DBRS Morningstar Releases Commentary on Evaluating Brand Strength for Sports Franchises

DBRS Limited (DBRS Morningstar) released a commentary titled “What’s in a Name? Evaluating Brand Strength in a Sports Franchise’s Credit Rating,” the first in a series that will examine the business risk factors with the largest impact on DBRS Morningstar’s assessment of credit risk for sports franchises across several North American leagues and European football leagues. These factors, when combined with DBRS Morningstar’s financial risk assessment, form the basis of determining a franchise’s credit rating.

Sports franchises are increasing their revenues rapidly, driven by rising broadcasting contracts, sponsorships, ticket prices and merchandising. To fund further investment, teams are issuing debt within the franchise, in special-purpose entities at the stadium level or by securitizing broadcasting rights. Regardless of where debt is issued, in order to evaluate credit risk, DBRS Morningstar forms a view on a franchise’s business risk by analyzing the magnitude and variance of revenues, earnings and cash flows as well as the slope of returns on invested capital. For sports franchises, these characteristics can be illustrated through the analysis of four primary factors:

(1) Popularity of sport and brand strength,
(2) Stability and diversification of revenue,
(3) Operating efficiency and
(4) League support and governance.

According to DBRS Morningstar’s “Rating Sports Franchises and Stadium Financings” methodology, brand strength and franchise quality reflect the sports’ popularity, the fans’ loyalty, the strength and appeal of the markets in which teams play and any particular team’s national or international appeal. A franchise’s brand strength builds over time and can be defined by recognizability (i.e., a well-known team); reputation (i.e., a winning team); and longevity (i.e., a history of success). DBRS Morningstar considers leagues and teams with strong brands to have established histories accompanied by loyal fan attachment.

DBRS Morningstar believes that there are many measures of a sport’s popularity and a franchise’s brand strength, the first factor in its analysis; however, this commentary tracks the engagement and attitudes of the target audience — fans — across major sports at the league and team levels. At the league level, DBRS Morningstar considers viewership of peak events, social media following and merchandise sales in each sport, while at the team level, DBRS Morningstar looks at the history of attendance over the regular season and playoffs as well as social media presence.

Ultimately, the most popular teams in the most popular sports will have (1) a greater ability to monetize their brands through sponsorship, both domestically and internationally; (2) a larger and more stable television or online viewership and game-day attendance; and (3) the ability to raise ticket prices, even during periods of underperformance.

In terms of brand strength, DBRS Morningstar believes that the top North American sports franchises (the Dallas Cowboys, New York Yankees, New York Knicks, New England Patriots, Los Angeles Lakers, etc.) are on par with the top European football clubs (Real Madrid, Barcelona, Manchester United, Bayern Munich, etc.) in the A (high) rating category. However, the variance among North American franchises in the same league is much less than European football clubs in the same league because North American leagues aim for parity through mechanisms such as salary caps, salary floors and revenue sharing.

Notes:
The commentary is available at www.dbrs.com.

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