tag:blogger.com,1999:blog-2893512317902577458.post3239095524172537437..comments2024-01-06T02:22:33.000-05:00Comments on Camden Depot: Cup of jO's (June 3, 2011): Orioles violating MLB's debt service -- so what?Jon Shepherdhttp://www.blogger.com/profile/03521809778977098687noreply@blogger.comBlogger4125tag:blogger.com,1999:blog-2893512317902577458.post-57711022831474067922011-06-05T12:22:33.107-04:002011-06-05T12:22:33.107-04:00As typically happens with stories like these, we&#...As typically happens with stories like these, we've gotten a bit more information in the past few days as more journalists jump on the story and build on initial reports. First, the income measure used by the league is EBITDA - earnings before interest, taxes, depreciation and amortization. More or less, EBITDA is a measure of operating cash flow (though it doesn't adjust for things like timing of converting receivables to cash or paying vendors). EBITDA is a reasonable choice for benchmarking debt, and 10:1 is also a reasonable metric. At 10:1, an interest rate of 10% means your free cash flow (what's left over after operating expenditures) would go to debt service.<br /><br />However, just because a team is in violation of that rule does not mean they are in dire financial straits. As I mentioned in my earlier post, the fact that a team like the Orioles owns a cable network can skew things significantly. From an accounting standpoint, the network could pay very little directly to the ballclub (lowering EBITDA), even if it is making significant disbursements to shareholders (like Mr. Angelos). <br /><br />In addition, when the team took on its debt is very important. Did the Orioles take on new loans this offseason to finance player acquisitions, or have these debts been around for quite a while and its cash flow that is drying up? Are long-term sponsorship deals slated to pay out more money in coming seasons that will quickly put the team back in compliance? Since this is just a single snapshot, we don't know; lenders (and the commish's office) would rightly look at trends in cash flow and debt.<br /><br />Notice, too, that "interest" comes before "taxes" in the acronym above. Thanks to the wonderful quirks of our tax code, interest payments are tax deductible expenses, but dividends paid to shareholders are not. This impacts the optimal capital structure (mix of debt and equity financing) for the team.<br /><br />In a cartel like MLB, it makes sense for the central organization to impose some financial constraints on members. MLB clubs are a very unique asset, and the value of Franchise A is highly correlated with the value of Franchise B. If owners make a mess things (like in LA and New York), that has direct impacts on the valuations for clubs around the league.The Oriole Wayhttps://www.blogger.com/profile/16483309131692836436noreply@blogger.comtag:blogger.com,1999:blog-2893512317902577458.post-78230263669142814612011-06-03T15:21:24.744-04:002011-06-03T15:21:24.744-04:00I know that Peter has refinanced his debt multiple...I know that Peter has refinanced his debt multiple times to take value out of the team for himself and the minority owners (which non-coincidentally took place after the Washington / MASN deals, when the economy and team value were at / close to all time highs). This is not at all surprising to me. More surprising is this is the first time I've really read about it.Brian P. Eganhttps://www.blogger.com/profile/09691356417728316132noreply@blogger.comtag:blogger.com,1999:blog-2893512317902577458.post-60757160408379240062011-06-03T14:25:34.991-04:002011-06-03T14:25:34.991-04:00@The Oriole Way -- With the evolution of corporate...@The Oriole Way -- With the evolution of corporate finance over the years, does it even make sense to have MLB suggest a 10:1 ratio? <br /><br />You point out a number of off balance sheet assets not taken into account for such a leverage test. Lending institutions are likely going to consider those same assets in their comprehensive diligenge check.<br /><br />So what is the point of MLB even levying the suggestion in the first place?<br /><br />Further, is this a case, then, of MLB owners starting their public campaign leading up to the CBA negotiations? I can't figure out a reason for this info to be leaked other than a PR campaign. It gives the average sports fan an initial reaction of "Uh oh, MLB teams can't stay in business at this rate" while having the ownership beneifit of not giving any real insight into the organizations at all.Nick J Falerishttps://www.blogger.com/profile/12413352719310759010noreply@blogger.comtag:blogger.com,1999:blog-2893512317902577458.post-27119812564125595262011-06-03T14:01:10.501-04:002011-06-03T14:01:10.501-04:00As someone with a fair amount of financial backgro...As someone with a fair amount of financial background, a 10:1 "debt to income" ratio means absolutely nothing, especially in professional sports where there is roughly zero outside transparency into "income" and many clubs have significant assets that wouldn't be carried directly on the club's balance sheet (particularly cable networks). Unless we start seeing things like interest coverage ratios or cash flow coverage, these reports should probably be reviewed with a very large grain of salt.The Oriole Wayhttps://www.blogger.com/profile/16483309131692836436noreply@blogger.com