VideoThat argument is largely theoretical, however, since baseball—unlike football—does not have a salary cap. Instead, any restraints on player salaries have to be "generated by some sort of fiscal responsibility," says the Red Sox's Furbush. And that type of cap lacks teeth, for two reasons: first, as most CFOs interviewed for this article admit, they have little control if owners decide to buy the next A-Rod. "If the owner tells the general manager he's willing to put in more money, that's his [green] light to go," says Marlins CFO Bussiere. "I wouldn't want to argue against it." More important, the player's union tends to view with suspicion any concerted effort at fiscal restraint.
For example, baseball CFOs widely attribute today's shorter contract lengths and a recent drop in player salaries to market conditions: insurers will no longer cover long-term contracts, and teams are using improved statistical methods to find and hire undervalued players. But the number of "untendered" players (younger players who become eligible for salary arbitration but are instead released by their teams) flooding the free-agent market has reportedly led the union to consider once again bringing collusion charges. (In 1990, MLB was found guilty of collusion and fined $280 million.)
Indeed, although baseball's finance chiefs work together on many issues, any explicit agreement to sit on their wallets at hiring time would be a serious violation of baseball's labor contract. The union's control extends further than outright collusion. The current collective-bargaining agreement (CBA) between the players and MLB spells out rules for just about every aspect of baseball finance and its accounting, from obvious salary-cap substitutes like luxury taxes to more-subtle "fiscal responsibility" initiatives such as team debt limits.
Behind in the Count
Fiscal controls such as debt limits are considered a labor issue because they ultimately limit spending, and baseball teams spend the bulk of their money on salaries. At the same time, it's clear that the increase in salaries over the past decade (as well as the soaring cost of buying a franchise) have contributed to a massive debt load in Major League Baseball. According to the blue-ribbon commission, aggregate team debt nearly quadrupled from $604 million in 1993 to $2.08 billion in 1999. Current estimates of combined team debt range from $3 billion to $4 billion.
Bussiere says that that debt growth is the best answer to those who are skeptical about baseball's reported losses. "Most of the teams have been driving losses and financing them through debt in the past 10 years," he says. And without some relief, says Los Angeles Dodgers CFO Cristine Hurley, "we are going to lose our ability to run our business."
Mariner says the debt issue is being attacked in two ways. First, MLB successfully bargained for a new debt-service rule in the current CBA that caps allowable debt at 10 times EBITDA by 2005. A previous rule, which required that teams maintain an asset/liability ratio of 60/40, says Mariner, proved unenforceable, in large part because the union had never agreed to it. Second, Mariner recently refinanced MLB's $1.5 billion central debt facility, converting it from a full revolver to a partial-term structure.
"One of the reasons I converted it," he explains, "is that a lot of the needs—including funding losses—were long-term needs." Each team now has access to a $50 million revolver and a $25 million term loan. The $500 million term-loan portion is securitized by national television rights and backed for the first time by institutional investors.
That structure offers even more insight into the fragile health of Major League Baseball. Because securitization reduces investor risk, Fitch Ratings gave MLB's first-time foray into the public debt markets a higher rating (A-) than MLB would have received for unsecured debt. MLB has no other publicly rated debt, but the head of Fitch's sports-rating practice, Dan Champeau, allows that the league would likely be considered an investment-grade credit. That puts MLB squarely in the BBB range. And given the level of credit enhancement typically provided by securitization, it seems safe to say that MLB, if rated, would be barely a notch above junk-bond level.
Champeau won't confirm that speculation, but the fact that MLB's securitized facility is rated lower than the National Football League's unsecured debt (A+), he concedes, suggests "a meaningful difference" in the creditworthiness of the two sports. (Football's hard salary cap and robust revenue sharing, notes Champeau, has long made it the gold standard of sports finance.) Still, he says, Mariner seems to be making good use of the stronger financial controls offered by the new CBA, which he notes is "a significant improvement from years past."
That's comforting, because individual teams are in far worse shape than MLB itself. A debt ratio of 10 times EBITDA, says Champeau, is generally indicative of below-investment-grade credit. Yet, CFOs of some 15 teams—half the league—submitted three-year plans that Mariner thought were unlikely to meet that limit by the 2005 deadline. Teams that fall short in 2005 can be forced to inject more equity into the team, be denied their share of national revenues collected by MLB, or even have the commissioner take over their financial decision-making.
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