Sports fans haven’t noticed any changes since Diamond Sports Group—a collection of 19 regional sports networks (RSNs) doing business as Bally Sports—filed for Chapter 11 bankruptcy, but that could change next month.
U.S. Bankruptcy Judge Christopher Lopez will preside over a key hearing on May 31 during which Major League Baseball’s attorneys, teams and other parties will debate whether Diamond should continue to broadcast MLB games without making timely payments.
MLB, the Arizona Diamondbacks, Cleveland Guardians and Minnesota Twins recently filed emergency motions in which they demand that Lopez force Diamond to pay them per their telecast rights agreements or, if Diamond can’t pay up, allow teams to serve notices of default to Bally RSNs. Defaults would eventually permit teams to exercise contractual remedies—including, potentially, termination.
On March 31, Diamond (through its RSNs) informed the Guardians and Twins that it would not make required payments by an April 1 due date. Attorneys for MLB blasted Bally as engaging in “plainly inequitable” conduct that is “untenable under applicable bankruptcy law.”
“Debtor RSNs made this decision,” MLB wrote in its petition, “even though they continue to use the clubs’ valuable intellectual property every day. By continuing to broadcast Guardian and Twins games, they generate post-petition revenue, yet boldly refuse to pay the clubs … The failure of the Debtor RSNs to perform under the telecast rights agreements has already caused material economic harm to the clubs.”
MLB also charges that Diamond has impacted the fans in RSN regions, because they are unsure where they will watch their local team’s games. The league describes this “uncertainty” as both unnecessary and avoidable since “debtors have stated that they have sufficient cash to pay the clubs the telecast rights fees for the duration of these chapter 11 cases, and yet they have elected to default on some of their payment obligations.”
Diamond’s ability to broadcast MLB games without paying is a byproduct of federal bankruptcy law. Like other parties that petition for bankruptcy under Chapter 11, Diamond received an “automatic stay,” which is a court order that tells creditors to suspend their collection activities and, in essence, back off. The stay provides time for Diamond to attempt to get its finances in order, including by renegotiating contracts so it would owe less.
But MLB and the teams argue Diamond still must pay what it already owes, not nothing or a lesser amount.
“Chapter 11 debtors are required to timely pay even the most mundane administrative expenses as they come due,” MLB wrote. If Bally RSNs can’t pay teams, MLB contends, those RSNs “should promptly reject their agreements with the Clubs to enable the Clubs to contract with an alternative broadcast partner.”
Diamond appears to have singled out the three clubs in question, which is by design. Last season, the Diamondbacks drew the second lowest TV ratings among the company’s 14 fully owned-and-operated RSNs, trailing only the Miami Marlins with deliveries of fewer than 20,000 area households per game. At the same time, Arizona’s legacy rights fees account for DSG’s fourth priciest contract, with an annual payout of some $68 million.
Much of the rate inflation can be chalked up to the relative size of the home media market. Per Nielsen, Phoenix is the eleventh largest DMA in the country; featuring 2.14 million TV homes (or roughly 2% of the nation’s base of 123.8 million), the physical dimensions of the market spill over across more than half of the state’s land area.
When approached from the opposite direction, it’s not difficult to suss out why Diamond saw fit to make its first payment of 2023 to the San Diego Padres, even if DSG waited until the final day of a two-day contractual grace period to make the club whole. At $47 million, the Padres are the third least expensive RSN obligation, while ranking among the top five in TV deliveries.
That said, the terms of San Diego’s legacy deal include a steep escalator clause; with nine years and $540 million left on the contract, the final season (2031) of the Padres’ RSN pact will cost Diamond more than $70 million in rights fees. Despite the regular price hikes, the Padres aren’t a loss leader for Diamond, although the same cannot be said for the low-rated NHL team, the Arizona Coyotes.
MLB repeatedly stresses that teams rely heavily on revenue from RSNs. The league asserts that “on average, 90-95% of every club’s regular season games each season are broadcast to fans via an RSN” and while percentages vary by club, each earns a “significant portion of their total revenues” from telecast rights agreements with RSNs. In not paying, MLB argues, Diamond has caused teams to navigate “a complicated and fragile situation.”
In their brief for emergency relief, the Diamondbacks struck a similar chord. The team complained that Diamond (through Diamond Arizona) is “forcing the Diamondbacks to fund [its] business.” The team says that Diamond badly needs the Diamondbacks to survive since basketball and hockey regular seasons have ended and the Diamondbacks are the only pro team available to broadcast through the summer.
Diamond, however, is not without defenses. The primary purpose of a reorganization via Chapter 11 bankruptcy is to eventually emerge as a viable business. That can mean restructuring contracts, including converting debt obligations into opportunities for lenders to obtain equity or paying less than what is currently owed. In legal proceedings, Diamond has suggested its deals with MLB teams are too expensive given changes in how fans watch games (more streaming, less cable) and should be lowered in value. Diamond has also offered to place money in an escrow that would be used to make payments to creditors, though where MLB teams would rank on the list to be paid and how much money those teams would actually receive is unclear. All told, Diamond in 2023 is on the hook for approximately $885 million in fees to the 14 MLB clubs.
The evidentiary hearing will provide an opportunity for Judge Lopez to directly question the parties and permit them to offer sworn testimony and evidence, such as financial documents and asset and liability projections. He will weigh the rights conferred to Diamond as a consequence of filing for bankruptcy with its continued obligations to MLB and its teams.
If persuaded by MLB, Judge Lopez could lift the stay, which would permit teams that have not been paid to provide notices of default to Bally. If Bally then doesn’t pay within a cure period, teams could terminate their agreements and seek new broadcasting partners. Alternatively, the judge could reason that Diamond is acting consistent with rights conferred by the bankruptcy filing.
For MLB and its teams, the deliberate slow pace of the bankruptcy process is not advantageous. By May 31, teams will have played roughly a third of the season. Although MLB and the teams demand “emergency” relief, an “emergency” in the bankruptcy process is not as urgent as that word might suggest. Many bankruptcies take years to play out, a prospect that could place some MLB teams—and by extension the league—in a difficult spot given teams’ considerable reliance on RSNs for revenue.
Diamond filed for Chapter 11 protection in March, in a bid to eliminate some $8 billion in debt from its balance sheet. Under the terms of its proposed restructuring, first-lien creditors would remain covered for their $635 million, while $6.4 billion in second- and third-tier debt, and approximately $1.7 billion in unsecured notes, would be exchanged for equity in the company that ultimately emerges from the bankruptcy process.
Since Sinclair Broadcasting acquired the Fox-branded RSNs from Disney in 2019 in a blockbuster $9.6 billion deal, the number of subscribers to the traditional pay-TV bundle has plummeted. At the time of the transaction, the RSNs reached north of 60 million households; per Diamond’s March 15 cleansing materials, that base has been whittled down to 40.6 million homes.