Fitch Ratings affirms Major League Baseball's (MLB) Club Trust Securitization at 'A-'. The Trust consists of approximately $352 million syndicated revolving credit facility and four series of notes consisting of $226 million series-1 term notes, $125 million series-2 term notes, $170 million series-3 term notes and $170 million series-4 term notes. The Rating Outlook is Stable.
RATING RATIONALE:
The 'A-' rating primarily reflects MLB's premier status as a professional sports league in the U.S. which has operated for over 100 years, the strength and ability to renew future broadcast contracts and the structural aspects of the transaction which isolates noteholders from team level performance. Fitch notes that during the Texas Ranger's bankruptcy proceedings in the summer of 2010 there were no interruptions in the flow of pledged funds. Additionally, the 'A-' rating reflects the fundamentally solid league economics and fiscal governance, including financial covenants, league level borrowing limits, reserve levels and mandatory pay down mechanisms (in the event national broadcast contracts are renewed at lower rates). Historical renewal rates of national broadcast contracts, and relatively stable stadium attendance and television viewership levels as well as international growth initiatives are viewed favorably.
The MLB Club Trust structure utilizes a bankruptcy-remote securitization of pledged revenues consisting of long-term national broadcast contracts in place through 2013 with ESPN (Disney; rated 'A' with a Stable Outlook by Fitch), FOX Broadcasting Company (NewsCorp., rated 'BBB+' with a Stable Outlook by Fitch) and Turner Broadcasting System (TBS) (Time Warner, Inc; rated 'BBB' with a Stable Outlook by Fitch). Noteholders benefit from the bankruptcy remote structure, which eliminates team related risks; however, they remain subject to the fundamental operational risks of MLB and the ability of MLB to renew national television contracts.
Key credit risks for the transaction include future renewal risk associated with the broadcast contracts as well as the current economic conditions which indicate heightened risks for all of Fitch's sports ratings. Fitch expects there will likely be increased pressure on individual and corporate discretionary spending levels and on the renewal values of key sponsorship and advertising agreements. Mitigating the renewal risks in the near-term are the national television contracts which run through 2013 and provide noteholders with significant collateral. Renewal risks are additionally mitigated by continued stable viewership and historical attendance growth since 2000. Additional risks include the overall high financial leverage of the participating teams and inherent risks associated with extension and/or renewal of the current collective bargaining agreement (CBA).
RATING DRIVERS:
--Continued solid attendance and viewership levels.
--Renewal of the CBA in 2011 and long-term broadcast contracts in 2013.
--Maintenance of the League's debt policies.
--MLB Management's proactive stance to monitoring and oversight of individual team finances.
SECURITY:
All the notes in the Trust rank pari-passu and are secured by, among other things, rights to receive certain payments shared among MLB clubs, including, primarily, the aforementioned national television revenues and radio broadcast revenues from national and international media contracts, and, to a lesser degree, revenues under licensing and sponsorship contracts entered into by Major League Baseball Enterprises, Inc.
CREDIT SUMMARY:
Despite the recent U.S. economic conditions, MLB's solid attendance and viewership are evidence of its popularity and underlying demand for MLB related content. Paid attendance of 73.1 million for the 2010 season was generally flat compared to the 2009 season of 73.4 million fans. The 2010 regular season television viewership was stable. Viewership for the World Series was down in 2010 reflecting a five-game series and two medium-sized markets of the Texas Rangers and San Francisco Giants as compared to the 2009 World Series featuring two large-market teams, the New York Yankees and Philadelphia Phillies, and a six-game series.
MLB's current CBA was enacted in December 2006 between MLB's club owners and the MLB Players Association, which ensures no work stoppage through the 2011 season. Fitch notes that the CBA promotes financial stability among MLB clubs through continued oversight of club level financial activities by the Commissioner's Office, enhanced revenue sharing, and the competitive balance tax. Teams exceeding certain predetermined thresholds are required to pay dollar-for-dollar into a central fund for distribution to fund a portion of player benefits. Fitch is currently monitoring the preliminary negotiations and will track progress throughout the season. Fitch notes there are currently no major economic reform issues associated with negotiations.
MLB clubs are subject to a debt service rule (DSR) based on a two-year rolling average of earnings before interest taxes depreciation and amortization (EBITDA). While the DSR limits are high at 10 times (x) EBITDA and (15x EBITDA for any club which has incurred stadium-related debt to finance construction of a new ballpark or major renovation in the last 10 years), Fitch views the oversight of the Commissioner's Office to enforce compliance with the DSR favorably. Key remedial measures, which primarily included debt and expense reduction, are viewed as important mitigating factors.
While Fitch positively views MLB's economic model and financial policies, a wide disparity exists between the financially strongest and weakest teams. A team's reliance on local revenues, which fluctuate significantly between small and large markets, and a team's discretion to spend unreservedly on player salaries can result in greater financial disparity among MLB teams. This disparity has the potential to lead to a less competitive framework for MLB, however, Fitch recognizes MLB's very long history of viability in good and bad economic times and more recently the diversity of MLB clubs that have participated in the post season since 2000 as important mitigating factors. Furthermore, Fitch notes despite the range of financial disparity of participating clubs, noteholders are insulated from team level operations given their rights to national television contracts to service debt prior to distributions to teams for operations.
Individual teams may be partially insulated in the near-term by the high percentage of multi-year contractually obligated arena-based income streams from luxury suites, club seats and sponsorship and advertising agreements. Nevertheless, potentially lower renewal levels of key revenues at the league and individual team levels should economic conditions worsen, would financially constrain the league and member teams. Additionally, while locally driven franchise and stadium revenues have experienced small growth over the past four years, expense growth levels have outpaced the revenue growth eroding net revenues. Fitch notes that a number of clubs have recently signed new and/or extended local broadcasting agreements that are expected provide additional revenues to support underlying financial stability. Fitch will closely monitor the underlying financial performance of the participating franchises.
MLB currently has 30 teams in major metropolitan areas in the U.S. and Toronto, of which 22 participate in the league lending facilities. MLB's extensive international marketing efforts, success of the MLB Network and the 2009 World Baseball Classic are viewed favorably as additional future potential for the sport.
Additional information is available at www.fitchratings.com.
Applicable Criteria & Related Research:
--'Global Sports Rating Guidelines' (May 9, 2007).
Applicable Criteria and Related Research:
Global Sports Rating Guidelines
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=325312
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