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NBA gets a loan
Question of the Day
The NBA is expected to borrow $175 million Thursday to help teams close operating losses brought on by the economic recession. UPDATE: The league said on Thursday that it borrowed an additional $25 million, bringing the total to $200 million.
The league will distribute the funds among 15 teams that requested them, with each team getting no more than $13.33 million. The borrowing, which is in addition to the $1.7 billion credit facility used by the league, comes as NBA teams are dealing with lower attendance and a loss of sponsorships.
Details of the new line of credit, first reported by SportsBusiness Journal, suggest the NBA was not going door to door on Wall Street looking for cash. Rather, it was JP Morgan and Bank of America that reached out to the league to inform the NBA they would be willing to lend money. The NBA, recognizing that borrowing opportunities are scarce and that some teams would benefit from an infusion of cash, took advantage.
While the NBA has not disclosed which 15 teams will receive the funds (the Wizards said they are not one of them), it's clear there are a number of teams in need of help. All around the league, some teams are playing in front of half-empty buildings, and no team can count on the once-reliable support from automakers and banks. The Memphis Grizzlies have been forced to keep payroll well below the league salary cap in recent years as attendance has fallen to less than 13,000 a game, last in the NBA. The Orlando Magic have been operating at a more than $10 million loss. And the Sacramento Bee reported last week that the Kings were on pace to lose more than $25 million before unloading the salaries of center Brad Miller and several others via trade last week.
Several teams have laid off staff, and the league in October said it would cut about 9 percent of its domestic work force.
But there's a case to be made that the NBA's borrowing isn't necessarily a bad thing. True, it would behoove the league and its teams to avoid increasing their debt load at a time when interest rates aren't favorable, but it is an encouraging sign that banks are lending money at all. Moreover, the ability of the NBA to borrow during the current credit crunch suggests that banks and ratings agencies are not worried about the league's finances. The NBA's multiyear, multibillion-dollar television contracts provide solid collateral, and the league is borrowing at a rate that's low relative to what others are paying these days.
One thing worth watching is how the economy will affect the NBA's salary cap for the 2009-10 season. It now seems likely that overall league revenues will decline for the year, meaning that the amount of money distributed to players also will drop. Early indications are that the cap could be reduced from nearly $59 million to $57 million. This could be a good thing for teams already operating well under the cap, but teams with payrolls right at cap level could be hit with luxury taxes for the first time. And it would mean that teams like the Knicks, Mavericks and Cavaliers, who are already paying millions in taxes, will end up paying even more. The upshot for players is that anyone looking for a big contract may not get it, and many players will prefer to take contract extensions with their current teams rather than enter free agency.
Long-term, the continued struggles of some teams could lead to a labor showdown in 2011, when the current collective bargaining agreement expires. David Falk, the agent for several current and former stars including Michael Jordan, told the New York Times last week that he believes teams would be willing to endure another work stoppage in order to push for a harder salary cap and a lower percentage of revenue distributed to players.
"I think it's going to be very, very extreme because I think that the times are extreme," Falk said.
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