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Mid-Year 2012 Outlook FINAL2

Mid-Year 2012 Outlook FINAL2

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Published by: Michael Ozanian on Jul 18, 2012
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 www.fitchratings.com July 19, 2012
Global Infrastructure & Project Finance
Sports / U.S.A.
2012 Midyear Outlook: Sports
Professional Sports
Special ReportRating Outlook
Labor Peace Moving Forward:
Successful new collective bargaining agreements (CBAs) inthe National Football League (NFL), Major League Baseball (MLB), and National BasketballAssociation (NBA) guarantee games through the medium term. The National Hockey League’s(NHL) CBA expires at the end of this season and, as with any labor negotiations, there areinherent risks related to economic changes that could lead to work stoppages.
Stable Game Day Attendance:
Game day attendance through the end of the NBA seasonand start of the MLB season is tracking very favorably with expectations, despite continuedweak and uncertain economic conditions in the U.S. Fitch Ratings does not anticipate adramatic drop in attendance through the summer or heading into the 2012 NFL season.However, certain teams will be affected by on-field performance and local economic conditions.
National Television Contracts Remain Key:
The NFL and NBA currently have large long-term national television broadcast and cable contracts that provide significant collateral toleague-level borrowing programs and a solid amount of franchise revenues. MLB’s nationaltelevision contracts expire in 2013. The NHL currently maintains less lucrative nationaltelevision contracts in the U.S. and Canada that range in duration and value, but provide somerevenues and stability to its franchises.
Local Media Contracts Show Growth:
Recent favorable new local media contracts in theMLB and the NBA continue to solidify the underlying demand for sports-related television andother media content.
Mixed Revenue Results
: Renewal rates for key collateral pledged to bondholders have beenmixed depending on local economic conditions, leagues, and team performance. Premiumseating including luxury suites and premium seats have faced the greatest pricing pressure,while advertising and sponsorship agreements have generally been stable to positivedepending on league and market.
Focus on Fan Experience:
As television technology continues to improve and providesuperior graphics, maintaining and/or improving the stadium or arena experience going forwardwill be key. New capital and enhancements to cellular networks to allow fans to multitaskacross media during games is likely to partially offset the risk of fans’ staying home for thegame. New scoreboards that also allow for instant replays and highlights of other games couldenhance the experience. Nevertheless, either option involves sizeable costs that will need tobe carefully assessed.
What Could Change the Outlook
Significant Reductions in Game-Day Attendance:
Lower attendance driven by economicfactors, competition, or fan interest may cause some ratings to experience downward pressure.
Changes in U.S. Economic Conditions:
To the extent continued economic uncertaintypressures individual and corporate discretionary spending, ticket sales, premium seatingproducts, game-day revenues, and sponsorships and advertising renewals may face pricingpressure and affect financial flexibility.
Rating OutlookSports
Related Research
2012 Outlook: Professional U.S.Sports, Dec. 16, 2011
Other Outlooks
Chad Lewis+1 212 908-0886chad.lewis@fitchratings.comCharles Askew+1 212 908-0644charles.askew@fitchratings.comDan Champeau+1 212 908-9188daniel.champeau@fitchratings.comTom McCormick+1 212 908-0235thomas.mccormick@fitchratings.comScott Zuchorski+1 212 908-0659scott.zuchorski@fitchratings.com
0102030405060708090100PositiveStableNegativeSource: Fitch.
Sports Rating OutlookDistribution
2012 Midyear Outlook: Sports 2July 19, 2012
Global Infrastructure & Project Finance
Professional U.S. Sports Leagues
Labor Agreements and Contractually Obligated Revenue Drive Stability
The NFL and NBA each now have long-term CBAs in place despite some friction in contractnegotiations. The MLB managed to conclude the process with less commotion. Contractuallyobligated television contracts and other league-level revenue-generating contracts in place for2012 provide a strong baseline of revenues to service the leaguewide borrowing facilities andprovide solid revenue certainty to fund a portion of individual team operating expenses.
National Football League
The NFL’s national broadcast television contracts with CBS, FOX, and NBC extendthrough the 2022 season. The NFL’s cable contract with ESPN extends through the 2021season. The contracts from 2014
2021 are valued, on average, at $4.99 billion annuallyand represent a significant boost from prior contracts. The average valuation increaserelates to an increase in average rights fees from 2014
2021 to $155.9 million from $99.6million per club during the 2012
2013 season. The new agreements include a number ofexpanded features including the ability to move games from a time perspective and acrossAmerican Football Conference (AFC)/National Football Conference (NFC) packages. Theincreased rights fees clearly signal the strong continued demand for NFL broadcasts andnongame content. In 2009, the NFL extended the subscription-based DirecTV contractthrough 2014 to broadcast the out-of-market television package “NFL Sunday Ticket.”Furthermore, the NFL Network holds the right to broadcast up to 18 games.One of the biggest risks to the NFL is the wave of concussions facing a number of the league’sretired players. In the short term, a number of pending lawsuits against the NFL could awarddamages to retired players. The timing and potential liability is currently unknown. To theextent damages are awarded, Fitch will monitor the financial effects, if any, to the NFL. Longer-term risks associated with concussions could potentially affect both the quality of play as wellas fan and corporate support. In Fitch's opinion, it is far too early to measure any potentialfinancial impact at this time.Fitch notes a number of important changes recently implemented by the NFL's competitioncommittee to further protect players. One change involves moving kick offs to the 35-yard lineto limit the number of injuries from what has historically been a high-injury element of the game.Other changes include the elimination of preseason two-a-day practices, reduced paddedworkouts and a recommendation by owners to require players to wear certain leg pads (thiscurrently remains under discussion). Additionally, new and increased medical staff andexamination procedures during NFL games are aimed at preventing serious injuries.The new CBA includes annual set-asides of $55 million, including $22 million to healthcare orother benefits for retired players as determined by the NFL Players Association (NFLPA),$11 million to medical research agreed to by the NFL, and NFLPA, and $22 million to charitiesas determined by the NFL. In Fitch's opinion, continued oversight to protect current playerswhile maintaining the integrity of the game and ensuring retired players are provided long-termbenefits are key underlying fundamentals in preserving the longevity and support for the game.
Related Criteria
Rating Criteria for U.S. SportsFacilities, Aug. 15, 2011
2012 Midyear Outlook: Sports 3July 19, 2012
Global Infrastructure & Project Finance
Major League Baseball
MLB’s performance over the last few years amid the uncertain U.S. economic conditions is atestament to the expected stability and demand for professional baseball in the U.S. andinternationally. In 2011, attendance grew approximately 0.5% to 73.4 million, after attendancedeclines in 2008
2010 following the MLB's record high in 2007 of 79.5 million. Overall, 2012season-to-date attendance is tracking around 6% higher than 2011 totals. However, Fitchnotes some markets that face a combination of severely weakened local economic conditionsand/or lackluster on-field performance have seen moderate declines, while other teams haveperformed far better.A new five-year CBA between MLB and the Major League Baseball Players Association(MLBPA) has been signed, guaranteeing 21 straight years of labor peace in MLB through the2016 season. The CBA maintains a number of the economic and competitive fundamentalsfrom prior agreements, namely the salary structure that includes a “competitive balance tax”system; free agency structures and a high level of revenue sharing among member clubs, allkey rating drivers for MLB and its facility ratings.Additionally, Fitch notes stability in television viewership over the past decade as a key ratingfactor. Year-to-date viewership across nationally televised games on FOX, ESPN, TBS and localmedia broadcasts has been mixed. However, variations are typical early in the season givenchanges in match-ups year over year. MLB’s national television contracts currently mature in2013. Given recent positive trends associated with national television contract renewals inprofessional sports leagues and on the local level, Fitch expects positive renewals in the MLB,and will continue to monitor attendance and viewership levels throughout the season.
National Basketball Association
On Friday, Dec. 9, the National Basketball Association and the National Basketball PlayersAssociation (NBPA) executed a new 10-year CBA, including options by both sides to opt outafter six years. Despite a shortened season due to the work stoppage that reduced regularseason games per team to 66 games (normally 82 regular season games), attendance levelshave remained markedly stable. NBA arenas played to 90.2% capacity during the 2011
2012season, similar to capacity in the 2010
2011 season. The NBA’s average gate receipts wereup 2.8% and reached a new per game record of $928,000.The 2011
2012 NBA season produced strong television ratings. The NBA regular season wasthe highest rated and most viewed in ABC history and was the second most viewed in ESPNhistory. Furthermore, the 2011
2012 NBA cable broadcasts were the most viewed in TNThistory, and in TNT’s entire 28-year partnership with the NBA. The 2012 playoffs continued thistrend: ESPN experienced the most viewership and highest ratings in the network’s history, andthe playoffs on TNT were the second most viewed in their history.Through April 11, 2012, regular season viewership on ABC (12 games) grew to 5.6 millionviewers from 5.1 million, or 10%, and a corresponding rating increase to 3.4 from 3.0, or 13%.Similarly, TNT broadcasts (37 games) showed an average viewership increase to 2.59 millionfrom 2.39 million, or 8%, and a corresponding rating increase to 2.0 from 1.8. ESPN viewershipthrough 60 games grew slightly to 1.93 million viewers from 1.88 million (60 games) resulting ina rating increase to 1.5 from 1.4.

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