Does Dodger Debt Hold Key To Team's Payroll Woes?
In his column today, T.J. Simers surveys the damage from the McCourt divorce. In the process, he reminds us of the Dodger company line, which is that the divorce has had no impact on the team's payroll.
That's a tricky question to unpack, and for that reason it wasn't fully addressed in last week's cover story on the McCourts. So let's try to tackle it a bit here.
Before we consider the divorce, let's look at two big factors that may offer a better explanation for why the team's payroll is down: the recession and the team's debt load.
As we know, in 2004, Frank McCourt essentially bought the Dodgers on a credit card. Once he owned the team, he refinanced some of that debt with a $250 million loan secured against ticket revenue. (And ticket prices, lo and behold, started to rise. Yes, when you buy a baseball ticket, you are still helping Frank buy the team.) He took out another $140 million loan to A) fund stadium improvements and B) fund his family's lifestyle, including the purchase of a second home in Malibu.
That's quite a lot of debt for a franchise that may be worth $700 million on a good day. But that was considered all well and good during a time of credit expansion. You may recall that it was pretty easy to get a mortgage or a home equity loan during this period.
But when the credit crunch arrived, suddenly the banks were not so keen to lend to Frank McCourt. Last fall, McCourt tried to get a $125 million loan. At the time, McCourt's key financial adviser, Jeff Ingram, advised the boss in an e-mail that in determining whether to approve the request, Bank of America would be focused on "how much cash and how much cash flow." Setting everything else aside, it all comes down to inputs and outputs. How much cash does McCourt want, and how much cash flow is the team generating to pay it off.
In an e-mail the previous year, Ingram advised that despite the increases in ticket prices, the Dodgers were not yet a "cash flow machine." B of A later turned McCourt down, and he has lately had to borrow money from his brother to pay spousal support.
What can we infer from all this? Well, to move forward on various projects -- a Dodger cable channel, commercial development, a new football stadium -- the Dodgers will need to take on new debt. But the team is already quite leveraged, and the banks are uninterested in lending.
What's an owner to do in this situation? You have to focus on cash flow. You have to figure that revenues are going to remain flat, at best, for a while. Attendance is down, and so now is not the time to raise ticket prices. So the only thing you can do is cut expenses, and that means -- among other things -- cutting payroll, or at least holding the line.
And that's how you end up with Octavio Dotel instead of Roy Oswalt.
It should be said that nobody has a greater incentive than Frank McCourt to see the team win. But it appears that he is constrained by the combination of the team's debt load and the credit contraction, and simply can't spend much more on the team than he already is.
It's important to note that it's those two factors in combination that seem to be at the root of the difficulty. Every other major league team is going through the same recession, but most haven't cut payroll as sharply as the Dodgers have. And that appears to be because not every team owes as much money as the Dodgers do.
So how does the divorce figure in? Well, it's clear from the divorce file that the team's finances and the McCourts' finances are hopelessly entwined. To give just one example, the law firm of Bingham McCutchen billed the Dodgers for $232,263 worth of legal fees connected to the divorce. So it's disingenuous to say that the divorce and the team's finances are completely separate, because they aren't.
And clearly, if there's a settlement, Frank will have to come up with some way to pay it, and that will affect Dodger finances as well.
But as for what's driving current payroll decisions, the divorce seems like a secondary consideration when compared with the pressures of the current lending environment.
Now, let's add the caveat that this is speculation and that without access to Frank McCourt's soul, it's hard to know why he makes the decisions he does. But that's what it looks like from the outside.
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