NEW YORK--(BUSINESS WIRE)--Fitch Ratings rates Major League Baseball's (MLB) Club Trust Securitization's $300 million increase to its senior secured credit facility 'A-'. Additionally, Fitch has affirmed the 'A-' rating on the outstanding $842 million term notes (series 1 - 7 maturing through 2021) and the outstanding senior secured credit facility ($500 million total including the $300 million increase). The Rating Outlook is Stable.
KEY RATING DRIVERS:
Solid Underlying League Economics: Debt service supported by large contractual revenue streams from investment grade counterparties. A new five-year collective bargaining agreement (CBA) that includes some additional strengthened core elements that promote financial stability and competitive balance. MLB continues to maintain a stable domestic fan attendance and viewership base and growing international fan base.
League Oversight and Governance: League's demonstrated willingness to step in and aid 'distressed' franchises. For example the league assisted the Texas Rangers and Los Angeles Dodgers during ownership issues.
Solid Legal Covenants and a Demonstrated Bankruptcy Remote Structure: Structural provisions ensure timely debt service. The MLB Club Trust structure utilizes a bankruptcy-remote securitization of pledged revenues consisting of long-term national broadcast partners in place through 2013. Noteholders benefit from the bankruptcy remote structure, which eliminates team related risks; however, they remain subject to all the fundamental operational risks of MLB.
Long History of Television Contracts: Current television contracts run through 2013 with ESPN (Disney; rated 'A' with a Stable Outlook by Fitch), FOX Broadcasting Company (NewsCorp.; rated 'BBB' with a Stable Outlook) and Turner Broadcasting System (TBS) (Time Warner, Inc; rated 'BBB' with a Stable Outlook).
Refinancing Risks Expose Teams to Potentially Higher Costs: The bullet maturities associated with the notes and bank renewals associated with the revolving credit facility expose the teams to potentially higher interest costs.
WHAT COULD TRIGGER A RATING ACTION:
--A significant decline in national television contact rights fees, which given the current trend is unlikely, could negatively impact the financial profile and metrics of the borrowing programs.
--A substantial change in individual and corporate spending on MLB related content.
SECURITY:
The notes and revolving credit facility of the MLB Club Trust Securitization rank pari-passu and are secured by, among other things, rights to receive certain payments shared among MLB clubs, including, primarily, the aforementioned national broadcast revenues from national and international media contracts, and, to a lesser degree, revenues under licensing and sponsorship received by Major League Baseball Properties, Inc.
TRANSACTION SUMMARY:
The transaction will increase the principal amount of the existing revolving credit notes issued by MLB Trust to $500 million from $200 million pursuant to the same terms, covenants, and other provisions that are currently in effect. The revolving credit facility will mature in 2016. The increase to the existing revolving facility will also support the planned increase of the maximum amount of facility debt to approximately $75 million for participating clubs that are debt service rule (DSR) compliant and approved by MLB. Currently, most of the participating clubs are limited to approximately $55 million of facility debt per club.
In December 2011, a new CBA between MLB and the Major League Baseball Players Association (MLBPA) was agreed to. The new five-year agreement coupled with the last 16 years guarantees 21 straight years of labor peace in MLB. The CBA continues a number of the economic and competitive fundamentals from prior agreements including a salary structure that includes a 'competitive balance tax' system, free agency structures and a high level of revenue sharing among member clubs. The competitive balance tax system has been slightly altered. The tax will decline to 17.5%, from 22%, of the actual dollars spent for clubs exceeding the threshold for the first time, but the tax as applied to repeaters will increase to 50% of that same figure for clubs that have spent above the predetermined level at least four consecutive times. An increase in the minimum salary will also be implemented.
MLB clubs will now be subject to the aforementioned DSR based earnings before interest taxes depreciation and amortization (EBITDA) during the most recent year. Under the new agreement, the rule for leverage will now be 8 times (x) EBITDA (and 12x EBITDA for any club which has incurred stadium-related debt to finance construction of a new ballpark or major renovation in the last 10 years). Under the prior agreement MLB's debt service rule of 10x and 15x EBITDA, respectively, was viewed as high. Fitch views the lower leverage thresholds and the oversight of the Commissioner's Office to enforce compliance with the DSR favorably.
The new CBA also includes mandatory testing of blood for human growth hormone for the first time at the Major League level beginning in Spring Training. Additionally, the League will be slightly realigned with 15 teams in each league by the 2013 season; another round of playoffs with two more Wild Card teams starting with the 2012 season; changes to the First-Year Player Draft and expansion of the use of instant replay. The new agreement will also include additional restrictions on signing players in the entry draft identified as key cost containment measures.
MLB's performance over the last few years during the U.S.'s uncertain 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 MLB's record high in 2007 of 79.5 million. Overall, 2012 season-to-date attendance is tracking around 6% higher than 2011. However, Fitch notes some markets that face a combination of severely weakened local economic conditions and lackluster on field performance have seen moderate declines while other teams have performed far better.
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 to match-ups year-over-year. MLB's national television contracts currently come due 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 MLB. Fitch will continue to monitor attendance and viewership levels throughout the season.
Fitch positively views MLB's economic model and financial policies, although a wide disparity exists between the revenues generated by the largest and smaller teams. A team's reliance on local revenues, which fluctuate significantly between small and large markets, and their discretion to spend unreservedly on player salaries can result in greater financial disparity among MLB teams. This disparity has the potential to lead to a less competitive framework for MLB. However, Fitch acknowledges that this disparity is partially mitigated by a revenue sharing transfer in excess of $400 million for 2011. Additionally, Fitch recognizes MLB's long history of viability in good and bad economic times and, more recently, the diversity of MLB clubs that have participated in the postseason since 2000 as important mitigating factors. Furthermore, Fitch notes, despite the range of financial disparity among participating clubs, noteholders are insulated from team level operations given their rights to national broadcast contracts to service debt prior to distributions to teams for operations.
While some teams are facing increased financial pressure due to weak economic conditions impacting attendance levels as well as corporate spending levels on sponsorships and advertising, those teams may be partially insulated in the near term by the high percentage of multi-year contractually obligated stadium-based income streams from luxury suites, club seats, sponsorship and advertising agreements and local broadcasting deals. Nevertheless, potentially lower renewal levels of key revenues at the league and individual team levels, should economic conditions worsen, would financially constrain the league and member teams. A key offset to softening stadium revenue growth include recently signed new and/or extended local broadcasting agreements that are expected to provide additional revenues to support underlying financial stability.
The MLB Trust is a bankruptcy-remote Delaware statutory trust established and owned by the member Clubs of MLB that choose to participate in the MLB Club Trust Securitization. MLB currently has 30 teams in major metropolitan areas in the U.S. and Canada, of which 21 participate in the MLB Club Trust Securitization. MLB's extensive international marketing efforts, the success of MLB Advanced Media, MLB Network and the 2009 World Baseball Classic are viewed favorably as additional future potential for the sport.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria & Related Research:
--'Rating Criteria for Infrastructure and Project Finance' (Aug. 16, 2011);
--'Rating Criteria for U.S. Sports Facilities' (Aug. 15, 2011).
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648832
Rating Criteria for U.S. Sports Facilities
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648556
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