As Major League Baseball negotiates the start to its season in the Covid-19 pandemic, stadiums are empty. That has a niche corner of the municipal bond market under pressure, according to UBS Group.
The New York Mets and New York Yankees service their stadium finance debt partly through ticket sales, putting the teams in a challenging position, said Jeannine Lennon, municipal credit strategist at UBS, in a phone interview Thursday. S&P Global this month lowered the ratings of bonds tied to the Mets to one rung below investment grade, and in late March placed Yankee Stadium’s bonds on “watch negative” on Covid-19 concerns.
S&P said in a March 23 report that it unclear when the baseball season would start or how many games would be played, citing the “significant possibility that the ultimate impact on the season could be worse” than the MLB was anticipating. Lennon wrote this week in a UBS research note that the league expects to lose an average $640,000 a game without fans in the stands.
“We’re seeing this liquidity crunch happen right now,” she said by phone. Meanwhile, she added, another cloud is looming over stadiums just as they seek ways to safely welcome back baseball fans.
“One thing to watch is the collective bargaining agreement with players is actually set to end December 31, 2021,” she said.
Stadium financing may be structured to include “cash reserves” for hard times as well as “strike funds,” both designed to ensure investors continue to get paid when a borrower’s revenue is drying up, according to Lennon.
“As an investor you want to see that these debt-service-reserve monies are structured into the original transaction,” she said. But historically, investors have viewed drawing cash reserves as a mark against the borrower — “it’s a red X,” said Lennon.
The economic shutdowns aimed at stopping the spread of Covid-19 have made it difficult for some borrowers to avoid that stigma in stadium financing.
“We’re seeing it in this pandemic,” she said. “People are using their reserve funds because these are unprecedented times.”
The Mets, though, are willing to step in with cash to avoid tapping the “rainy day” fund should a revenue shortfall jeopardize its debt payments due in December, according to Lennon.
“They’re not obligated to do so according to all the legal documents at the original point of the transaction,” she said. But for investors, “it is good to see that a team would step in and put its own revenue on the line.”
The Mets stadium bonds, issued in 2006, were lowered to BB+ as its ballpark “revenue and liquidity profile no longer supports investment-grade ratings,” S&P said in a June 4 report. While many borrowers, including the Mets, make semi-annual debt payments, Lennon said the Yankee stadium financing is considered strong because the annual debt payments are made before the year begins.
Major League Baseball Players Association Executive Director Tony Clark said in a statement released over Twitter on Thursday afternoon that the union has submitted a counterproposal for the season’s framework, but no agreement had been reached.
“The teams are all wanting to play,” said Lennon. “It’s just a matter of figuring out how that logistically happens right now.”