Friday, June 03, 2011

Much Ado About Nothing

With Cubs finances in the papers today, it's time to dust off Ivy Chat for a day. The story reports that the Cubs, among other teams, have too much debt:

(N)ine franchises (are) in violation of MLB's debt service rules, according to information presented in a confidential briefing at the owners meetings last month and confirmed to the Los Angeles Times by three people familiar with the presentation.

The Dodgers and Mets have been in headlines for their troubles and find themselves among the nine with the Cubs. Those three are joined by the Orioles, Tigers, Marlins, Phillies, Rangers and Nationals as teams out of compliance with MLB's rules, according to sources, none of whom was authorized to disclose the information.

Why are the Cubs on this list and what does it mean? Let's look at the rule they are in violation of first:

The rules, intended to ensure clubs have the resources to support their financial obligations, generally limit a team's debt to 10 times its annual earnings, although Commissioner Bud Selig has wide latitude to enforce those rules. Selig declined to comment for this story.

Earnings is used kind of nebulously here. Most likely what is meant here is operating revenues. This number is a company’s total revenues less its operating expenses (payroll, cost of goods sold, marketing expenses, etc.). MLB rules limit total debt to an amount capped at 10 times this number. If the Cubs generate $200 million in revenue, but only make $50 million after expenses, they would be limited to $500 million in debt.

OK, now we know the numbers, what does this mean for the Cubs?

Most likely nothing.

When we go back and look at the Cubs debt situation, we see that total debt is about $674 million. But of that amount, $175 million of the debt is funded by the Ricketts themselves. This debt is really equity, but was designed as debt to help the Tribune Corporation avoid paying taxes purposes on the sale. Another $74 million in subordinated debt might also be structured in such a way that the Cubs don’t have to actually make any cash payments on the debt for years.

The MLB debt calculation most likely includes all the debt and doesn’t distinguish between senior and sub debt. And sub debt is more like equity than a real loan.

One supposes that this story does serve as a reminder that the Cubs do have a lot of debt and that a reasonable person would expect much of the payroll runoff the next two years to not be re-spent. But is this story an alarm bell for anything? No.

In short, there's nothing to see here. Move along.

According to your buddy David Kaplan, he guarantees that the Cubs are going to trade Soriano come next season. Considering they most likely want to trade Zambrano that is a lot of money being spent on players to go away huh?
We stinks!
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