DBRS Morningstar's Takeaways From Its 2022 Credit Outlook Series: A Play-by-Play on Rating Sports Franchises and Stadiums

As part of its takeaways series, DBRS Morningstar is publishing several write-ups about pertinent topics discussed during its 2022 Credit Outlook series. In the session titled “Covering all the Bases: The Unique Features of Sports Transactions,” Michael Goldberg, Senior Vice President, Sports Finance at DBRS Morningstar, discussed the features DBRS Morningstar considers when rating sports franchise and stadium transactions. These include how the brand strength of a sports franchise is evaluated, what role the leagues play in our analysis, the importance of the club's on-field success, and how traditional financial metrics don’t adequately capture credit risk in sports.

Rating sports franchise and stadium transactions is growing in importance for DBRS Morningstar. The company currently has 17 ratings—all private transactions—up from a single rating in 2013. This includes five new ratings in the past year alone.

As the ratings are private, the entities cannot be named but span the sports world from hockey, basketball, and baseball to football and soccer, including the National Football League (NFL), National Basketball Association (NBA), Major League Baseball (MLB), the National Hockey League (NHL), and Major League Soccer (MLS) as well as England’s Premier League and Spain’s La Liga.

Goldberg noted stadium renovations or new stadium constructions are the drivers of this growth because of the focus on premium seating, exclusive supporters’ clubs, the overall fan experience, and sustainability in order to generate a return on the investment in new projects.

“Stadium projects are the main reason for debt issuance in this sector and for our growing rated universe,” he said. “Many new stadium projects are planned in the near future so we expect this to continue.”

When considering the overall strength of an organization, DBRS Morningstar takes many factors into consideration, including brand, diversification of revenue sources, the league in which it is involved, and the financial reports. However, Goldberg said one factor is the superstar when it comes to evaluating a club.

“The brand is the most important thing we look at because it drives all revenue streams. When we think of the strongest brands in the world, we don’t really think of sports, but I would argue that sports brands have a stronger attachment to their customers than many (consumer) brands.”

Because of their attachment to the brand, fans are willing to drive revenue through season ticket subscriptions and merchandise sales.

When analyzing the brand, DBRS Morningstar starts at the league and sport level and takes into consideration many aspects, including social media following, TV viewership, attendance, and merchandise sales. However, Goldberg noted each of these metrics have flaws. Social media following is clearly more important for global sports and leagues; attendance is affected by many factors, including the number of games in a season, stadium sizes, and ticket prices; and merchandise sales data are difficult to obtain.

Another key metric in evaluating a sports franchise is the diversification and growth of its revenue streams, Goldberg said. The three main sources of revenue in sports are broadcasting, sponsorship, and gameday revenue. He also noted a very high percentage of these revenues is contractually obligated, making it easy to predict income from year to year, barring a pandemic or on-field performance.

“We’ve seen a significant increase in the value of sports broadcast rights over the past 20 years and the reason is sports is one of the only things people watch live on TV,” he said.

In 2021 alone, 94 of the top 100 watched live shows in the U.S. were sports. On that list, 75 of the top 100 were NFL games, with the NBA Finals and MLB’s World Series well down the list.

The marked propensity of fans for viewing live sports has led to strong growth in national broadcasting contract values, which are often renewed at higher multiples than the previous deals. The NFL is dominant at $10 billion per year or 2.1 times (x) its previous deal, while DBRS Morningstar expects the NBA's next deal in 2025 will be more than 3.0x its current deal of more than $7 billion. Outside the U.S., the NHL’s national broadcast rights in Canada were last renewed in 2013 at 2.6x the previous deal. However, in Europe the domestic rights plateaued after seeing similar growth to the U.S. leagues in recent years.

But Goldberg doesn’t expect this trend will persist. “In our analyses, we don’t forecast this growth to continue.”

Goldberg noted sponsorships have been “a steady source of growth” for teams over the past few years as they become creative with new platforms, including brand placement on helmets and jerseys and partnerships with new vertical markets, such as cryptocurrency and online sports betting. The clout of the sponsors—typically financial institutions, brewers, and airlines—adds to the appeal.

“In general, we view sponsorship contracts favourably as they are long term with strong and stable counterparties,” said Goldberg.

This also spills over to naming rights, with sponsors willing to pay hundreds of millions of dollars on long-term agreements to have their brands attached to the stadium in which an event is held.

Gameday revenue is a more volatile revenue stream for some teams, but the biggest brands sell out regardless of on-field performance. However, winning brings playoff home games and in Europe additional Champions League matches, all huge revenue generators.

While the performance of the team is important and winning in a given year has a big impact on the income statement, Goldberg said the year-over-year success of the team does not factor prominently into the overall rating.

“Winning or losing in a given year is not important to our ratings and we wouldn’t upgrade or downgrade every year because of on-field performance,” he said. “Winning or being competitive over a long period can have a positive effect on the brand and losing the opposite effect, which is what could affect ratings.”

When considering financials, Goldberg said EBITDA is also not considered in the valuation of sports franchises because of players’ salaries.

“Teams can make the decision to invest in players in order to either win or put out an entertaining product,” he said. “Over the long term, this could have a very positive effect on a franchise’s enterprise value but in the short term, there would be a negative effect on profitability.”

The onset of the Coronavirus Disease (COVID-19) pandemic had a large, albeit temporary, effect on all leagues, teams, and stadiums, putting a halt to sports events around the world and prompting analysts to revise the ratings.

Most of the sports entities DBRS Morningstar rates experienced a negative rating action—either a change in trend to Negative or a downgrade. The trends were changed for those transactions where the pandemic had a short-term impact while the rating downgrades were made to those already underperforming before the pandemic or those that borrowed to cover pandemic-related losses, thus increasing their debt permanently.

Despite the temporary pandemic-related setbacks, Goldberg sees a bright future for sports franchises.

“We’re now back to a state where most franchises are in great shape and the prospects for growth are really strong,” he said.

Written by Scott Anderson

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