No Penalty Box for Hockey’s Credit

The teams will be slightly larger credit risks following the cancellation of the National Hockey League season, according to Moody’s. But over the long run, the league could see improvements in its credit quality.

Moody’s Investors Services believes the cancellation of the National Hockey League’s 2004-2005 season only marginally increases the teams’ near-term risk.

Moreover, the outcome of the labor standoff, with play expected to resume next season, could lead to improvements in the credit quality of the league, according to a report by the credit rating agency.

Hockey is expected to return for the 2005-2006 season with either replacement players or a new collective bargaining agreement (CBA) that aligns player salaries with revenues. It may also include some revenue sharing among NHL teams, said Moody’s officials.

A CBA that also includes some level of revenue sharing among NHL member teams, “mitigates the currently heightened near-term risk,” noted Moody’s senior vice president Neil Begley. Such an agreement would lead to a greater certainty of profitability as player salaries rise and fall in accordance with some portion of revenues, he said.

The hockey league “may also indirectly benefit from the league-wide payroll change in competitive-balance towards a more socialistic one, comparable to the highly successful and more credit-worthy National Football League,” according to Begley.

Under the new model, teams generating lower revenues could boost their competitiveness because talented players may cost less to acquire, and limits will be placed on how much teams may spend, he added. The NHL, as a result, could see more consistent profitability and increasing team valuations that, over time, could lead to higher credit ratings.

To be sure, the league’s work-stoppage funds and other reserves won’t cover team overhead if games are not played next season, he acknowledged. At some point, most teams would have to look to owners to help cover operating costs, including interest expense, according to a Moody’s release.

Warns Begley: “If this support is not forthcoming, teams then would face the prospect of default and bankruptcy unless the league has the wherewithal to extend additional support.”

Players were locked out in September with the expiration of the last CBA, which had been signed in 1995 after a protracted labor stoppage that shortened that season. That CBA had no salary cap or other mechanisms to counter the dramatic rise in players’ salaries in relation to team revenues. That rise contributed to a wide scale lack of profitability among NHL teams, Moody’s noted in its report.

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