Sports Leagues Brush Off Pandemic as Business Model Thrives
The major sports leagues led by the NFL, NBA and MLB, have made it through the pandemic seemingly in fine financial health, as rising values and fan support forestalled some of the worst forecasts based on curtailed seasons and audience-free arenas.
“2020 and the beginning part of 2021 were the most challenging years for sports in recent history,” said Fitch Ratings sports sector director Henry Flynn on a video call. “But our view is through the cycle. We were expecting, as much as we could when we got into [the pandemic], that sports are a strong asset class and this would be a temporary disruption. Fundamentally, demand for sports is really, really strong.”
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Based on Fitch Ratings, the major leagues are as robust as they were pre-pandemic. On Nov. 19, the agency re-affirmed the NFL’s stadium financing venture as an A+ rating, and the league-wide credit facility at A, unchanged from during and before the pandemic. Both are firmly in the middle of what is considered the “investment-grade” rating range in the bond industry. The “ratings reflect the NFL’s position as the most popular professional sports league in the U.S. and its strong and highly regarded economic model,” the Fitch ratings note said in part.
Similarly, the NBA’s debt was reaffirmed this month at A-, the same rating it has held since 2015. “The NBA’s business model and financial profile are consistent with the other ‘A’ category ratings for the National Football League (NFL) and Major League Baseball (MLB),” the agency wrote in a Nov. 12 note. This past summer, MLB’s debt was also rated at A-, the same rating it held pre-COVID. The trio all have commonalities: low debt ratios, compared to other industries; a strong fan base; and a willingness to dedicate significant sources of cash flow, like TV contracts, to making sure debt is paid. Fitch is the only one of the three major debt ratings agencies to carry current ratings on the leagues. The NHL, MLS and other major leagues don’t have current ratings or they aren’t publicly disclosed by any agency. Flynn says Fitch rates 45 sports-related entities, including teams and facilities, and the overall health of the group is strong, with an average BBB rating, meaning an investment-grade credit, though two levels below A on the 22-level ratings scale.
In the case of the leagues, their strength flowed down to the team level, as leagues provided credit lines to franchises and allowed them to do more outside borrowing during the pandemic. “All the leagues ensured their clubs had liquidity to get through this,” said Flynn. That does means the leagues carry more debt, including credit lines they are expected to tap in coming years. Based on ratings disclosures, the NFL carries $10.2 billion in debt, the NBA $7.6 billion and MLB $5 billion. Most of each league’s debt is tied to programs that help member clubs cover costs and income shortfalls from the pandemic.
There are two overarching factors that underpin the ability of the pros to draw on billions of dollars in bank loans and cause nary a ripple among investors, according to Andrew Zimbalist, an economics professor at Smith College.
“The most important factor is we’re in an era now—and have been for some time—of rising franchise values. Just like when you take out a mortgage on your house, if your house is worth more, then it’s easier to get a loan,” Zimbalist said on a phone call.
The other factor is the favorable labor cost structure not seen in any other industry, with the NFL, NHL, NBA, MLS and WNBA all having salary caps. “Sports leagues with the salary cap have this automatic and very significant adjustment. Most businesses don’t have a salary cap,” Zimbalist added. The exception, Major League Baseball, averted payroll disaster by negotiating a pro rata rate for its 60-game 2020 season with the players’ union.
Beyond the league level, predictions that an extended pandemic would be catastrophic for sports-related bonds and businesses never came to fruition, thanks to league support and, in part, to government programs like the Payroll Protection Program, which supported thousands of sports entities, from the Big East and Mountain West conferences to dozens of minor league clubs. That doesn’t mean there isn’t a lingering financial hit even as teams have returned to full stadiums and schedules. For instance, even as the New York Yankees, through September, sold $194 million in tickets for the 2021 season, according to a municipal bond disclosure last week, the team had to use nearly half of that to cover $94 million of 2020 tickets fans opted to roll over into 2021.
Still, the pandemic may have proven that the sports business is stronger than even its most ardent supporters may have believed. “In the past, sports may have been viewed as a discretionary choice of people, but to me the industry of sports getting through COVID is suggesting it’s becoming essential in some way,” said Fitch’s Flynn. “For top-tier, premium content, you’re seeing continued very strong demand for sports and the sports ecosystem.”
That doesn’t mean sports is bulletproof: There are concerning longer term trends, such as the weakening of the regional sports network business model and the unwillingness of younger people to want to sit through three-hour games, said Zimbalist. But those are issues that may or may not end up being significant. When it comes to the pandemic, thought to be the biggest financial threat that sports has faced in decades, it appears to be largely in the rearview mirror.
“You’re really looking at the overall trajectory, rather than a blip—or what we all hope is a blip,” said Zimbalist.
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