The Gathering Storm – Part 1
This is the first article of a continuing series on the economic condition of the NHL and its franchises leading up to the expiration of the current Collective Bargaining Agreement on September 15, 2012.
Monday’s New York Post printed an article claiming that the New Jersey Devils are facing imminent bankruptcy. The piece asserts that the team has missed a September 1 loan payment and is technically in default on its debt. This situation also affects the holding company that owns the Prudential Center, the team’s arena, which guarantees the Devils’ loans. According to the paper, the situation is compounded by the fact that one of the co-owners, Brick City LLC, is looking to sell its 47% stake in the team and stadium and is having trouble finding a buyer despite dropping the asking price by 20%.
This report is vigorously disputed in the blog Fire & Ice which printed an official statement from the team arguing that the Devils are not facing bankruptcy and that co-owner and Managing Partner Jeffrey Vanderbeek is close to buying out Brick City’s share of the team. Interestingly, the report does not deny that the team has missed a loan payment and states that ‘a refinancing will be completed shortly’.
There are several interesting points to be discussed as a result of this revelation. The first is how this plays into the continuing saga of Ilya Kovalchuk. It was only last summer that the Devils outbid the Kings for Kovie’s services with a contract that was initially voided by the NHL. Nevertheless, the contract was restructured and the Kings lost out on the chance to acquire a franchise player. I speculated at the time that the Kovalchuk signing was driven by Vanderbeek rather than the Devil’s resident genius General Manager Lou Lamoriello. If you look carefully at how the contract is structured, Kovalchuk is paid only $6 mm for the first two seasons of the deal before the disbursements jump to over $11 mm for five seasons starting in 2012-13. It looks to this observer that Vanderbeek is hoping to win the Stanley Cup, and then quickly sell the team at the top of the market before the major payments to Kovalchuk commence. That plan went badly awry last season when the Devils missed the playoffs, and with the team’s other star, Zach Parise, only signed through this season and goalie Martin Brodeur nearing the end of his career, the window for winning the Cup is quickly closing. Vanderbeek may have lost his expensive gamble and is now saddled with an albatross of a contract that will make it very difficult to fit in additional salaries going forward.
Secondly, despite the team’s denial, all is not well in New Jersey. As I wrote last year, the decision of the New Jersey Nets to move back to New York was a severe blow to Devils Arena Entertainment, Inc., the entity which owns the Prudential Center. The arena was expected to be profitable for the first time this year, but the NBA lock out may force the cancellation of an undetermined amount of games in the Nets final season at ‘The Rock’ as the stadium is known. The Devils were in the bottom 20% of the NHL in attendance last season and have always had trouble selling out games despite winning three Stanley Cups in a decade. As a result, the Post article claims the Devils and the arena company owe more in debt than the two are worth. Yet, the team retorts in the blog that ownership, read Vanderbeek, is doubling down by negotiating to buy out his co-owner. I find this curious since most of Vanderbeek’s money was made as an executive for the now defunct Lehman Brothers, and he lacks the deep pockets of many of his fellow owners. I surmise that the Post article is mostly accurate and that the team’s response smacks of an effort to save face with its fans while it desperately seeks to renegotiate loans and keep the wolves at bay. Time will tell.
Finally, what does this tell us about the health of the NHL and its franchises? We have already seen the movement of Atlanta to Winnipeg and the bankruptcy and near extinction of the Phoenix Coyotes. Dallas and St. Louis are officially on the block, the latter because the private equity firm that owns 70% of the team can no longer sustain the Blues’ operating losses. While the popularity of the sport has never been greater based on rising television ratings, the inexorable rise in the NHL’s salary cap (and salary floor), a subject to be discussed in a future article, is likely taking a heavy toll on many small market teams. These teams, that were hurting financially before the 2004-05 lock out, now find because of the rising floor that their salary costs are even higher than they were before the stoppage. Yes, national television revenues will partially mitigate this, but I would not be surprised if operating losses are increasing in the smaller markets. What does this mean? The current CBA expires prior to the start of next season and is automatically extended unless either party decides to opt out. It would not be surprising if the owners look to restructure their deal with the players, and that the dark clouds of labor unrest will once again appear on the horizon of the National Hockey League.