Finance Uncategorized

NBA debt level increase opens door for new owners

The NBA has increased the debt limit for its franchises, signaling an opportunity for current and potential owners.

(David Dow - NBAE via Getty Images)
(David Dow – NBAE via Getty Images)

The new NBA TV deal has done more than open the door to new sources of revenue: It has allowed the NBA to increase the debt level for teams.

The tripling of rights fees is matched by a 40 percent increase in allowable debt. Teams are now allowed to borrow up to $250 million: $50 million from outside sources and $200 million from the league loan pool, which has been expanded to nearly $4 billion. The last debt limit increase was in 2008.

This increase means the NBA’s loan pool surpasses that of the NFL by almost $500 million. It’s a sign of two things: the impact of the league’s broadcast deal and the increasing valuations of teams.

(Kirby Lee - USA TODAY Sports)
(Kirby Lee – USA TODAY Sports)

It’s also a clear reflection of the financial health of the league. After record prices in the sales of the Milwaukee Bucks and Los Angeles Clippers, increasing the debt limit makes purchases of teams more attractive for potential owners because they are able to secure financing from the league. More debt means more flexibility for potential owners and justifies higher valuations. Remember, buying a team is an investment as much as it is a toy for wealthy owners.

Take the Bucks purchase: Hedge fund managers Marc Lasry and Wesley Edens agreed to what was at the time a record $550 million price for the team. However, because the team was leveraged at $125 million – then the maximum debt that could be obtained from the league – they needed to pay only $425 million upfront after assuming the team’s debt. Lasry and Edens also financed $50 million from outside sources for the purchase, so total equity for the purchase was $375 million.

(Mary Langenfeld - USA TODAY Sports)
(Mary Langenfeld – USA TODAY Sports)

Leagues prefer in-house credit over external sources because they want to ensure the financial viability of owners and avoid scandals like the aborted 1997 sale of the NHL New York Islanders. John Spano nearly tricked the league and selling owner John Pickett into closing the sale of the franchise despite the fact that Spano had no equity and was completely leveraged for the purchase.

The NBA has come a long way from just a few years ago when it struggled to find a buyer for the New Orleans Hornets and had to take control of the team. With higher debt opportunities and increased valuations, some owners may suddenly be looking to sell, especially before the probable CBA negotiations and potential lockout after the 2016-2017 season. The next likely sale of a franchise – the Atlanta Hawks – may indicate the kind of impact this will have on the types of new owners.

You can follow Nick on Twitter at @Nick_Zobel.

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