Fitch Affirms MLB Club Trust Securitization Senior Secured Credit Facility & Term Notes at 'A'

NEW YORK--()--Fitch Ratings has affirmed the 'A' rating on the Major League Baseball (MLB) Club Trust Securitization's approximately $1.05 billion senior secured revolving credit facility and approximately $955 million in term notes.

The Rating Outlook is Stable.

The rating reflects MLB's core underlying business fundamentals including its unique operating model and environment, which continue to perform positively including during the most recent economic downturn. Television contracts renewed in 2012 at extremely favorable levels correspond to near-term projected leverage under 2.0x (under Fitch's calculation, including the maximum debt allowed under the borrowing facility divided by each individual franchise's share of national television contract revenues) continuing to decline over the medium term. Additionally, the diversity of MLB revenues from MLB Advanced Media (MLBAM) and revenue sharing has bolstered individual team financial health. Despite the discretionary spending nature of sports, MLB clubs have maintained solid attendance levels and corporate support at their respective facilities. In addition, league level sponsorship and advertising partnerships have grown over recent seasons notwithstanding tepid economic conditions.

KEY RATING DRIVERS

Solid Underlying League Economics: Debt service is supported by large contractual revenue streams from investment-grade counterparties. A collective bargaining agreement (CBA) is in place through the 2016 season, and it includes core elements that promote financial stability and competitive balance. While renewal risk surrounds a new CBA in 2016, MLB has maintained uninterrupted play since 1995. Major League Baseball continues to maintain a stable domestic fan attendance and viewership base and a growing international fan base.

Established League Oversight & Governance: MLB has demonstrated a willingness to step in and aid 'distressed' franchises. For example, it assisted the Texas Rangers and Los Angeles Dodgers during ownership issues.

Solid Legal Covenants; Demonstrated Bankruptcy Remote Structure: Structural provisions ensure timely debt service. The MLB Club Trust structure utilizes a bankruptcy-remote securitization consisting of pledged revenues derived from long-term national broadcast contracts in place through 2021. Noteholders benefit from the bankruptcy remote structure, which eliminates team-related risks (as was demonstrated in bankruptcy filings of the Rangers and Dodgers); however, they remain subject to all the fundamental operational risks of MLB.

Long History of Television Contracts: In 2012 MLB entered into eight-year television contracts with ESPN (Disney; 'A'/Outlook Stable), FOX Broadcasting Company (NewsCorp.; 'BBB+'/Outlook Stable) and Turner Broadcasting System (TBS) (Time Warner, Inc; 'BBB+'/Outlook Stable). The contracts, which took effect in 2014 and run through 2021, represented a 100% increase in annual rights fees and will deliver $12.4 billion in combined revenue.

Refinancing Risks Expose Teams to Potentially Higher Costs: The capital structure includes bullet maturities associated with the term notes and bank renewals associated with the revolving credit facility, which could expose teams to higher interest costs. However, robustness of cash flow and strong capital market access provide MLB flexibility to refinance outstanding debt on an ongoing basis, largely mitigating refinancing risk. Fitch's analysis of refinance risk under stressed interest rates suggests MLB would be able to meet debt obligations with substantial coverage and low leverage.

Peers: MLB's current leverage on a team basis is around 2.0x migrating toward 1.8x by 2021 (Fitch's calculation). Revenue derived from MLBAM provides additional cash flow that marginally reduces leverage on an individual franchise basis. MLB's leverage is comparable with the NFL's (League-wide, Football Funding and Football Trust rated 'A'/Outlook Stable) leverage of approximately 1.74x and lower than the NBA's (Hardwood Funding, LLC, 'A-'/Outlook Stable), which is projected to be below 3.0x and migrating down when the new television contract increases become effective in the 2016-17 season. A unique feature of the MLB facility is that it benefits from a bankruptcy remote structure that isolates noteholders from team-level financial risk.

RATING SENSITIVITIES

Negative: A significant decline in national television contract rights fees, due to termination of new contracts or additional debt, without offsetting revenue increases, that causes leverage (on a team basis) to materially increase above 2.0x.

Negative: A substantial change in individual and corporate spending on MLB related content materially weakening financial metrics.

Negative: A delay in the extension of the collective bargaining agreement or material changes to the CBA which negatively impact the existing foundation of the MLB CBA, neither of which Fitch currently expects.

Positive: Given near-term projected leverage under the borrowing program, additional near-term positive movement is unlikely.

CREDIT UPDATE

Strong and increasing attendance levels are a testament to the continued demand for professional baseball. Attendance increased slightly for the 2015 season to approximately 73.8 million and is expected to increase an additional 1% in 2016 to 74.5 million. While the National Football League prevails in terms of average attendance, MLB averages remain significantly above other major professional U.S. sports leagues such as the National Basketball Association and National Hockey League. Fitch does not expect any material shifts in MLB attendance in the near term.

MLB continues to implement initiatives to drive the popularity of modern day baseball, both domestically and internationally. In 2015, MLB unveiled its 'Play Ball' platform, which has funded outreach and training to encourage participation in baseball at all ages. MLB is also expanding its presence through internationally played games. Examples include the MLB Opening Series in Australia in 2014, as well as a recently played game against the Cuban national team and spring training games in Mexico City in 2016. MLB remains committed to growing the sport globally, which could lead to further revenue growth and sustainability of the League.

The current CBA between MLB and the Major League Baseball Players Association (MLBPA) runs through December 2016 and essentially provides 21 straight years of labor peace when combined with previous agreements. MLB and the MLBPA have begun negotiations on extending the current CBA. Renewal risk is partially mitigated by a labor contingency reserve that includes nine months of interest payments on outstanding debt during renewal years. Fitch does not expect structural amendments to the current CBA to be material and, based on historical negotiations, does not anticipate a work stoppage from the CBA renewal.

Fitch views MLB's economic model and financial policies favorably, despite a wide disparity in local revenue. Fluctuations can occur significantly between small and large markets, leading to differences in discretionary spending on player salaries. This discrepancy has the potential to lead to a less competitive framework for MLB. Partially mitigating the disparity is a revenue-sharing transfer between large and small market teams, which was in excess of $370 million for 2015. Also, 15 teams in the largest markets are disqualified from receiving revenue sharing payments, which contributes to greater revenue equality among current teams.

The sizeable increase in the national television contracts has helped boost team finances across the League. In particular, teams facing increased financial pressure due to weak economic conditions in their local markets are now somewhat isolated from the risk due to the size and length of the contracts. To a lesser extent, the high percentage of multi-year contractually obligated local broadcasting revenue and stadium-based revenues such as luxury suites, club seats, sponsorship and advertising agreements partially offset volatility associated with game day ticket sales. Nevertheless, potentially lower renewal levels of key revenues at MLB and individual team levels, should economic conditions worsen, may financially constrain MLB and member teams.

Term noteholders are insulated from team level operations given their rights to national broadcast revenue prior to distributions to teams for operations. The current structure was tested and validated in the bankruptcy proceedings of the Los Angeles Dodgers and Texas Rangers.

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 22 participate in the MLB Club Trust Securitization.

Additional information is available on www.fitchratings.com.

Applicable Criteria

Rating Criteria for Infrastructure and Project Finance (pub. 28 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=870967

Rating Criteria for U.S. Sports Facilities, Leagues, and Teams (pub. 09 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685897

Additional Disclosures

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1005114

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Scott Zuchorski
Senior Director
+1-212-908-0659
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Chad Lewis
Senior Director
+1-212-908-0886
or
Committee Chairperson
Seth Lehman
Senior Director
+1-212-908-0755
or
Media Relations
Sandro Scenga, New York, +1-212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Scott Zuchorski
Senior Director
+1-212-908-0659
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Chad Lewis
Senior Director
+1-212-908-0886
or
Committee Chairperson
Seth Lehman
Senior Director
+1-212-908-0755
or
Media Relations
Sandro Scenga, New York, +1-212-908-0278
sandro.scenga@fitchratings.com