The sports industry looks like it will weather an expected 2023 recession just fine, thanks to media-rights deals that create largely predictable balance sheets for teams, leagues and facilities, according to a new study from Fitch Ratings.
“There is a lot of revenue predictability on the sports side, which helps weather a potential storm,” Finch’s director of infrastructure and project finance Henry Flynn said in a phone call. The agency predicts a mild recession for the U.S. beginning in the second quarter of next year.
In some ways, it’s difficult to say how recessions affect sports, since the economic downturns of the past 20 years—sparked by the dotcom implosion, a mortgage bust and a pandemic—have been greater shocks to the system than the expected recession should be. Besides that, the ways recessions used to affect sports doesn’t really matter given the financial structure of the business today. “Media [revenue] is locked in with minimum levels, sponsorships are generally locked in for at least a year, season tickets are locked in,” Flynn added.
That doesn’t mean there aren’t potential hazards, however. Compared to a very strong 2022 rebound, spurred by the leaner pandemic years, 2023 likely will see a bit of softness in the rate of growth of attendance and related revenue, according to the agency.
The report, “Global Sports Outlook 2023” sees the financial outlook for sports next year as neutral, likely to unfold as the first ‘normal’ year since 2019. The industry is susceptible to consumer spending habits for tickets and merchandise. For arena owners, there is some risk of a greater ticket sales decline given the exceptional strength of concert touring in 2022, Flynn noted. In any case, a more severe recession than expected could notably cut ticket sales and the desire of companies to sponsor teams and pay up for luxury boxes. Right now, however, Fitch Ratings sees little risk of sponsorship and naming-rights deal prices suffering from a potential recession or the recent chaos in the cryptocurrency industry, which has been a notable sports sponsor.
On the costs side, inflation could start to erode margins on concessions and merchandise, though teams tend to have good pricing power. Sports will also see cost pressure from the post-pandemic rise in insurance rates that is being compounded by the need to beef up cyber-risk coverage as teams and stadiums collect more fan data, according to the analysis. Generally speaking, though, the industry appears in fine shape.
“They survived COVID. And made it through with very few ratings downgrades, zero defaults in our rated portfolio, some covenant issues but those were cured with liquidity from cash on hand or high up the organizational chart,” added Flynn. “If you can survive that, then certainly this doesn’t look anything like the shock COVID was.”
Longer term, the Fitch report suggests some factors that could evolve into negative trends for sports. One is the increase in direct-to-consumer sports media. Under the traditional model, a large media operator, like Comcast, guarantees leagues annual payments regardless of ratings. As consumers cut cords, leagues and teams see a chance to get a cut of potential profits from streaming games. But moves to capture more upside also mean teams will be exposed to greater downside from subscriber churn. Sports organizations also could see franchise valuations put under pressure from a relative glut of teams up for sale.
Fitch Ratings is considered one of the three major debt ratings services in the U.S. These ratings matter because they typically directly influence the interest rates borrowers have to pay in the debt market. In addition to balance-sheet measures it would apply to any business, the agency takes franchise strength into account when modeling out sports organizations. Fitch has 100 active ratings on sports entities, and its current outlook is stable for 89 of them and negative for 11, a slight overall weakening from 2021.