O's one of nine teams in violation of MLB debt service rules

[Sports Guy]

SG, are you still getting info from sources there that leads you to believe he isn't committed to spending anything or are you just basing your opinons on his financial commitment on the time when you worked there during the Thrift years?

Both...Its also called common sense.

Its called paying attention. Its called looking at what the salary has been for years. Its called knowing what he values and what he doesn't.

AM is a problem but you are the most naive person on the planet if you don't think PA is the #1 issue. He has been the constant for the last 14 years...He is awful.

[JTrea81]

Both...Its also called common sense.

Its called paying attention. Its called looking at what the salary has been for years. Its called knowing what he values and what he doesn't.

AM is a problem but you are the most naive person on the planet if you don't think PA is the #1 issue. He has been the constant for the last 14 years...He is awful.

Well I'm sure MacPhail has a budget, the problem is he uses that budget to get multiple mediocre players instead of one difference maker.

He spends where he shouldn't (bullpen) and goes cheap where he should spend (position players).

I guess you are saying that you believe he doesn't give MacPhail a large enough budget, and in turn AM doesn't allocate those resources correctly.

[Slappy]

One thing that perplexes me about this 10x EBITDA rule is that it doesn't account for cash on the balance sheet. If the O's are maintaining a large cash balance, the debt should not be a huge concern. Are we talking about net debt instead of just gross?

A large cash balance is a possibility, given the undersized payrolls of the last 3 years.

[Sports Guy]

Well I'm sure MacPhail has a budget, the problem is he uses that budget to get multiple mediocre players instead of one difference maker.

He spends where he shouldn't (bullpen) and goes cheap where he should spend (position players).

I guess you are saying that you believe he doesn't give MacPhail a large enough budget, and in turn AM doesn't allocate those resources correctly.

First of all, you aren't going to get an argument from me that the team spends money poorly...but that has been going on for years, not just the AM years.

I have no doubt that PA is willing to spend 70-90 million on payroll...and they can win with that but they aren't willing to put the money into scouting, player development, int'l and domestic signings and things like that...PA has zero idea how to allocate things properly.

[ScottieBaseball]

Or Peter Angelos is fixing the books so it appears that way...

I picture you with a tin-foil hat, storing cans in your shelter.

Lots of businesses fix their books to make it appear they are taking a loss. I'm sure the Orioles aren't any different.

The Yankees take much more profit in than you see in those Forbes reports.

I'm not suggesting that Peter Angelos is having the books cooked, but it's a plausible theory. It's my understanding that no MLB franchise is required to fully disclosed their financials nor is there a standard by which all clubs must maintain said records.

[Frobby]

On the surface, however, I see little reason for concern. I expect the debt level is substantially below the value of the franchise and also substantially below the net worth of our principal owner - Peter Angelos - which would imply a situation one million percent different than the one in LAD. I also expect that the Orioles are, generally, a franchise that is run quite conservatively from a financial perspective.

Just to be clear, I'm not concerned that the Orioles are teetering on the verge of bankruptcy, or anything like it. But what this shows is that, putting aside whether the team is profitable, the requirement that the Orioles maintain a certain debt coverage ratio places a constraint on their ability to increase the payroll. Higher payroll --> lower EBITDA --> less money the team is allowed to borrow. Since the Orioles are already out of compliance with the required ratio, they really can't raise payroll unless the team's owners reach into their own pockets to make capital contributions.

[Flosman]

I'm not suggesting that Peter Angelos is having the books cooked, but it's a plausible theory. It's my understanding that no MLB franchise is required to fully disclosed their financials nor is there a standard by which all clubs must maintain said records.

This is completely untrue. With the amounts of debt in absolute dollars that MLB clubs carry all of the clubs are adhering to GAAP. Cooking the books is not happening and I am sure that the Notes to the financial Statements would clearly allow the user to ferret out any related party distortions or capitalization distortions when comparing clubs.

All of this is a silly topic. The reason a team like the Orioles is on the list is right in front of us. EBITDA is down and the club stays at or near the leverage that its agreements allow. Debt has to be retired in this situation. However like in almost any situation like this latitude is given to correct the situation in a way that is sound in light of the current situation. The article even says this.

[GoldGlove21]

Angelos bought the Orioles without MASN for $173M and the value you of the club did not decrease. Angelos will not lose money when he sells the team. That being said, the stadium doesn't get more than half full on most nights and a lack of fans at the games costs the team money for numerous reasons. There is less money to make on ticket sales, food and merchandise sales. If I am not mistaken the profit from the merchandise sold at the stadium does not get shared with other teams as the goods from the internet and stores outside of the stadium do.

Most of the commercials you see on MASN are MASN commercials! The Orioles are making a lot less money then they could. The bottom line still comes back to some bad business decisions like spending $60M-$80M a year when it was clear to everone except the Orioles that we were not going to compete. I just think that the running of the Orioles has been handled poorly and I am not just talking about the results. I think a team like the Rays understood that losing now meant that the team could be put together in a much cheaper manner and that the process could help set them up for years to come. Instead of picking 3rd-7th every year the Orioles should have been picking first or second IMO. The Orioles could also have had their hand in the International talent pool.

[TiredofLosing20]

Yes, that is correct. EBITDA is a proxy for cash flow and, in the past when I worked directly with a previous employer's lenders and perhaps today, it was not unusual for EBITDA to be the key financial number in loan covenants regarding coverage, etc. While 10X EBITDA may leave plenty of room in a coverage ratio, it is an amount used as a proxy to say - that's enough debt.

On the surface, I would say it is disappointing that the Os should be on this list. As mentioned, however, we do not know the reasons for the Orioles being on this list. As mentioned in the article, it was a point in time snapshot - so perhaps the Os had not yet collected revenues from MLB, MASN or season ticket holders to pay down debt. Or perhaps our debt amount is close to normal (or much lower), but our maybe our EBITDA is lower than in prior years. It is very likely that our 2011 EBITDA projection would be based on 2010 revenues (to be conservative) and the current year's payroll - which is much higher than last year. This would certainly result in a lower EBITDA which could cause the Os to miss the 10X requirement. Of course, an uptick in attendance or MASN viewership/payout would cause our EBITDA to increase or we might deal folks like Vlad, Hardy, Reynolds at the deadline and lower our payroll again.

This assumes our debt level is normal, but who is to say there has not been a large one-time distribution to the owners? While I expect our ownership runs the team fairly conservatively, I would not be so quick to ridicule JT and his question of whether our debt level is the result of some owner machinations.

On the surface, however, I see little reason for concern. I expect the debt level is substantially below the value of the franchise and also substantially below the net worth of our principal owner - Peter Angelos - which would imply a situation one million percent different than the one in LAD. I also expect that the Orioles are, generally, a franchise that is run quite conservatively from a financial perspective.

EBITDA is generally considered when discussing a firm's ability to cover their ongoing debt service. You are right in suggesting that taking a snapshot can be misleading. Timing of receipts or payments will affect the debt balance (for working capital debt). A distribution to the owner would not affect EBITDA but could affect debt. With that said, most typical credit vehicles will have some covenants as it relates to ownership distributions as well as having the ownership (if it is privately owned) on the hook.

I would say I am a bit surprised that the Orioles would need to be that significantly leveraged at any given point but without more information and taken at face value, I agree it is not particularly worrisome.

I do think you can infer tho that either the Orioles have tons of EBITDA and tons of debt or the more likely case IMO that the Orioles have smaller EBITDA and moderate debt.

[hoosiers]

Any way you slice it, the O's are probably carrying several hundred million in debt.

Not only has the front office's baseball moves been a disaster, but apparently the operations department can't balance a budget either.

What a mess. Ownership truly is a disaster.

I could slice it many ways in which our debt is less than several hundred million dollars including an estimated/actual EBITDA in the $5M - $10M range.

While it is possible our debt has ballooned to unsavory levels, there is nothing in the article to suggest that is the case - keeping in mind that the Os have NOT been on this list previously. If operations in the past year and years have happened in the normal course of business, one would assume that the debt level generally is where it has been in the past and/or where ownership intended/projected it to be.

While possible, any conclusion that this is a mess or an ownership disaster would require substantially more information.

[TiredofLosing20]

I'm not suggesting that Peter Angelos is having the books cooked, but it's a plausible theory. It's my understanding that no MLB franchise is required to fully disclosed their financials nor is there a standard by which all clubs must maintain said records.

You don't think they are required to disclose their financials to MLB? I don't know the answer to that. I can tell you with complete certainty that they are required to fully disclose their (most likely audited) financials to their lenders.

[Stotle]

It seems pretty likely to me that this story was leaked by MLB ownership as a first volley in the upcoming CBA negotiations. Their lenders obviously consider the borrowing teams credit worthy. Without any background as to the purpose of MLB's initial setting of the debt leverage ratio at 10-1, and as others have mentioned without further details as to each team's specific situation, I'm not buying there is potentially a larger MLB issue. These ratios are ALWAYS in flux, which is why when negotiated Credit Agreements will generally allow for a certain period of time for which they must be out of whack before an event of default is called.

[DrungoHazewood]

You don't think they are required to disclose their financials to MLB? I don't know the answer to that. I can tell you with complete certainty that they are required to fully disclose their (most likely audited) financials to their lenders.

Not only do they have to disclose their books to MLB, they have to disclose them to the MLBPA as part of the CBA.

[Stotle]

You don't think they are required to disclose their financials to MLB? I don't know the answer to that. I can tell you with complete certainty that they are required to fully disclose their (most likely audited) financials to their lenders.

Exactly. And if the lenders aren't concerned, it's hard for me to get fired-up.

[Going Underground]

With the Sox act put in because of Enron it is harder to cook the books. That being said.companies on Wall Street are always adjusting the balance sheet or late with the numbers. Companies accrue expenses or revenue all the time. Sometimes you want expenses to end up in a certain month. Write offs are taken at certain times ro adjust the balance sheet.