June 1, 2020

How COVID is bleeding professional sports leagues

April 23, 2020
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What strange times for the sports world.

The National Basketball Association, National Hockey League and Major League Soccer suspended their season, the NCAA canceled both the men’s and women’s March Madness tournaments, Major League Baseball’s Opening Day is being delayed, and The Masters golf tournament is being postponed.

For fans, the cancellations or pauses in play are shocking and devastating.

For professional sports leagues, franchises, players and ancillary businesses supporting them, the reality of the situation may prove more ominous or, as one NHL executive indicated, “seismic.” No other industry may be hit harder by the coronavirus outbreak than sports, even if these games are eventually made up or rescheduled.

Think of airlines and retail. Clearly, they are facing a big crisis too. Yet, while passenger travel and foot traffic may be markedly down, people are still flying and shopping.

But for the sports industry, COVID-19 is game over, at least for a short period. With events postponed and canceled, no one will be in the seats of these large entertainment venues for the foreseeable future.

Aggregate annual revenues for the big five U.S. professional sports leagues exceed $30 billion, with the National Football League nearly half of that. While it is impossible to predict what will happen, each month where games are suspended or canceled, the combined potential revenue loss for the NBA, MLB, NHL and MLS could exceed $2 billion and those losses grow substantially if the NFL suspends or cancels regular season play in the coming months.

Leagues and franchise owners face the stark reality of decimated incoming cash flows and few ways to meaningfully decrease expenses in the short term.

Obviously, decisions to suspend or cancel play were made for the right reasons. Fan and player safety are unquestionably paramount. Professional sports leagues and franchises made difficult decisions and should be applauded.

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But that doesn’t change the fact that the coronavirus pandemic is presenting unique liquidity challenges for the sports industry. And those challenges increase the longer cancellations and suspensions persist.

Cash-flow risks

The immediate, top-line business concern for sports teams is naturally the loss of ticketing, sponsorship, media and other revenue. For rescheduled events, pre-sold and season ticket purchases can, in most cases, be applied as a credit for replacement dates. That should help to minimize ticket refunds. But for canceled events, that won’t be the case and ticket refunds may prove inevitable. In any event, walk-up ticket sales are lost forever so long as events are on hold.

Sponsor contracts will need to be reviewed carefully for the potential loss or deferral of revenue. Often these agreements contain performance thresholds — number of games, attendance figures, etc. — meaning an extended layoff could require reimbursement of a portion of sponsorship money that has already been received. Sponsorship contracts may even contain force majeure or early-termination provisions for circumstances like this.

The same holds for media broadcast contracts, which generally only pay out for games that are actually played. And then there is the loss of event-day revenue such as parking fees, and merchandise and concessions sales. With no fans in the stadiums and arenas, these sources disappear.

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At the same time, professional sports have fixed costs that are all but impossible to discharge. For instance, the obligation to continue to pay player salaries, a subject of each league’s collective bargaining agreement, will likely continue with the intent to reschedule games. If a meaningful portion of the remaining schedule or all games are eventually canceled, that may change and the players may also lose out.

Venue-use agreements are another major operating expense for franchise owners, and those agreements will need to be carefully analyzed for any relief if events are canceled. And that extends to team practice and training facilities.

Simply put, it is not easy for leagues and teams to shut off expenses if the coronavirus pandemic seriously cripples their income.

A new reality

All of this adds up to a new reality for the sports industry.

In this environment, cash-flow forecasting based on revised revenue and expense projections is paramount. Teams that have debt leverage will need to assess impacts to their financial covenants and take proactive steps with their relationship lenders.

Owners should look closely at their business interruption insurance policies to determine the availability and magnitude of coverage for the losses that are likely to arise from the cancellation or suspension of events.

It is also a good time to assess short-term liquidity and financial flexibility. Owners will have to immediately consider the potential need to make capital calls from ownership, borrow on existing lines of credit or even arrange new debt financings.

It might even be time for franchises to consider bringing in additional minority owners as a way to tap some extra cash, although most ownership groups will be able to weather the storm by investing additional capital into the team.

Sympathy for owners may not be great, but fans love their teams and need to understand the financial pressures this pandemic will put on their teams as businesses.

Until this pandemic is contained, the sports industry will struggle more than most to adapt. But the hope must be that the interruptions only last for weeks, not months, and that all of us are able to return to enjoying the entertainment that defines us as fans.

Mark Kurtenbach is the co-head of the Sports and Entertainment Practice at Hogan Lovells.

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