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Time to renegotiate?

2009 April 8
by Skip Sauer

Tom Hicks, owner of the Texas Rangers, Dallas Stars, Liverpool FC, and who knows what else, has defaulted on $525 million in debt. He says its no big deal, just a negotiating tactic. This story describes how Hicks built his business and sports empire on massive leverage. Indeed the $525 million was borrowed in late 2006 against the Rangers and Stars franchises, whose value had risen well above their combined $334 million purchase price. Being fully leveraged is not ideal in a market where revenues are expected to decline.

Two aspects of Hicks’ “tactical move” seem awry to me. First, if he can’t get new lines of credit (would you loan to a king of leverage in this environment?), how willing are his lenders to give him more favorable terms than they did back in 2006? The notion does not make financial sense. Second, from an ethical perspective, Hicks is really stuffing it in the bankers’ faces. As a group at least, the banks have taken an enormous hit as their loan portfolios have evaporated. Hicks is essentially saying, “mark my loan down too, and lower my payments or else!” The bluff is that he’s willing to hand over the Rangers to his creditors. At least that is what Hicks’ stance implies, in which case they won’t be doing much future business with him. Alternatively, he really does need the relief, and his leveraged empire might be ready to crumble.

A few miles north in Kansas City, Missouri, the local pols are taking a second look at a $25 million deal with the Chiefs. The Chiefs were given a $25 million tax credit on the premise that they’d move their spring training camp from Wisconsin to a local venue. The pols think it was a ten year deal; the Chiefs are negotiating a five year deal (renewable), with the owners of the site, Missouri Western State University.

Absent an agreement with the public, the Chiefs are surely working on terms that make sense, with incentives for performance on the part of Missouri Western: do it right for the first five years, and we’ll continue the relationship. The public subsidy — and that’s what the $25 million tax credit is, a transfer from the treasury to the Chiefs — presumably requires a longer period than five years to pass the political smell test. The political reality creates a conflict with sensible private contract terms. But even on its allegedly original terms, this looks like a pure handout to me, one that is quite hard to justify. Stadium subsidies are one thing, but $25 million to hold a summer camp lasting all of three weeks (!!) at Missouri Western?

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