Sports Lending Market Back to Normal as Higher Rates Spur Team Refinancing
Though leagues and teams loaded up on debt to get through the pandemic, strong cash flow from media deals and the return of full seasons and full stands has sports organizations in a good spot, 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, managing director of the sports finance group at U.S. Bank, said in a phone call. “Obviously there was still bad stuff going on, but on a relative basis, what it did was give teams and leagues a fortress balance sheet. Coming into ’22 as we slowly work through this, we’re back to normal in a lot of ways. And that gives teams a lot of optionality now on how they want to deploy capital.”
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Based on general market activity, major sports are not as affected yet by rising interest rates because they have been offset by the tightening of the risk premium borrowers pay. That is, sports teams and venues of every stripe in MLB, MLS, NBA, NFL and NHL are considered less risky in the current market than they were during the pandemic, when rates were at historic lows.
Borrowing rates are based on three benchmarks, depending on length of the loan. Long-term loans work off of 30-year U.S Treasury rates, medium-length loans off 10-year Treasuries and short-term loans off the dollar-based SOFR (Secured Overnight Financing Rate) which replaces the long-used but often manipulated LIBOR (London Interbank Offered Rate). Each day’s SOFR is the rate banks paid overnight for cash loans secured by U.S. Treasury bonds. The SOFR today is at 1.45%, up from nearly zero throughout the pandemic, but below the pre-pandemic 1.6% rate, according to data from the New York Federal Reserve Bank. Both 10- and 30-year Treasuries are their highest yields since November 2018, at 3.08% and 3.2%, respectively.
“Broadly speaking, for sports construction projects—stadiums, arenas, etc.—pricing has gone up due to supply chain issues,” said Vogel, whose group works with more than 40 organizations from the major leagues. It has provided capital for various activities including new-stadium construction, such as SoFi Stadium in Los Angeles. “Rates are noticeably higher since March, but I wouldn’t say it has stopped a lot of investment since financing is just part of the puzzle.”
During the period of very low financing rates, teams were more comfortable holding floating rate debt as part of their financing strategy. With rates ticking up, teams are reevaluating the mix of floating rate and fixed rate debt they’re holding with an eye toward mixing lengths to manage against facing too much risk at once in the future if rates go much higher.
Still, in many ways, the market has remained consistent in the past year. Sports organizations are benefiting from the return to normal attendance levels and strong media contracts that provide cash flow, which allows teams to keep debt ratios at reasonable levels, even as total debt rose during the pandemic. Team-level data is hard to find, but the three publicly traded sports organizations provide some insight. The Atlanta Braves’ debt was $700 million at the end of 2021, compared to $559 million at the end of 2019. Madison Square Garden Sports, the parent of the NBA’s Knicks and NHL’s Rangers, had $385 million in debt as of June 30 last year, compared to $54.6 million in June 2019, according to Reuters data. The Green Bay Packers’ debt rose to $156.3 million in early 2021, compared to $147.4 million in early 2019, according to its latest annual report.
In many cases, teams left the debt-financing to the leagues while owners raised cash through other means, such as equity sales, according to Vogel. Total Major League Baseball debt—league and teams— hit $8.6 billion during the pandemic. Based on information disclosed by ratings agency Fitch, the NBA’s debt increased by $2.2 billion, to $6.7 billion, primarily by issuing league-level debt to support specific undisclosed teams. The NFL has about $10.5 billion in debt on its books, also based on Fitch disclosures.
It seems the worst-case scenarios, such as capital calls on limited partners and difficulty getting financing during the pandemic, never materialized. “From our bank’s perspective, we did more financing during COVID than I think any other period,” said Vogel. “There was a view that, on the other end of this, you were going to have a lot of stability and the consumer was going to return and media wasn’t going anywhere. … You’re seeing really strong fundamentals, and I think that rang true with a lot of investors in the industry.”
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