Global Infrastructure & Project Finance

Sports / U.S.A.

2012 Midyear Outlook: Sports
Professional Sports
Special Report
Rating Outlook Sports

Rating Outlook
Labor Peace Moving Forward: Successful new collective bargaining agreements (CBAs) in the National Football League (NFL), Major League Baseball (MLB), and National Basketball Association (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 are inherent risks related to economic changes that could lead to work stoppages. Stable Game Day Attendance: Game day attendance through the end of the NBA season and start of the MLB season is tracking very favorably with expectations, despite continued weak and uncertain economic conditions in the U.S. Fitch Ratings does not anticipate a dramatic 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 longterm national television broadcast and cable contracts that provide significant collateral to league-level borrowing programs and a solid amount of franchise revenues. MLB’s national television contracts expire in 2013. The NHL currently maintains less lucrative national television contracts in the U.S. and Canada that range in duration and value, but provide some revenues and stability to its franchises. Local Media Contracts Show Growth: Recent favorable new local media contracts in the MLB and the NBA continue to solidify the underlying demand for sports-related television and other media content. Mixed Revenue Results: Renewal rates for key collateral pledged to bondholders have been mixed depending on local economic conditions, leagues, and team performance. Premium seating including luxury suites and premium seats have faced the greatest pricing pressure, while advertising and sponsorship agreements have generally been stable to positive depending on league and market. Focus on Fan Experience: As television technology continues to improve and provide superior graphics, maintaining and/or improving the stadium or arena experience going forward will be key. New capital and enhancements to cellular networks to allow fans to multitask across media during games is likely to partially offset the risk of fans’ staying home for the game. New scoreboards that also allow for instant replays and highlights of other games could enhance the experience. Nevertheless, either option involves sizeable costs that will need to be carefully assessed.


Sports Rating Outlook Distribution

100 90 80 70 60 50 40 30 20 10 0


0% Positive Stable

5% Negative

Source: Fitch.

Related Research
2012 Outlook: Professional Sports, Dec. 16, 2011 U.S.

Other Outlooks

Chad Lewis +1 212 908-0886 Charles Askew +1 212 908-0644 Dan Champeau +1 212 908-9188 Tom McCormick +1 212 908-0235 Scott Zuchorski +1 212 908-0659

What Could Change the Outlook
Significant Reductions in Game-Day Attendance: Lower attendance driven by economic factors, competition, or fan interest may cause some ratings to experience downward pressure. Changes in U.S. Economic Conditions: To the extent continued economic uncertainty pressures individual and corporate discretionary spending, ticket sales, premium seating products, game-day revenues, and sponsorships and advertising renewals may face pricing pressure and affect financial flexibility.

July 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 contract negotiations. The MLB managed to conclude the process with less commotion. Contractually obligated television contracts and other league-level revenue-generating contracts in place for 2012 provide a strong baseline of revenues to service the leaguewide borrowing facilities and provide 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 extend through the 2022 season. The NFL’s cable contract with ESPN extends through the 2021 season. The contracts from 2014−2021 are valued, on average, at $4.99 billion annually and represent a significant boost from prior contracts. The average valuation increase relates to an increase in average rights fees from 2014−2021 to $155.9 million from $99.6 million per club during the 2012−2013 season. The new agreements include a number of expanded features including the ability to move games from a time perspective and across American Football Conference (AFC)/National Football Conference (NFC) packages. The increased rights fees clearly signal the strong continued demand for NFL broadcasts and nongame content. In 2009, the NFL extended the subscription-based DirecTV contract through 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’s retired players. In the short term, a number of pending lawsuits against the NFL could award damages to retired players. The timing and potential liability is currently unknown. To the extent damages are awarded, Fitch will monitor the financial effects, if any, to the NFL. Longerterm risks associated with concussions could potentially affect both the quality of play as well as fan and corporate support. In Fitch's opinion, it is far too early to measure any potential financial impact at this time. Fitch notes a number of important changes recently implemented by the NFL's competition committee to further protect players. One change involves moving kick offs to the 35-yard line to 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 padded workouts and a recommendation by owners to require players to wear certain leg pads (this currently remains under discussion). Additionally, new and increased medical staff and examination 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 or other 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 charities as determined by the NFL. In Fitch's opinion, continued oversight to protect current players while maintaining the integrity of the game and ensuring retired players are provided long-term benefits are key underlying fundamentals in preserving the longevity and support for the game.

Related Criteria
Rating Criteria for U.S. Facilities, Aug. 15, 2011

2012 Midyear Outlook: Sports July 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 a testament to the expected stability and demand for professional baseball in the U.S. and internationally. In 2011, attendance grew approximately 0.5% to 73.4 million, after attendance declines in 2008−2010 following the MLB's record high in 2007 of 79.5 million. Overall, 2012 season-to-date attendance is tracking around 6% higher than 2011 totals. However, Fitch notes some markets that face a combination of severely weakened local economic conditions and/or lackluster on-field performance have seen moderate declines, while other teams have performed 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 the 2016 season. The CBA maintains a number of the economic and competitive fundamentals from 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, all key rating drivers for MLB and its facility ratings. Additionally, Fitch notes stability in television viewership over the past decade as a key rating factor. Year-to-date viewership across nationally televised games on FOX, ESPN, TBS and local media broadcasts has been mixed. However, variations are typical early in the season given changes in match-ups year over year. MLB’s national television contracts currently mature in 2013. Given recent positive trends associated with national television contract renewals in professional 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 Players Association (NBPA) executed a new 10-year CBA, including options by both sides to opt out after six years. Despite a shortened season due to the work stoppage that reduced regular season games per team to 66 games (normally 82 regular season games), attendance levels have remained markedly stable. NBA arenas played to 90.2% capacity during the 2011−2012 season, similar to capacity in the 2010−2011 season. The NBA’s average gate receipts were up 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 was the highest rated and most viewed in ABC history and was the second most viewed in ESPN history. Furthermore, the 2011−2012 NBA cable broadcasts were the most viewed in TNT history, and in TNT’s entire 28-year partnership with the NBA. The 2012 playoffs continued this trend: ESPN experienced the most viewership and highest ratings in the network’s history, and the 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 million viewers 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 million from 2.39 million, or 8%, and a corresponding rating increase to 2.0 from 1.8. ESPN viewership through 60 games grew slightly to 1.93 million viewers from 1.88 million (60 games) resulting in a rating increase to 1.5 from 1.4.

2012 Midyear Outlook: Sports July 19, 2012


Global Infrastructure & Project Finance
National Hockey League
NHL attendance for the 2011−2012 season was generally flat compared with totals from the 2010−2011 season. The league experienced strong television ratings during the 2012 playoffs due to a combination of strong rivalries and, similar to other professional sports, continued demand for sports content. Given the trends in other professional sports, the generally positive season could fuel future renewals of television contracts, which historically have earned significantly lower rights fees than other professional U.S. league contracts. The NHL’s CBA expires in September 2012. Fitch will monitor ongoing negotiations between the league and players. Despite the NHL’s full 2004−2005 work stoppage, the NHL has maintained generally solid arena attendance. Nevertheless, the league exhibits a relatively wide disparity between large markets with a long operating history and expansion markets. Teams in stronger markets that have a robust history continue to perform well from both an attendance and revenue perspective, while expansion teams face challenges related to maintaining and building a strong dedicated fan base, a task in which some cases has been exacerbated by weak on-ice performance. Fitch will closely monitor negotiations as discussions begin. Fitch views the long history of the NHL in North America and solid underlying economic model, which includes a salary cap that bolsters both financial stability and competition, as key for the future of the sport.

Professional Sports Franchises and Facilities
Facility Revenues Show Resiliency After Labor Issues
Through the summer and fall of 2011, the NFL and NBA work stoppages dominated sports news headlines. As Fitch previously noted, facilities that faced renewals after the 2010−2011 season were confronted by difficult economic conditions as well as by labor uncertainty, an environment which rendered the renewal of existing and/or new seating options and sponsorship and advertising contracts more difficult. Since the successful resolution of the CBAs, overall renewals on premium seating products and advertising contracts have been stable. Currently, most Fitch-rated arena facilities face pending NHL CBA expiration on Sept. 15, 2012. Absent an agreement prior to expiration, NHL sales teams may struggle with renewals of seating and sponsorship contracts.

Contractually Obligated Income Provides Stability
Revenue contract renewals exhibited more lag time than during the normal sales season because of labor instability, Fitch notes that most arena management teams were able to renew or newly sell most expiring contracts this past offseason. For instance, all 101 suites pledged as collateral for the revenue-backed notes of the Staples Center in Los Angeles (Fitch-rated revenue-backed notes ‘BBB+’/Stable Outlook) are currently contracted. Additionally, 24 more premier seats were contracted for this past season than contracted during the 2010−2011 season. The notes benefit both from the arena’s location in a vast media and entertainment market and from the fact that the three main tenants at the Staples Center are all currently enjoying success: the NBA’s Lakers and the Clippers both reached the second round of the NBA Playoffs,, and the NHL’s Kings won the Stanley Cup for the first time in the franchise’s nearly 50-year history. The Pepsi Center in Denver (‘BBB−’/Stable Outlook), a considerably smaller market compared with Los Angeles and home to the NBA’s Denver Nuggets and the NHL’s Colorado Avalanche,
2012 Midyear Outlook: Sports July 19, 2012 4

Global Infrastructure & Project Finance
also weathered the storm fairly well. Despite concerns related to the NBA labor negotiations, management at the Pepsi Center was still able to maintain contracted suite capacity of approximately 84%, assuaging fan concerns about missed games through options such as credits towards future events for any missed games and cash credits back to the suite holder. Through the offseason, the Pepsi Center was able to increase its suite occupancy rate by 3% to 87%, which, while not as robust as rates at the Staples Center, still indicates moderate to strong resiliency. Fitch maintains monitored private ratings on approximately $699.6 million in arena- and teambacked debt at four other arena facilities in the U.S. and Canada. Average net leverage on this debt, as well as Staples and Pepsi Center debt, netting out cash-funded debt service reserves; any restricted operating reserves for yearly maintenance costs and unrestricted cash and investments on the balance sheet, equals 3.3x across these facilities. Average aggregate collateral revenue coverage of debt service payments following the 2011−2012 season is estimated to be 1.7x among the same arenas, despite the NBA lockout and 11 missed preseason and regular season home games per team. In addition, all of these facilities successfully operated and exhibited rating stability through the past full-season NHL lockout, though another significant lockout combined with any broader macroeconomic instability as was seen from 2007−2010 would likely pressure ratings. Fitch also rates approximately $1.6 billion in NFL facility and team-related debt across six different NFL franchises with an estimated net leverage equaling approximately 3.4x. Average debt service coverage across these facilities following the 2012 regular season is estimated to be approximately 2.2x, indicating core stability despite the summer-long lockout. Rated facilities in the stronger NFL markets fared well through the recession and have maintained very robust levels of contractually obligated income (COI) through this past season’s labor stoppage. Mid-tier markets experienced some declines in revenue through the downturn, but in cases where team performance improved, management teams are budgeting for marked increases in suite and club seat occupancy levels and advertising revenues. In some instances, poor performing teams in weaker metropolitan statistical areas (MSAs) have seen decreased levels of COI than seen five or six years ago. In these cases, facility management will need to be proactive in managing contract rollover and controlling expenses to maintain rating stability going forward. As seen in the other major sports, MLB attendance and revenue performance varied depending on the makeup of the surrounding market and team performance. Where the market is less robust and team performance has sagged, renewals of revenue contracts and variable revenue streams such as parking, concessions, and ticket sales have fluctuated. Where the market is stronger and the team has a long and, for the most part, successful history, performance of the revenue stream has been stable to positive. Local broadcasting rights fees continue to positively fuel MLB-related credits. Demographics are an integral component of these fees, as large markets tend to benefit from multiple outlets participating in the bidding process. A number of reported new local television contracts have increased annual rights fees well over 50%. The contractual nature of these fees will provide significant financial flexibility for MLB clubs.

Economic Impacts to Some Seating Options
As Fitch has seen across the U.S. sports sector, the multiyear club seating product has proven a more difficult sell during and after the recession, and certain facility management teams have
2012 Midyear Outlook: Sports July 19, 2012 5

Global Infrastructure & Project Finance
begun to offer a larger percentage of one-year contracts. Shorter-term agreements, while potentially allowing for higher revenues during successful tenant seasons, give rise to inherently more risk due to their shorter duration and exposure to more frequent renewals, fluctuating market conditions and team performance. As would be expected, teams in stronger and more expansive markets have seen relatively more stability in this revenue stream, and thus, have been able to continue to focus on multiyear sales. The Staples Center illustrates this trend, premier seating revenues having increased steadily at 2% since 2008 through the downturn with no annual declines. Teams in smaller markets that have exhibited less than stellar performance on the field, diamond, court, and ice have seen more volatility on this line item. South Florida Stadium LLC, whose revenue-generating asset Sun Life Stadium plays host to the NFL’s Miami Dolphins and the Miami Hurricanes National Collegiate Athletic Association (NCAA) football team, provides one example of such a trend. Club seats, leased at around 70% occupancy from 2003−2007, have fallen significantly since then to around 40% in 2011. In addition to inconsistent Dolphins performance on the field over the last few years, the housing market in Miami-Dade County has been slow to recover after the recession, and the unemployment rate remains above state and national averages, though the County has recently reported a rising trend in sales of single-family homes and condominiums and year-over-year increases in sales tax figures.

Strength in Sponsorships and Advertising Revenues
Collateral cash flow generated from sponsorship and advertising contracts has proven relatively more resilient than other sources of revenue. It is Fitch’s opinion that advertisers hold the access they can gain to the elusive male 18−45 demographic through sporting events in high regard, though in less expansive markets, this revenue stream is relatively more volatile. Efforts underway at various stadiums, ballparks, and arenas, such as enhancing audio and video equipment, augment the potential for increasing stability and growth in sponsorship and advertising at venues. Though smaller market teams did see relatively greater volatility in the past few years, Fitch has also seen teams that performed poorly during the recession experience revenue rebounds following improved team performance. Not surprisingly, teams with limited competition from other sports in the surrounding MSA and with solid team performance have performed the most consistently from a revenue perspective. In addition, note collateral generated from facilities that opened in the midst of the downturn is still performing well, as contracts were secured leading up to the venue’s opening, and, other than the occasional counterparty default, are still being honored. Certain facilities that opened prior to the recession that signed a large amount of three- and five-year contracts, which have been rolling off in the years between 2008 and 2011 faced a greater amount of pricing pressure. In some instances, robust renewals and new sales will be needed to reach collateral levels experienced prior to the downturn, though a fair amount of flexibility still exists even under stressed scenarios.

Looking Forward
Overall, the outlook for sports facility venues remains stable in 2012. Collateral packages in the sports and entertainment sector were built with economic cyclicality and exposure to discretionary income volatility in mind, and thus revenue models and associated debt service payments were originally structured with adequate cushion above covenant levels. Fitchgenerated scenarios consider stressed contract renewal rates in premium seating and
2012 Midyear Outlook: Sports July 19, 2012 6

Global Infrastructure & Project Finance
advertising, lower attendance leading to lower parking, concessions, and other variable revenues and stressed expense levels above historical rates. Under such circumstances, aggregate Fitch-rated facility coverage of debt service payments does not fall below 1.7x through 2017. Overall, facilities for the most part have maintained investment-grade profiles through the downturn and experienced a fair amount of renewal and new sales success following the negotiation of labor agreements in the MLB, NBA, and NFL. Going forward in the medium to long term, the maintenance of a stable outlook in the sports sector partially hinges on a continued effort by facility management teams investing in modern audio and video equipment to enhance the fan experience on game days as the digital and high definition experience at home continues to modernize and improve. Furthermore, the leagues and individual teams will have to continue to work hard to garner similar results from key corporate partners and fans choosing to spend their entertainment and discretionary dollars on sports-related content. Fitch believes sports-related ratings have demonstrated their ability to withstand economic downturns and continues to believe that they retain financial flexibility to manage the uncertainties facing the sports industry in 2012.

2012 Midyear Outlook: Sports July 19, 2012


Global Infrastructure & Project Finance

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. Copyright © 2012 by Fitch, Inc., Fitch Ratings Ltd. and its subsidiaries. One State Street Plaza, NY, NY 10004.Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings, Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third-party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings can be affected by future events or conditions that were not anticipated at the time a rating was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion is based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at anytime for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. 2012 Midyear Outlook: Sports July 19, 2012 8

Sign up to vote on this title
UsefulNot useful