If there’s been a lesson learned from the worst economic decline since the Great Depression it’s that home loans were granted to those that probably should have never been approved in the first place. Approval rules were lax and when the bottom dropped out, foreclosure rates went up.
That doesn’t mean that lending institutions suddenly said, “Stop the presses! No more loans.” What it meant was loans would continue, but with common sense that should have been there in the first place.
Such is the lesson learned from the debacle that Tom Hicks and his Hicks Sports Group got themselves into. HSG, the holding company for the Texas Rangers, as well as the NHL Dallas Stars, finds itself mired in $525 million of debt. To work on getting out from underneath this mountainous weight of debt, Hicks is unloading both franchises.
As most reading know, the sale of the Rangers has been stuck in neutral since January, as creditors for Rangers have yet to sign-off on a deal between Hicks and an investor group led by Pittsburgh sports attorney and minor league baseball club owner Chuck Greenberg and current Rangers president and Hall of Famer Nolan Ryan. Why is it stuck? Key creditors are looking for a higher bid, while baseball used a creditor threat against lenders by moving the Rangers into voluntary bankruptcy.
(See an archive of documents in the Rangers bankruptcy cases)
Today on Forbes, I highlight the PR battle that has ensued between the creditors and the group Texas Rangers Baseball Partners that are working to push the sale through (see Texas Rangers Bankruptcy Will Mean Smarter Loans, Not the End of Them For MLB). A key talking point by the lenders has been that loans to MLB will dry up. As highlighted above, fat chance.
A claimed side-effect of Texas Rangers Baseball Partners using the “pre-packaged” plan to expedite the sale of the club to a group of investors headed by Pittsburgh sports attorney and minor league baseball club owner Chuck Greenberg and current Rangers president and Hall of Famer Nolan Ryan, would be that lenders are so upset with MLB at the moment over the sale processes being rammed through without creditor approval, that loans to current owners or prospective purchasers of MLB clubs will dry up, creating the inability to refinance debt, or gain credit to purchase clubs.
What’s really happened here is bad loans to Hicks Sports Group, the holding company for the Rangers. While MLB has rules governing the amount of debt clubs can carry, HSG got around that by having banks grant credit to them, as opposed to the Rangers. Overleveraged, and under-collateralized, HSG defaulted on $525 million in loans. As the distressed debt hit the open market, predatory hedge fund Monarch Alternative Capital gobbled up $125 million of the debt, making them now the lead creditor of HSG. According to sources, Monarch continued to purchase the debt even after the exclusive agreement between Tom Hicks and the Greenberg/Ryan group to complete the sale took place in January, a possible sign that even though the creditors want the bidding opened back up to try and garner more for the Rangers’ assets, Monarch was really positioning themselves for a major payoff, regardless of the exclusive agreement.
To underscore the fact that talk of loans to MLB drying up are really nothing more than a scare tactic, the holding company for the New York Mets is nearing a $375 million refinance. This after attendance has waned at the new Citi Field that opened last season, and Mets owner Fred Wilpon lost tens of millions of dollars due to the Bernie Madoff scandal. According to the SportsBusiness Journal, “The new price is 350 basis points over the London Interbank Offered Rate, a floating-rate index that is currently around 0.42 percent. The lien on the team is for $175 million, the sources said.”
All this isn’t to say that It will all be smooth sailing in the future. Certainly, loans will not be as easily had as before (as it should), and interest rates will likely be higher, but to say they will all dry up seems near the realm of fantasy.
Ask yourself... Why would you not want to grant loans to an industry that saw record revenues (again) last year in a down economy? Why would you not want to grant loans when franchise values have continued to increase?
The lesson learned is that the loans to HSG should have never occurred, and that moving forward, every effort should be made to make sound loans to prevent the mistakes that were made with HSG to never happen again.
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Maury Brown is the Founder and President of the Business of Sports Network, which includes The Biz of Baseball, The Biz of Football, The Biz of Basketball and The Biz of Hockey, as well as a contributor to Forbes SportsMoney blog. He is available for hire or freelance. Brown's full bio is here. He looks forward to your comments via email and can be contacted through the Business of Sports Network.
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