The Rockies had yesterday off so I’m heading in a different direction today. Last night, the Los Angeles Times released a story detailing the troubling high debts of several MLB teams. Apparently, MLB has debt ratio requirements for the franchises. Currently, there are nine teams that are outside of what MLB deems to be acceptable levels of debt. While this may not seem all that significant, it is. In the last year, teams from three of baseball’s largest markets have essentially become insolvent and MLB has had to step in and save all three.
Debt, when used appropriately, can be a great tool. It helps you leverage a little money into a lot more. But, lenders and borrowers must walk a fine line. Lenders must make sure they can be paid back and borrowers must make sure they aren’t getting in over their heads. For those that have been living under a rock for the last three years, abuse of the debt process was the main factor in our current economic debacle. So, if the powers that be with Major League Baseball think they are immune to systematic financial failure, they’re a bunch of fools.
While the Times piece did a great job of bringing light to this issue, it would’ve been nice if they disclosed each franchise’s debt service coverage ratio. In the article, Bill Shaikin mentioned that there were several teams that had debt in amounts that were ten times their annual income. Perhaps I’m misunderstanding Shaikin, but the appropriate formula is not income divided by overall debt. Instead, it should be annual income divided by annual expenses related to overall debt.
Really, it’s pretty simple. If a business has a debt service ratio over one, they are appropriately leveraged and making money. If their debt service ratio is a fraction, they aren’t making money. If you or I were to walk into a bank and try to get ANY kind of loan with a debt service ratio less than one, they would reject us faster than Ted Nugent turning down a tofu sandwich.
The nine franchises that aren’t in debt compliance with MLB are the Mets, Dodgers, Rangers, Phillies, Marlins, Nationals, Orioles, Cubs, and Tigers. The most troubling part of this list is that the Rangers, Phillies, Cubs, Mets, Dodgers and Tigers are all large market franchises with solid attendance figures. They make more money than the small market organizations and have to rack up a lot more debt to fall out of compliance.
The problem with the MLB’s debt service ratios is that they aren’t correctly enforced. While the standards for what is appropriate have been laid out, it’s completely within Bud Selig’s discretion to make the rules compulsory. Selig has obviously ignored these teams in over leveraged situations and that’s led to the financial messes we’ve seen over the last year.
This stuff isn’t rocket science. It’s just a matter of adequate evaluation. These franchises have enormous financial tools and there are thousands of brilliant pecuniary minds that could whip MLB’s fiscal picture into shape. Why leave it in the hands of a commissioner who has repeatedly proven to be inept?
I’m not saying that MLB is doomed, but this kind of fiscal irresponsibility is disconcerting. Currently, two historic MLB franchises are mired in deep financial troubles and that’s bad for baseball. The McCourts and Wilpons had no incentive to appropriately run their businesses because they knew that MLB would bail them out if they got in trouble. Having that kind of safety net eliminates the need to be risk adverse. In effect, MLB is a co-signer for every single franchise. It is probably in its best interest to make sure everyone maintains some sort of sanity when it comes to money.
Disagree? As always, comments are welcome.