Fitch Rates NBA's Notes 'A-'; Outlook Stable
Fitch also affirms the NBA's outstanding \\$2.17 billion senior notes (issued through Hardwood Funding, LLC) and the NBA's outstanding \\$1 billion secured revolving facility due 2020 (issued through Basketball Funding LLC) at 'A-'.
The Rating Outlook for all debt is Stable.
The 'A-' rating reflects the underlying core economic model of the NBA, which is based on a solid revenue sharing mechanism and a collective bargaining agreement (CBA) that fosters competitive balance through its soft salary cap. The NBA's overall domestic and international popularity and support further supports the rating. The NBA's television contracts, which increase considerably in the 2016-17 season, will reduce overall leverage on the notes and facility from historical levels to those consistent with other 'A-' Fitch rated professional sports league ratings.
KEY RATING DRIVERS
Solid Underlying League Fundamentals: The NBA has a strong economic model that includes equal distribution of multi-year national television contract revenues and significant revenue sharing among member teams. Debt service is supported by large contractual revenue streams from investment grade counterparties. The current CBA between the NBA and National Basketball Players Association includes solid core elements that promote financial stability and competitive balance. Domestic fan attendance and viewership continue to grow and have remained stable over the past 10 years and the league continues to grow its existing large international fan base.
Long History of Television Contracts: The NBA's current television contracts run through 2016 with Walt Disney Company (Disney; rated 'A'; Stable Outlook) (ESPN & ABC) and Turner Broadcasting System (Turner; subsidiary of Time Warner rated 'BBB+'; Stable Outlook) (TNT/TBS). In late 2014, the NBA announced expanded partnerships with both Turner and Disney. Under the new nine-year television rights agreements, ABC and ESPN and TNT will televise NBA, WNBA and NBA Development League games beginning with the 2016-17 season running through the 2024-25 season. The contract represents a roughly 3x increase in average annual rights fees.
Positive League Oversight and Governance: The league maintains significant resources and has demonstrated a willingness to step in and aid 'distressed' franchises. For example, the NBA successfully assisted the New Orleans Hornets (now New Orleans Pelicans) during ownership issues and ultimately bought the team and facilitated a sale at a higher valuation, and the league assisted in the Los Angeles Clippers sale during ownership issues. The league's favorable debt policies and financial management and oversight are also positive contributing rating factors.
Strong Liquidity and Coverage but Team Exposure: Structural provisions ensure timely payment of debt service, as national television revenues flow into an account established by the NBA to meet debt service obligations, including funding of interest and labor contingency reserves, before distribution to the participating teams. The risk of individual team bankruptcy causing disruption in debt service payments is mitigated by the agreement of all NBA teams to allow a bankrupt team's national television revenues to continue to flow to the lenders to cover debt service and the league's oversight and governance.
Refinancing Risks Expose Teams to Potentially Higher Costs: The bullet maturities associated with the notes and the necessity of bank renewals associated with the revolving facility expose the teams to potentially higher interest costs. This risk is partially mitigated by the overall low leverage under the borrowing program and robust debt service coverage ratios.
Peers: The NBA's leverage under the league-wide program is projected to be below 3.0x when the new television contract increases become effective and is consistent with the other 'A' category ratings including the NFL (G-3/G-4 programs rated 'A+'; Stable Outlook and NFL Leaguewide [Football Funding and Football Trust rated 'A'; Stable Outlook]) and MLB (Club Trust Securitization rated 'A'; Stable Outlook). The NFL's Football Trust and Football Funding currently have leverage around 1.74x (\\$250 million in league-allowed debt under the facility divided by a \\$144 million per-team national television contract [not including DirecTV]). MLB's current leverage is also around 2.0x but additionally benefits from the securitization features.
The NBA's national television contract length is similar to those of the NFL, MLB and NHL, while the CBA is similar to the NFL and NHL (MLB's expires in 2017). The NBA's soft salary cap is slightly weaker than those of the NFL and NHL but is slightly stronger than that of MLB, where player salaries have some restrictions but owners can elect to go above predetermined levels by paying a 'tax'.
Negative: A further increase in the league's permitted debt per team in the near term would increase leverage on a per-team basis inconsistent with the current rating.
Negative: A significant decline in future national television contract rights fees, which, given the current trend is unlikely, could negatively impact the financial profile and metrics of the facility.
Positive: Given near-term projected leverage under the borrowing program, additional near-term positive movement is unlikely. However, a material reduction in leverage under the facility could potentially move the rating positively.
SUMMARY OF CREDIT
The NBA, under its affiliate Hardwood Funding LLC, issued \\$231 million of senior notes consisting of \\$20.7 million series 2016 Y (7-year), \\$71.3 million series 2016 Z (10-year), \\$41 million series 2016 AA (12-year) and \\$98.3 million series 2016 BB (15-year). The notes will refinance outstanding debt under the NBA's league-wide borrowing program and will close in late February.
The 2014-15 NBA season continued the favorable trends experienced over recent years and the 2015-16 season is tracking positively as well. Arena capacity for 2014-15 was a record-setting 94%, continuing the past 11 years of greater than 90% capacity. The 2014-15 was also the all-time high for attendance at 21.9 million, which included 700 games sold out, up from the previous record of 676 sellouts set 20 years ago.
The international element of the NBA continues to be one of the more positive league factors. For over 10 years, the growth and diversity of international players has been tremendous. At the start of the 2015-16 season there were 100 international players (out of 450 total NBA players) from 37 countries and territories. NBA content is available in 215 countries and territories in 49 languages. NBA merchandise is currently available for sale in 100 countries and the NBA has over 1 billion social media likes and followers.
Building on significant success in China, where it is estimated that over 300 million youths are playing organized basketball, the NBA is currently exploring international growth in Europe, Brazil, India and Africa. The recently completed 2015-16 NBA Global Games, which have a long history, allowed fans in London, Milan, Madrid, Shenzhen, Shanghai, Rio and Mexico City to experience NBA matchups or NBA vs local clubs.
The NBA's CBA continues to be a contributing factor toward growing competitive balance on the court, creating greater competition between small and large markets and driving greater fan interest. The CBA includes a 'soft' salary cap/'tax' system enhanced by an escalating tax aimed at augmenting on-court parity and controlling payroll expenses. The new 'tax rates' for incremental spending above the tax level commenced in the 2013-14 season.
The 10-year CBA signed in December 2011 includes options available to both sides to opt out after notice by Dec. 15, 2016, effective June 30, 2017. As with any CBA, there are always risks with 'opt out' periods, prior to the expiration, as league economics change and grow. The salary cap and floor under the CBA are expected to increase significantly as a result of the new television contracts effective in the 2016-17 season. Fitch will continue to monitor discussions ahead of the opt-out period.
The revolving facility and notes are parity obligations secured by participating teams' national television contract revenues and other assets. The NBA currently has 30 teams in major metropolitan areas in the U.S. and Canada, of which 20 participate in the league lending facilities.