Today’s headlines feature the news that Major League Baseball has nixed a proposal made by Dodger owner Frank McCourt to use future television revenue to finance both his baseball team and his divorce. There is actually a risk that the Dodgers may default on certain payroll obligations later this month unless McCourt can find a fresh infusion of cash to keep the team’s accounts solvent.  Just a few years ago, this problem would have been unthinkable but most of us don’t realize that many wealthy people have lots of paper assets but never enough ready cash.  That is the McCourt Story.

Ironically, ownership of major league sport’s franchises has rarely been a boon to the owners over the short run.  We are used to the images of these owners appearing in swanky resorts for league meetings and crying that the payroll costs of their teams were causing them to lose money.  But it’s tough to scrounge up much sympathy for folks with sufficient wealth to lay out $200 million or more to own a team populated with lesser millionaires.

 

The money in professional team ownership came not in the profits but in the gains.  It was not uncommon for teams to lose money from year to year.  But banks and other investors freely lent because it was prestigious to do so and because they had the security of knowing that almost no one who ever sold a team lost money. In fact the price of professional teams in established markets seemed to have no limit.  It was into this world that Frank and Jamie McCourt purchased the Dodgers and their stadium for $430,000,000 in 2004. Shortly after that deal was made one of the business arms borrowed $367,000,000 against future ticket sales.  It also appears that the McCourt’s needed some money to keep up appearances so they borrowed $100,000,000 personally against their Dodger holdings.

 

In the old days this was not the problem it has become.  The lenders could have the comfort of thinking that if things got bad, they could bank on a sale of the team for far more than what was paid.  Everyone would be whole and the profit would even be treated as a capital gain rather than ordinary income.

 

But America’s once insatiable appetite for any kind of athletic event has begun to wane.  The driving force for the last half century has been television revenue.  But in recent years even that has shown signs of market saturation.  It is television and radio broadcast rights that make the entire system work and the news has not been good for several years. This is why the megawealthy owners look nervous when they are attending their league meetings.

 

And then there is the situation with the banks.  As we noted before, banks love to be affiliated with professional teams.  This is why their names appear on almost every stadium in the country.  But with the collapse of a fair number of financial houses in the last decade, bank examiners are less and less impressed with bank debt that does not “work” in the traditional sense.  They are now putting banks on “watch lists” where the debt is not being repaid on a current basis and the banks are responding by insisting that any loan granted be used for either working capital or capital expenditures directly related  The days of levering illiquid assets for personal spending money are gone.

 

What McCourt was trying to do was to sell off 17 years of Dodger media revenue to Fox Sports for $2.7 billion.  We are told that $100,000,000 was going to be used to buy out his wife’s claims to ownership of the Dodger interests.  Major League Baseball had the right to veto the deal and they did claiming that McCourt’s mixing of team business with pleasure threatened the long term health of the team.

 

As we noted before, the days of ever spiraling team prices may be headed toward an end.  And without that, teams are going to find themselves relying more and more on balancing their books as banks and other lenders tighten their belts.  In the meantime, the folks who own these teams may be flying to Palm Beach or Palm Springs for annual meetings looking fit and tan but they better have another source of income besides ticket and media revenue to gas their planes.