More trouble in Hicksville?

[sachmo71]

Below is an article taken from Street and Smith's Sports Business Journal, reposted on a website:

Losses put Hicks group in default
By
DANIEL KAPLAN
Staff writer


Tom Hicks' Southwest Sports Group, which owns the Texas Rangers and Dallas Stars, is in default on $135 million of debt because of steeper than expected financial losses at the teams, four well-placed sources said.

Southwest did make a principal payment last week but has been unable to meet internal financial requirements obligated under the loan from J.P. Morgan Chase. Last year, the Rangers, reeling from poor performance on the field and at the gate, lost $35 million on a cash basis, and including interest costs, nearly $50 million, the sources said.

Most loans, in addition to requiring regularly scheduled interest and principal payments, also call on borrowers to maintain certain levels of financial performance, often measured through cash flow and revenue. It is here that Southwest Sports Group stumbled, signaling just how poorly Hicks' sports empire has fared financially and another sign of the ailing sports economy.

"The default is a technical default that has existed only since June 15 ... and is not a principal or interest default," said one of the sources, a person familiar with the situation who requested not to be identified. "Tom Hicks is in the process of refinancing that loan."

A spokesman for Hicks declined to comment, as did J.P. Morgan and Bank of America, one of the banks in the financial syndication of the $135 million loan.

Mitchell Ziets, a sports investment banker, said that Hicks' problems may not be unique. In cases where a sports entity suffers steep attendance drops while carrying a lot of debt, he said, more teams may run afoul of financial performance requirements.

When Hicks, who founded the leveraged buyout fund Hicks Muse Tate & Furst, bought the Stars in 1995 for $84 million, he envisioned it as the centerpiece of a Texas sports empire. In 1998, he bought the Rangers, the lease to the ballpark and 270 acres around it for $250 million.

The Rangers reached the playoffs in 1998 and 1999 but have been mired in last place ever since. The club signed shortstop Alex Rodriguez to an astonishing 10-year, $252 million contract in December 2000, the largest player deal in history.

Despite Rodriguez's star power, the Rangers fell fast in the attendance race, dropping 23 percent at the gate since he signed, while payroll rose 48 percent and was the fifth-highest in MLB heading into this season (see chart). This year, the team is aggressively trying to trim salaries and last week traded away outfielder Carl Everett and his $9.15 million annual salary, though the Rangers reportedly will offset some of that.

At the same time, the economics of pro hockey are reeling, with most teams bleeding money while a labor disturbance looks likely before the 2004-05 season.

Last September Hicks announced that he would sell the Stars and his 50 percent interest in the American Airlines Center. But after apparently finding no takers at the right price, said to be around $250 million, he pulled the team off the market several months ago.

Just before he disclosed he would try to unload the Stars, sources said Hicks won a financial amendment from his banks to temporarily lower some of the loan's financial hurdles.

That amendment expired June 15. With the Stars and their debt still sitting on Southwest Sports' balance sheet, the company went into default that day.

Now the company will look to cure the default through the refinancing, and perhaps by aggressively slashing the Rangers' payroll. The Stars' payroll, ranked fourth in the NHL last season, could take a hit, too.

Is Hicks responsible for his own fate? I'll bet he's wishing he had never heard the words "Juan Gonzales" and "No-Trade Clause" mentioned in the same breath....

It sort of worries me, though. Hicks is a good owner from a fan perspective. He tries to do what it takes to win, and he isn't (wasn't?) afraid to spend money to do it. Those days may be gone...and I hope we don't lose him as an owner.

[vtbub]

As good as A-Rod is, he's not worth that kind of money. The Rangers/Stars have made some real questionable moves, overpaying for talent.

Teams get frustrated at the Yankees for driving up salaries. The reason the Yankees win is because they have tremendous home grown talent, the money they spend is on filling holes.

Teams like Texas, Los Angeles, and to a degree Boston have not followed that and it hurts them.

Hicks tries to win. In the day and age of teams like KC, or the Bungles and Clippers, it goes well with the fans. The Rangers and Stars have succeeded under him better then anybody else. What he hasn't done with the Rangers is had good people giving him advice. He had good people in Gainey and Hitchcock with the Stars and they won it all. Too bad the hockey market sucks.

[scooper]

There actually is a Hicksville in Northern Ohio.

[tucker342]

wow, that must be one special town...

[scooper]

Thankfully, I've never been there. But I went to college with a guy from there. Oddly enough, he wasn't a hick.

[sachmo71]

Here is another article on the subject, with some comments from both sides.

Hicks' sports group in technical default on debt
Monday, July 07, 2003
A report in a highly respected sports business journal says Tom Hicks' Southwest Sports Group is in technical default on $135 million in debt.

Street and Smith's Sports Business Journal reports that Southwest Sports Group, which owns the Dallas Stars and Texas Rangers baseball team, is in default because of bigger losses than expected.

"The fact that Tom is in financial default on the Southwest Sports loan is becoming well know among that niche of the finance world," the author of the article, Daniel Kaplan, said in an interview Monday afternoon with The Ticket's Hardline.

Kaplan's article, which was published Monday in the Sports Business Journal, cited "four well-placed sources." The report that said the problem for Southwest Sports Group has been its failure to maintain certain levels of financial performance required by the loans.

In other words, according to Kaplan, Southwest Sports Group is not in default on its payment of principal or interest on the loans. Those have been paid on time.

"The default that Southwest Sports Group has is a different one. It defaults on a requirement to meet certain financial performance goals," said Kaplan. "Most corporate loans have these financial covenants built in. The performance could be the amount of revenues. It could be certain attendance. It could be a certain amount of cash flow. This is very, very common.

"What is not common is the default. That's what is going on here. The reason they are in default is because the Texas Rangers have done so poorly. They lost $50 million last year."

According to the article, last fall, just before Hicks announced his intention to sell the Stars, Southwest Sports Group worked out an agreement with his lenders to lower some of the financial performance requirements. That agreement ended June 15, which is when Southwest Sports Group went into default.

The report said Hicks will try to rectify the default through refinancing and perhaps -- emphasis on perhaps -- aggressively slashing the payroll of the Texas Rangers. The Stars payroll could take a hit as well.

"There are two things that are happening," said Kaplan. "One is that Southwest is in the process of refinancing. As part of refinancing they are obviously going to try to get rid of some of those covenants. That will be up to the banks to decide whether that will indeed happen.

"The second thing, and this is the one that is going to impact the fans down there the most, is that you are going to see drastic reduction in payrolls for those two teams."

When asked if the payroll cuts were a prediction or a fact, Kaplan said he sees it as fact.

"I think it is pretty obvious that he is going to be cutting dramatically the payroll of his teams," said Kaplan. "He is going to have to. He's losing too much money and he is now in default."

Michael Cramer, who is the chief operating officer of the Southwest Sports Group, told the Dallas Morning News that "Nobody is broke," but added that both the Stars and Rangers need to cut costs.

Cramer put the Rangers losses at $45 million for 2002 and the Stars red ink for last season at $3 million.

"All we want to do is operate on firm financial ground and to do that we have to get our payrolls down," Cramer told the Morning News. "We have to put our house in order with our younger players."

There have been several media reports about the Stars slashing their payroll for next season. The Stars have maintained that they are not cutting payroll, but trying to keep it at the same level as last season. That is about $66 million.

Late last month Stars president Jim Lites addressed the issue during an interview on The Ticket's BaD Radio show.

"We do not expect any reduction on payroll," said Lites. "If we just sign the players that we currently have on our roster and committed and those which are restricted -- Marty Turco, Aaron Downey, Niko Kapanen -- we anticipate with just those players our payroll will be where it was a year ago. We are going to keep this team intact."

But the Stars lost a key member of that team when Derian Hatcher signed a five-year, $30 million contract with the Detroit Red Wings last week.

The Stars said at the time that they were not able to offer a Hatcher a five-year contract because of concerns over the Collective Bargaining Agreement, which expires after next season.

There is belief that the new CBA will impose some kind of cap or luxury tax on team payrolls. The debate over the new CBA could lead to a lockout in 2004-05.

Reports of problems with Hicks' financial empire are nothing new. Dan McGraw, a Fort Worth writer and former senior editor for U.S News & World Report, wrote an article for D Magazine last summer on Hick's financial situation. McGraw, in an e-mail, offered this take on Monday's report in the Sports Business Journal.

"This technical loan default may or may not be serious." McGraw wrote. "Only the bankers and SWSG know for sure. But any sign of dark clouds hovering over SWSG is not a good sign for DFW sports fans. And for Stars fans, this is particularly troubling"

The line from Southwest Sports Group in the past has been that the Dallas Stars and Texas Rangers are separate entities and that the financial performance of one does not have an impact on the other.

That very issue came up late last month when the Stars announced they would not offer a contract to Hatcher before he became an unrestricted agent on July 1.

Lites, during an interview on The Ticket, was asked about suggestions that the financial woes of the Rangers might have had an impact on the Hatcher situation. Lites said no, adding he was "insulted" by the suggestions.

But McGraw, the author of last summer's D Magazine article, doesn't buy that argument.

"For SWSG to say that the finances of the Rangers and Stars having nothing to do with one another is disingenuous. The red ink being thrown out by the Rangers is bleeding over to the Stars," McGraw said in his e-mail. "In effect, it is not a stretch to surmise that the reason Derian Hatcher was not signed has as much to do with the financial performance of the team in Arlington as it does with worries of a labor shutdown next year."

There is still more info coming out on this, but I don't see how Hicks can keep losing money on the Rangers and not have it affect the Stars. I realize that with corporate laws the teams can easily be considered seperate entities, but in the end, it comes out of one man's pocket.

It's a very interesting story, and the spin control has been extraordinary. The president of Southwest was on the same station mentioned above this morning, saying basically that there were no financial problems and the plan for both teams was to try to win first and worry about the budget later. When I look back at the pricing structure of the Stars playoff tickets, I find that statement a bit hard to swallow.