Should the Big Ten ultimately decide to cancel the fall sports schedule, the members’ athletic departments would be left with a significant deficit to cover. Penn State and Wisconsin have publicly stated that a lost football season would result in a $100 million shortfall. While some athletic departments may have the cash reserves and/or the alumni support (donations have been robust throughout the summer) necessary to plug the short-term operating gap, for most, the financial responsibilities will need to be met at the university level.
The majority of Power 5 schools should be able to restructure and/or take on new debt to prevent their athletic programs from going under (of course, as we recently saw at Stanford, whether they want to or not is another question). However, the prospect of conceding control of their destiny to the university—at a time when they see higher education facing considerable challenges—is likely a scary proposition for collegiate athletic directors (which would explain why the Pac-12 is trying to leverage their TV contracts to get money up front—to save their jobs and their budget). But the idea of taking out a loan at the conference level makes little sense. Universities are very highly rated (think: AA or AAA). Unless a school has a debt cap or leverage amount issue, they should be able to get debt cheaper than an athletic department could on their own.
Our Take: Jon Wilner recently reported that the Pac-12 Conference was exploring a centralized debt facility (similar to what the NFL, NBA or MLB offers its team owners). Under the proposed plan, schools who wish to borrow money would pledge contracted future media rights revenue as security for the loan. While the structure is logical enough (credit ratings aside), the significant gap between the haves and have-nots within the various conferences makes it far more difficult to execute. Remember, when the pro sports leagues first introduced league-wide debt facilities, all of the teams—even those who were not taking advantage of it—had to sign off on its creation (if one of the teams were to default it could be bad for the whole league). In the case of the Pac-12, it seems unlikely that USC or Stanford (two schools who wouldn’t take money) would be on board. Of course, even if the conference could get all of its members to agree on the program, there are more efficient forms of financing than issuing against broadcast revenues—especially right now with games (and by proxy) broadcast revenues in peril.
The Power 5 schools with access to the capital markets have been taking advantage of the record-low interest rates. In fact, many have already gone to the bond market this year with an eye toward making sure they have a lot of liquidity for the various operating hurdles that will be in place for this fall semester. Schools are thinking if they can borrow in the 2% or lower range—and historically their endowment funds have returned more than that—it makes sense to have a little extra flexibility in the budget. For perspective, the loan program the Pac-12 is discussing would offer schools money at a rate of 3.75%.
There are bound to be some very interesting conversations between universities and their athletic departments about the size and costs of their programs (once the universities begin to cover them). Those discussions are bound to result in fewer sports (with a concentration on what schools are good at). Dialogue about coaching salaries—and perhaps who is paying for them (think: alumni endowment as opposed to out of the university’s financial aid budget)—is also likely on the horizon at many institutions. Of course, if athletic departments aren’t going to be paying for coaches’ salaries moving forward, that’s money that could be used to pay the debt service allocation issued by the university on their behalf.
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