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Why we're gonna hate Tom Ricketts - Part I

Monday, May 18, 2009

The Cubs are about to acquire an Alex Rodriguez, except this A-ROD will never wear a uniform, swing for the fences, take a banned substance, shag flyballs during BP... or retire. No - this A-ROD will be the $31mm+ of annual interest payments on the debt Tom Ricketts will issue to buy the Cubs from the Tribune Company.

Daniel Kaplan of The Sports Business Journal published an article this morning with some new information about the planned sale of the Cubs. (see more Cubs Sale process articles on The Cubdom.)

The major news is that JPMorgan Chase, Citigroup, and Bank of America are the three lenders that will provide financing for the transaction. According to Kaplan, the Ricketts are providing $450 million of the $900 million Cubs purchase price, meaning they will need to borrow another $450 million to complete the deal.

Currently, Ricketts is hoping to split the $450 million into:
• $50 million of 'perk notes' (for wealthy investors willing to make a lousy investment in return for being called a Cubs owner and some really sweet Cubs tickets)
• $100 million of fixed rate private placement loans from institutional investors (pension funds)
• $350 million from the bank group (and whomever the banks can turn around and sell a chunk to.)

So what does this mean for fans? Well, now that we have some solid numbers to work with, we can pull out our calculators.

The Perk Notes - $50,000,000
Most of my information on these notes comes from Ed Sherman's article in Crain's. The $50 million would have a 6.5% fixed dividend and the balance would be due in 15 years.
Annual interest expense: $3,250,000

The Fixed Rate private placement loans - $100,000,000
I have no source on the rate, but it will almost assuredly be higher than the 6.5% (no one would buy anything lower than the 6.5% perk notes, otherwise they'd ask for a perk note.) So, let's assume 7% on the $100 million with no principal reduction.
Annual interest expense: $7,000,000

The bank group floating rate loans
Loans such as these are usually priced at LIBOR (The London InterBank Offered Rate, which is similar in nature to the Prime Rate) plus or minus a certain percentage. So, if LIBOR was 1% and the rate was LIBOR+3%, then the debt would pay at 4%... but if LIBOR increased to 6%, then the debt would pay at 9%. Furthermore, Kaplan says the deal will have a floor of 3% for LIBOR and reading between the lines it sounds like the deal will be LIBOR +3%, so the debt would start at 6% and move up when LIBOR, which is currently near 1%, reaches above 3%. So initially, we'll assume a LIBOR floor of 3%, plus 3% or a 6% rate on the $350 million.
Initial Annual interest expense: $21,000,000

Total initial interest expense: $31,250,000
Alex Rodriguez' 2009 salary: $33,000,000

OK, if that isn't bad, we've only looked at half the picture because the $31.25 million does nothing but pay the interest on the debt this year. We still have to discuss where interest rates are going, and how the Ricketts are ever going to pay off the principal on their debt.

To answer the easy question first, I doubt the Ricketts will ever pay off the debt, rather, they'll keep refinancing it until inflation takes its toll and we all have $450 million in our pockets for sports betting, but if they wanted to pay it off, let's calculate the cash set-asides they would need to pay off $450,000,000 (that's a good number of zeros):
Payoff in 5 years: $90 million/year
Payoff in 10 years: $45 million/year
Payoff in 15 years: $30 million/year
Payoff in 20 years: $22.5 million/year
Payoff in 30 years: $15 million/year
Payoff in 45 years: $10 million/year

YIKES! Those numbers are on top of the $31.25 million a year for interest. And I thought Frank McCourt had dug himself a deep hole. Now we're into MLB betting territory.

Coming soon, part II of Why we're going to Hate Tom Ricketts: You think it's bad now, wait until inflation kicks in and LIBOR rockets skyward - the Ron Paul adventure.

This post brought to you by BetUs.com

Posted by Byron at May 18, 2009 8:08 AM | Bookmark and Share | BallHype: hype it up!
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The interest rate on the private placement would probably be closer to 10 or 12%, so figure on another $5-$7 million of interest expense.

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