Nine of 30 teams reportedly in violation of MLB debt service rules
The Dodgers and New York Mets might rank as the biggest financial headaches for Major League Baseball, but they are not the only ones.
Nine of the 30 teams are in violation of the MLB debt service rules, according to information presented in a confidential briefing at the owners’ meetings last month and confirmed to The Times by three people familiar with the presentation.
In addition to the Dodgers and Mets, the teams out of compliance are the Baltimore Orioles, Chicago Cubs, Detroit Tigers, Florida Marlins, Philadelphia Phillies, Texas Rangers and Washington Nationals, according to the people, none of whom were authorized to disclose the information.
Commissioner Bud Selig declined to comment for this story. His predecessor, Fay Vincent, said he would consider the number of teams in violation of the sport’s debt rules to be “troublesome.”
Frank McCourt, the Dodgers’ owner, has told executives within the industry he does not agree with Selig’s decision to appoint a trustee to oversee his team and does not understand why Selig has not acted similarly with any other team.
“I can’t say I haven’t heard people in baseball talk about that,” Chicago-based sports business consultant Marc Ganis said, “but there is a lot of deferral to Bud on this one.”
Selig often says baseball is in a “golden age,” in large part because revenue has jumped from $3.6 billion in 2002 — the last year seriously threatened by a strike or lockout — to $7 billion in 2010.
The debt service rules emerged from the 2002 labor negotiations, after overall club debt soared from $600 million in 1993 to $2.1 billion in 1999 and $3.1 billion in 2001.
The rules, intended to ensure clubs have the resources to support their financial obligations, generally limit a team’s debt to 10 times its annual earnings, although Selig has wide latitude to enforce those rules.
With the financial struggles of three teams exposed to public view — the Dodgers in divorce court since 2009, the Rangers in bankruptcy court last year and the Mets in the aftermath of the Bernie Madoff scandal over the last few months — a prominent sports investment banker said his industry is “somewhat concerned” about the league’s ability to ensure its teams remain on solid economic footing.
“You’ve got to be thinking, with two of the premier franchises in trouble and a major-market team that has just come out of bankruptcy, what else is out there?” said the banker, who declined to be identified because of his work with the league and its clubs.
Rob Manfred, baseball’s executive vice president of labor relations, would not confirm the number of teams in violation of the debt rule or identify any of them.
“To take a snapshot of the number of non-compliant clubs at a point in time can be very misleading,” Manfred said. “With one or two exceptions, we see how teams are going to be compliant again in the short term, so we’re not worried about them.
“We are not concerned about the overall economic condition of the industry.”
The chief executive of one National League club called the number of teams out of compliance “a hiccup” and said the commissioner’s office has worked to correct the situation before lenders could become reluctant to extend financing within MLB.
“I think we’re healthy,” the executive said. “The banks see it. The banks get it. We’re still thriving.”
McCourt says the Dodgers are in compliance with the debt service rules. According to a person familiar with the matter, McCourt received a waiver from the commissioner’s office last year permitting the Dodgers to hold debt more than 10 times annual earnings.
That waiver is currently under dispute, according to a person familiar with Selig’s view of the matter.
Under the debt service rule, Selig is authorized to impose whatever remedial measures he sees fit. The rule lists 16 possible actions Selig could take, among them an order that a team raise equity, a requirement that all team expenditures be approved by his office and the suspension of the team owner.
Dodgers trustee Tom Schieffer must approve all team expenditures over $5,000, although Selig did not cite the debt service rule in announcing Schieffer’s appointment. McCourt has said he believes Selig’s actions are “predetermined” to force an ownership change.
Ganis, the consultant, noted that McCourt and his ex-wife, Jamie, redirected more than $100 million of Dodgers revenue toward their personal lifestyle, while no such allegation has been made against Fred Wilpon, the Mets’ principal owner.
“Don’t underestimate that issue,” Ganis said.
In addition, there is no indication the Mets have struggled to meet payroll this season, as the Dodgers have.
Wilpon told Sports Illustrated last week that his team had $427 million in debt and could lose $70 million this season.
The Dodgers’ financial data is not publicly available for this year or last year, but divorce court records show the team lost $10.3 million in 2006, made $5.7 million in 2007, lost $39.4 million in 2008 and made $8.4 million in 2009.
The Mets announced last week they had agreed to sell a minority share in the team for $200 million. McCourt has said he is not interested in selling a share of the Dodgers.
McCourt last year asked for approval of a $200-million loan from Fox. Selig rejected the deal, in part because the Dodgers’ debt load would have increased from $525 million to $725 million, according to a person familiar with the deal.
However, according to the New York Times and ESPN, Wilpon has the option to convert the sale of a minority share into a $200-million loan within three years. Manfred declined to discuss the Mets deal but said it is not similar to the one proposed by McCourt.
“The Mets situation, when you understand it, is an equity infusion,” Manfred said. “It has nothing to do with additional debt or pulling future revenues. We see no similarity between the two situations.”
The Dodgers have pledged future ticket and parking revenue to satisfy loans, according to court documents. McCourt says a proposed long-term contract with Fox includes an equity stake in Prime Ticket and should count as an equity infusion; Selig has yet to approve or refuse the contract.
“The Dodgers are in compliance with MLB’s debt service rule,” McCourt spokesman Steve Sugerman said Thursday. “And the Dodgers will continue to be in compliance next year with the Fox media rights deal in place.”
Vincent, the former commissioner, said it is difficult to understand the debt service issue without understanding the nature of the debts.
“Debt to an outside party who could assert rights could be very difficult,” Vincent said. “Debt to the twin brother of an owner is a different story.”
The Rangers’ situation before bankruptcy and the Dodgers’ current situation grew complicated in part because some debt is held not by the team itself but by related entities. Manfred said the current round of collective bargaining includes proposals to tighten the debt service rules, although he would not be specific.
The players’ union has the right to information about team debts and consultation with regard to violations and remedies. Michael Weiner, executive director of the Major League Baseball Players Assn., would not discuss how many teams were in violation of the debt service rule or identify any of those teams, but he said he did not consider the issue a major concern.
“The fact that we’re bargaining over potential changes to the rule does not mean it does not work,” Weiner said, “any more than the fact that we’re bargaining over potential changes to benefit plans or revenue sharing or any other subject.”
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