Capital Markets

NFL Runs Up the Score

Patriots? Giants? Either way, rating agencies like the way the National Football League plays its game.
Marie LeoneJanuary 30, 2008

When field goal kicker Lawrence Tynes split the uprights with a 47-yard, overtime field goal
to propel the New York Giants over the Green Bay Packers, and into Super Bowl XXLII, the stage was set. The Giants, who entered the National Football League playoffs as a mere wild-card selection, are headed into a classic showdown that pits them against the undefeated New England Patriots. “This is just what the NFL wants,” quipped finance executive Ray Schaetzle, after watching the dramatic finish.

The former executive vice president of finance of pro-basketball’s New Jersey Nets, who is currently a consultant with Resources Connection, was reacting to the bigger picture. The 2008 Super Bowl will pit the underdog Giants against the so-far unstoppable New England Patriots, reignite the New York-Boston rivalry, and put two high-profile quarterbacks center stage — the Patriot’s Tom Brady and the Giant’s Eli Manning — explained Schaetzle.

That kind of made-in-heaven match-up promises a nice boost for pro football’s finances. But, in football terms, the dream match-up really just kicks in the extra point. Where the NFL really scores is its revenue-sharing model, salary cap, and debt level limits.

Those fiscal policies are why credit rating agencies put the NFL at the top of the list among pro sports when it comes to financial management. “You are not going to find a league that is rated as highly [as the NFL], or one that even comes close,” asserts Neil Begley, an analyst for Moody’s Investors Service.

Moody’s gives the NFL’s $635 million of senior unsecured debt an A3-rating with a stable outlook. Competitor Fitch Ratings gives the notes — which mature in 2017 — an A+ rating, reflecting the leagues “steady stream of strong, predictable revenue.” Standard and Poor’s doesn’t rate the NFL debt, but in a report about the business risks of professional sports leagues, credit analysts say that the football league has “the most generous revenue sharing program and stringent expenditure controls” of any professional league. The S&P ratings team adds that the NFL “clearly has the strongest business and financial models” in pro sports, and a risk profile that is “of investment-grade quality.”

Sounds too good to be true? Maybe, but the NFL backs up the credit-rating accolades with some impressive stats. To start, the league’s guaranteed revenue stream is more like a waterfall. The NFL derives about 50 percent of its revenues from “the world’s most lucrative fixed long-term national TV broadcasting, cable, and satellite sports contracts,” writes Begley in a report he co-authored for Moody’s. In 2006, television rights contracts pulled in $3.3 billion worth of gridiron gold, and long-term TV deals will generate $24 billion through 2013.

And, of course, those airtime rights are eagerly snapped up by large investment-grade rated companies that want to put their products and services in front of the coveted 18- to 40-year-old male, and whoever else makes up the 120 million weekly viewers that sit in front of their television sets to root for their favorite teams. As a result, the NFL has locked in broadcast contracts that average more than $2 billion a year for the next five years.

The revenue is broken into three segments, reports Moody’s. Broadcast television rights, which includes deals with CBS, FOX and NBC, will generate $11.6 billion through 2011. Satellite broadcaster DirectTV’s will pay the league $3.5 billion through the 2010 season, and cable sports powerhouse ESPN (a Walt Disney company) signed an eight-year deal for $8.9 billion.

Furthermore, the turnstiles at football stadiums seem to print money. Total league attendance exceeded 17 million for the third consecutive season, and represents a 99 percent stadium capacity factor, according to FitchRatings analyst Chad Lewis. Further, a scarcity of tickets (reportedly, waiting lists for season tickets in some markets are 10 years long) allows prices to remain steady. On average, a season ticket for an NFL team is $68.00 per game, with season passes for the Patriots and Giants running about $91.00 and $81.00 per game, respectively.

Throw in revenue collected from stadium naming rights, local advertising, luxury box sales, and merchandising, and the privately-held league is a multi-billion dollar moneymaking machine. What’s more, Moody’s reports that NFL franchises have far higher values than the teams that play in the National Hockey League, Major League Baseball and the National Basketball Association. Nevertheless, it is the fiscal policies that are set up around the revenue that makes the NFL the gold-standard among sports leagues, say the rating agencies.

For example, the league’s “highly developed” revenue-sharing model spreads proceeds from television fees, gate receipts, and merchandising equally among the 32 teams, notes Moody’s Begley. In that way, each member team isn’t dependent on team performance and market size. However, as new stadiums are built or renovated, those teams pull in more non-shared ancillary revenue, throwing the income balancing act out of whack. The additional new stadium revenue is tied to luxury boxes, advertising, sponsorships, stadium naming rights and novelty and concession sales. Begley says that the league addressed the disparity to some extent by creating a pool of funds from the top 15 clubs to supplement the teams with low-revenue generation.

The NFL scores more points with credit rating agencies with its player “hard salary cap structure,” adds FitchRatings’ Lewis. In March 2006, the league renegotiated its collective bargaining agreement (first signed in 1993), which extends at least through the 2010 season, and once again puts a limit on player salaries — the single largest expense for teams. On average, player salaries represent 65 percent of a team’s operating expenses. Although the salary cap is suppose to be lifted in 2011, Lewis told that historically, the cap is renegotiated before the existing contract expires. The labor agreement also includes a no-strike and no-lockout provision, which further reduces risks.

Under the CBA, players receive 59.5 percent of total NFL revenue over six years. For 2007, that means that teams were allowed to spend up to $109 million on player salaries. The cap is set to rise to $139 million for the 2008-2009 season. The incremental rise in the salary cap allows teams to keep high-paid superstars, while the all-for-one revenue-sharing model maintains a relatively high level of competition. That ensures that big market teams don’t become perennial Super Bowl champs, and fans walk away from the game bored, notes Lewis.

The NFL also bolsters its credit rating by imposing limits on debt. Right now, the league limits each team to $150 million of debt secured by, or with recourse to, football-related assets. That capital is earmarked to help build new stadiums or renovate old ones. The league recently voted to reduce that debt cap by about $20 million over two years, partitially to mitigate the rising debt levels arising from new stadium construction, says Begley.

Still, the limit has increased by only $50 million over the last eight years, despite a “significant” increase in team market value, notes Begley. Perhaps more important, the NFL commissioner — currently Roger Goodell — can assess teams for ongoing operating funds and debt service needed by the league. It also helps that NFL owners tend to be deep-pocketed entreprenuers who are able to infuse teams with capital if liquidity problems surface, says Begley.

Moody’s and Fitch Ratings also like the idea that the NFL is a non-profit trade association that acts for the benefit of member teams, rather than profitability. That gives bondholders a bit more security about the commissioner’s motives in assessing teams for what is needed, rather than in excess of current needs. For the record, Begley says that management has never let a financially distressed team default. Indeed, the league imposes standard cure rights – meaning that the commissioner and owners have historically agreed to “cure” cash flow shortfalls of a failing franchise, rather than risk default.

In addition, Lewis points out that the NFL has a “conservative” loan-to value ratio of about 25 percent. He figures it this way: The average market value of a team is $600 million, based on the most recent sale prices of franchises. He then divides into that market value the $150 million ceiling that the league imposes to come up with the ratio.

Begley expects the NFL to go to back to the market with another bond offering soon. But it is unclear how much the league will want to raise. Like its existing $635 million notes, the new debt will be part of the league’s G-3 Resolution program, the agreement that authorizes the NFL to advance — on a matching basis — up to $150 million to teams to build or renovate stadiums.

For 15 years after the new stadium is in operations, the leagues assesses the team based on what it calls “visiting team share” of club seat revenues. To supplement the VTS, each of the 32 NFL teams are assessed $1 million per year. Although the commissioner has unconditional authority to assess teams to cover league expenses, including G-3 debt service, there is a $6 million limit on what can be used to service the public notes, explains the Moody’s report.

To date, Moody’s counts 12 projects that are being funded using the G-3 advances. The projects total $1.1 billion, which includes the recently announced $300-million Jets/Giants stadium in New Jersey.

One big question remains, however. It is an uncertainty that even the credit rating agencies could not address. When the new stadium opens in 2010, will the Giants walk on to their home field wearing championship rings from Super Bowl XXLII?