the occupational disease
The occupational disease of securities analysts is that they analyze everything. For instance, I have a friend that I worked with over twenty years ago. One day, she came to me at work and said she’d been counting the steps on the flights of stairs in the subway station near our office and found that each flight was 13 steps. Wasn’t that a strange number, she said, and what did I make of it.
The notable thing about this exchange is that we both thought of it as perfectly normal. I was flattered that she had asked me.
It’s in this same vein of below-the-surface interest that I’m viewing the recent entry of the Los Angeles Dodgers into Chapter 11 bankruptcy. I don’t see any way for me to make money–other than perhaps bar bets–from finding out what’s going on. But I can’t help myself.
how a Chapter 11 filing usually works
The company in question has a lot of long-term debt outstanding, which is not being fully serviced. Trade creditors are not being paid, either. Trade creditors threaten to start bankruptcy proceedings in court as a way to force long-term creditors to pay them off. At some point, the long-term creditors get fed up at being nickeled and dimed to death and allow the bankruptcy to occur.
Management stays in place. Long-term debt holders trade some portion (maybe all) of their debt for 100% of the equity in the firm that emerges from the proceeding. Equity holders are wiped out; they receive nothing. Trade creditors may or may not get paid, depending on the circumstances.
the Dodgers’ court case
I’ve glanced through the court papers. They don’t say a lot.
–They indicate that five interlinked companies are filing for bankruptcy together. The names suggest that the overall ownership structure is complex and involves both corporations and partnerships.
–They also indicate that the Dodgers have a working capital problem and aren’t able to meet the June 30th payroll, either through the club’s cash flow or through borrowing.
–Secured creditors are not listed in the filing, only unsecured ones, like former ballplayers who agreed to deferred compensation (Manny Ramirez, at $20 million, is owed the most).
–The only thing the McCourt camp says about the overall debt situation is that it believes the filers have more than enough assets to satisfy secured creditors; total assets are $500 million-$1 billion; total liabilities are under $500 million.
What else do we know?
1. According to the Los Angeles Times, Fox Sports has offered the Dodgers $1.6 billion for the right to broadcast Dodgers games for thirteen years after the current contract (also with Fox) expires in 2013. A reasonable first approximation (read: good guess) is that the present value of the proposed contract is $800 million. That’s just about the entire asset value of the baseball franchise.
Fox reportedly was willing to advance about half that amount (the numbers being reported vary) to McCourt/Dodgers. Major League Baseball, whose approval was needed, rejected the deal as not being in the best interests of baseball. Reportedly, this was because about half the advance would have been paid directly to Mr. McCourt to settle personal debts, leaving the Dodgers in a deeper hole than before.
2. The Dodgers were unable to get a working capital loan from a bank. The club was quickly able to line up $150 million in financing from a JP Morgan hedge fund once it was in Chapter 11, however.
The issue here is that in Chapter 11 unsecured creditors go the bottom of the list of entities to be repaid–and therefore may not get back a penny of what they’ve lent. This suggests to me that the Dodgers had no unencumbered assets to use as collateral for a loan and that potential lenders who saw the club’s financials suspected that a Chapter 11 filing was imminent.
One possible explanation is being offered by Dodger Divorce, a blog written by Josh Fisher, an ESPN correspondent. In his June 21st post, titled Mechanics, Mr. Fisher says basically that the revenue from parking at the stadium and from non-premium ticket sales go to other parts of the McCourt empire and not to the Dodgers. Fisher estimates this cash flow to be about $80 million a year.
One other thing: the interest rate the Dodgers negotiated for the financing is staggeringly high. The simplified version: $15 million in interest yearly, plus the Dodgers must pay back $150 million, even though they’ll only get about $143 million.
3. Bankruptcy–in which equity holders virtually always lose everything–was Mr. McCourt’s best option. That says something, doesn’t it?
One thing Chapter 11 accomplishes is to freeze litigation between McCourt and his wife over who owns the club. And it may make that whole question moot, since Chapter 11 may well disenfranchise both.
At the same time, the bankruptcy allows McCourt to reopen the possibility of sale of Dodgers’ broadcasting rights. It’s hard to imagine that the court would allow any money to be diverted for anyone’s personal use, though. But who knows.
Stay tuned. The court proceedings should be very entertaining.
one odd figure catches my eye
The obvious point of comparison is with another woefully managed franchise, the Mets. In contrast to the Dodgers, the Mets have agreed to turn over the running of the franchise to professional baseball people and are negotiating to sell part of the team to replace what they lost by using Bernie Madoff to manage their money.
If I recall correctly, the Mets baseball team receives $60 million a year for broadcasting rights from SNY, the cable venture that the Wilpons own a share in. But Fox is apparently offering the Dodgers more than double that for broadcasting rights to Dodgers games. Hmm.