Fitch Ratings: Baseball Strike Would Weaken MLB-Related Credits.

Business Editors

SAN FRANCISCO--(BUSINESS WIRE)--Aug. 20, 2002

Last Friday, Aug. 16, 2002, the Major League Baseball Players Association's (MLBPA) Executive Director Donald Fehr announced that the MLBPA Executive Board had set Friday, Aug. 30 as the date a player strike will begin if no collective bargaining agreement has been reached with the major league clubs. If there is a work stoppage this season, it would be MLB's ninth since 1972. Work stoppage risk is among the major credit challenges associated with sports finance debt and this risk has been reflected in all Fitch sports ratings. Fitch believes a MLBPA strike would weaken bonds issued to finance baseball stadiums and MBL franchise-supported debt.

'Work stoppages may have a material negative impact on the long-term credit quality of some sports transactions, although in the short-term, payment of debt service is generally accommodated by structural provisions in most transactions,' said Dan Champeau, Managing Director, Fitch Ratings.

Although each transaction is analyzed on a case-by-case basis, some generalizations regarding the effects of work stoppages should be noted. Work stoppages in professional sports have the potential to alienate a sport's fan base, as evidenced by the significantly lower attendance and weaker television ratings immediately after MLB's last work stoppage in 1994-1995. A work stoppage may also reduce the future value of certain contractually obligated revenue (COR) agreements such as broadcast agreements, club seats, luxury suites, and sponsorship agreements that may support debt payments.

However, adequate short-term protection of debt service payment is usually afforded to bondholders in sports transactions. Specifically, some revenue agreements that are the basis for the COR supporting the debt service payments require payment, even if games are cancelled due to a work stoppage. However, it is important to note that the underlying credit of the club may be weakened. In addition, most transactions include certain debt service reserve funds that can be drawn down if needed, then replenished once revenue is available. Other financial covenants, including performance reserve funds and income distributions tests that are designed to trap cash within a transaction, may also be included for bondholder security. Most sports transactions that Fitch has rated have included a combination of the above noted security features.

The impact of work stoppages on bonds that are secured by general municipal sales taxes in a given city, county, or large region, is minimal. In general, the taxes are collected by the municipality and allocated to pay debt service whether the anchor tenant teams are playing or not. Further, debt service payments are typically made from taxes that are, in some cases, voter approved.

Fitch has reviewed over $8 billion in sports-related debt in the four major U.S. professional sports leagues (MLB, National Basketball Association, National Hockey League, and the National Football League) since 1990.