he's really screwing everyone over, he's got a franchise worth maybe 700 million and is getting a current return of somewhere between .3% and 1.5% on his investment.

 

:lol

 

A 5% return would be 35 mill a year. He's got some hope of realizing that in 2012 and thereafter.

[...]

Well, thanks.

 

I always appreciate it when anyone actually bothers to read one of my long, boring posts dealing with financial reality. This junk always takes more than two sentences to explain, and even then there are many more nuances that could have been tossed in.

 

However, it's always much more fun to bash Loria. After all, he's such an evil, capitalist kind of guy.

 

:lol

 

Wouldn't want reality to get in the way of anyone wanting to have cheap fun at their own expense, as they so often do.

[mystikol87]

Do you write for The New Times?

[Rabbethan]

Do you write for The New Times?

 

If he did, wouldn't he be going on about how Loria is a crook?

[...]

Do you write for The New Times?

 

I used to pick up a few copies of it every now and then. Why? My dachshunds, Megabyte, Gigabyte and Terabyte seemed to enjoy relieving themselves upon its pages. Which I figured was a perfect use for that waste of ink and paper.

 

If he did, wouldn't he be going on about how Loria is a crook?

 

:lol

 

Ain't that the truth.

[mystikol87]

That's where I wa going with it, boys. Complimenting you by dissing that awful publication.