May 102009
 

So I sit down for dinner at around 6:30 last night and decide that it is a little quiet so I turn on the TV and watch CBC’s Hockey Night in Canada pre-game show. During the show they had a 15 minute interview with Jim Balsillie (click the link and then click on Inside Hockey: Jim Balsillie). Ron starts off asking the intro question asking Balsillie to tell everyone about what he is doing in putting in an offer for the Coyotes. What came next almost made my jaw drop. Ron MacLean then went on to quote from my article that I wrote a couple days ago. Very cool.

In the comments thread of the previous story I was asked what I thought was the likely outcome of this bankruptcy proceeding will be. The short answer is that I am not a lawyer and thus probably don’t have a clue. But that is dull so let me take a stab at outlining some of the issues that may arise.
I came across a copy of the actual bankruptcy filing which may give us some clues as to where this may lead. What we learn from the bankruptcy filing is that they have valued the teams assets as between $50 and $100 million with liabilities being between $100 million and $500 million. The filing goes on to list the top 40 creditors with secured loans/liabilities (they did not list unsecured loans) of which Jerry Moyes himself is at the top of the list with over $103.8 million being owed to him. The rest of the list doesn’t even total $5 million so by far, Jerry Moyes is the largest creditor. I can only assume that this is money he lent the organization over the past several years to keep it afloat. Other notable creditors are the City of Glendale being owed about $507K and the National Hockey league being owed $271,474.92.

The first defense the NHL is undertaking is that Jerry Moyes was no longer in control of the franchise and that the NHL had been operating it since November and thus Moyes did not have the authority to file the bankruptcy. It will be interesting to see what the NHL’s defense for this is because publicly they have stated on many occasions that they had not taken over the Coyotes, denying rumours that they had. Having no clue what actually happened behind the scenes it is really difficult to determine what the judge will decide here but this might be the league’s best option at stopping the Balsillie. But assuming the NHL can’t get the case tossed out on the grounds that the Moyes wasn’t in control things will get interesting.

In bankruptcy court, the judge’s mandate is to do what he deems in the best interest of the creditors (secured given priority over unsecured) and he has some authority to override existing contracts in order to do so. Moyes has submitted a plan that presumably will keep all of the creditors ‘whole’ meaning that they won’t have to take any cuts in the money that is owed them (i.e. they will be repaid in full). There is little doubt that this offer will be an enticing one for the judge to accept. The only issue is that the Balsillie offer is conditional on him being able to move the team to Southern Ontario. The NHL is going to argue that the Phoenix Coyotes don’t own the rights to an NHL franchise, but rather only own the rights to an NHL franchise in Phoenix and that it is non transferrable. They may have a case here too but it will all depend on the wording of the franchise agreement and what, if any, clauses are within that agreement. If the franchise agreement is explicit in that the franchise is for Phoenix and Phoenix only then they may have a claim, but as we know franchises have been sold and moved (the Coyotes were originally the Winnipeg Jets) so it will be a tough sell on the part of the NHL that the Phoenix Coyotes cannot be moved under any condition.

That might leave the NHL left in a position where the only option to stave off the Balsillie bid is to find another potential owner willing to buy the franchise for enough money to pay off the creditors and be willing to keep the franchise in Phoenix. If this happened then maybe the judge will deem this a better option, even if the offer was lower than Balsillie’s, because he would not have to break any contracts or agreements. But as we know, there is over $108 million in secured debt and who knows how much unsecured debt there is. On top of that Moyes has stated he has lost $73 million over the past three years. It is going to be a real tough task on the part of Bettman and the NHL to find such an owner because that person or entity might have to be willing to pay upwards of $150 million for a franchise that is likely to lose $50-75 million over the next few years. That won’t be an easy sell and presumably Jerry Moyes and the NHL has been looking for such a buyer for the past several months, if not longer, and has come up empty.

That makes the Coyote’s future in Phoenix unlikely at best if the NHL fails in getting the case tossed out of court on the grounds that Moyes was not in control of the franchise and not in authority to file bankruptcy. The only other possible outcome is someone outbids Balsillie be that another owner looking to move the team to Southern Ontario, or someone interested in moving them elsewhere, such as Kansas City. But is there anyone out there willing to pony up $215+ million dollars for a franchise to relocate them anywhere but southern Ontario? I am not sure. For that amount of money the most likely bidders are people looking to move the team to a proven hockey market like Southern Ontario. But you never know. I’ll certainly be interested in how all of this unfolds.

(if there are any lawyers or people knowledgeable on bankruptcy laws out there that have more insight into what may or may not happen I’d definitely be interested in hearing your thoughts)

  8 Responses to “CBC reference and more on Balsillie's bid for Coyotes”

  1.  

    David, I am a Canadian business lawyer. I also have a substantial amount of cross-border experience, so I know my way around US law as well.

    I have done a pretty extensive 6-page analysis of the legal documentation (having obtained a full set) and the issues. It is published on HF Boards’s Business of Hockey site (http://hfboards.com/showthread.php?t=640482) and at James Mirtle’s site on http://www.fromtherink.com/ (I post frequently on both). I suspect you will get a lot of useful information from that analysis.

    A couple of corrections to your post, however:

    1. The top 40 creditors that you cite are the UNsecured creditors, not the secured creditors.

    2. The secured creditors at this point consist of a private investment company called SOF, from whom the team have had a financing arrangement, and the NHL (who have been advancing funding to the team). They are owed ~$60 million and $35 million, respectively (although the NHL’s money also partially consists of advance on revenue sharing that the team is entitled to receive later).

    3. The largest creditor, if the bankruptcy is allowed to proceed, will ultimately be the City of Glendale. The City’s current amounts owed are listed, but what is not listed is the enormous amount of money that will be owed if the team is allowed to reject the lease. Under US bankruptcy law, if a bankrupt party rejects a contract as the team is planning to do, that rejection is deemed to be a breach of that contract (makes sense, right?) and the other party can put their claim in as an unsecured creditor just like all the other creditors, to go through the process of proving the claim (again, just like all the other creditors). Since the lease is for another 21 years or so, the damages will be substantial. There have long been reports that the lease has a liquidated damages clause of $700-750 million, which may or may not be enforceable (there are laws governing that issue), but even if the City is limited to just its actual damages, they will dwarf even Moyes’ unsecured claim.

    4. Under US bankruptcy law, the bankrupt can reject what are called “executory contracts”. Essentially, these are contracts which, but their nature, are ongoing (as opposed to a contract between you and me where I buy a piece of equipment from you and pay you the price on a one-off basis). Leases are the easy and most typical example. However, the decision as to whether or not a contract is rejected does not lie with the bankrupt party but rather with the court. The bankrupt party applies to the court for permission. The court will exercise its discretion, based on all of the factors that you would assume would apply.

    5. For this reason, the City’s huge claim is not listed as an unsecured claim (just the smaller day-to-day ones). If the team is granted the right to reject the lease, then the list of claims will be amended to include that figure, and it will be in the hundreds of millions either way.

    5. The NHL’s court filings have confirmed that in fact they HAD found an owner in Jerry Reinsdorf. They were delivering a signed offer from Reinsdorf offering to buy the Coyotes and keep them there. This would, of course, result in all creditors (including the City under their lease) getting paid in full. Mr. Moyes would receive less, of course.

    Take care.

  2.  

    Thanks for the feedback Gerald. Yes, I mistakenly didn’t discuss the lease agreement but wouldn’t the judge take into consideration the likelihood of Glendale collecting the full amount of the lease? But that I mean, if the judge deems that no NHL franchise is viable in Phoenix under the current lease conditions, then any promise of a new owner successfully fulfilling that contract is next to nil so he won’t have any issue adjusting that lease agreement accordingly. The bankruptcy judge is supposed to make the business viable once it comes out of bankruptcy and by all accounts, even according to Bettman and Daly, that an NHL franchise in Phoenix isn’t likely viable under the current lease arrangement and the city has pretty much agreed to renegotiate. In short, what I am saying is that the judge won’t view what the city is owed over the long term as the actual amount they are owed but rather as a much smaller amount.

    So ultimately what you are telling me is that between the secured and unsecured creditors, and not including the city, the total debt is closer to $200 million? I’d be shocked if Reinsdorf’s offer was in that ballpark. I’d also be shocked if Balsillie wasn’t willing to up his offer if necessary as well.

    What are your views of the likely outcome of these bankruptcy proceedings?

  3.  

    There are a couple of points to make regarding your analysis:

    1. Yes, the amount owed to the creditors is in the range of $200 million, although that is including Moyes’ $100 million.

    2. The Judge cannot “adjust” the lease. People for some reason think that a judge is allowed to rewrite contracts. While there may be some limited leeway with respect to collective agreements, that is only because there is specific statutory law addressing union contracts. With respect to other contracts, including leases, there are only two options – the bankrupt estate rejects them, in which case they are then automatically in default and the other party is entitled to put forth his damages claim as an unsecured party, or the bankrupt estate assumes them, in which case they remain in place according to their terms.

    3. The judge doesn’t consider the likelihood of any creditor collecting their claim in full. Each of the creditors have certain contractual rights under their respective contracts, and they submit claims based on those terms. If the lease is rejected and thus put in default, they put forth their claim in the same way as everyone else. To the extent that their claim is valid, they then go into the unsecured creditor pile. to the extent that there are assets available after the secured creditors are satisfied, the unsecured creditors share proportionately. For example, if the unsecured creditors total $300 million and there is $100 million available, everyone gets 1/3 of their claim(100/300).

    4. It is not the judge’s issue whether hockey is viable in Phoenix. IF another party comes along and wants to stay in Phoenix, it is not for the judge to say “no, you won’t make it”. I am not sure where you would get the notion that the bankruptcy judge is “supposed to make the business viable”, as you put it, but that is not and never has been the role of any judge. His concern is the payment of the creditors.

    5. Most importantly, you are missing the point with respect to other offerors and what they have to “beat”. They don’t have to “pay” $200 million for the judge to decide that the creditors are getting more. If another party comes in and decides to assume the ownership fo the franchise in Phoenix and assume the day-to-day creditors opf the franchise ($5-6 mil) and assume the lease (worthe hundreds of millions), then if he pays (for example) $160 million, that is enough to repay the secured creditors plus about $60 mil to Moyes. Instead of the unsecured creditor Moyes getting all of the remaining money, Moyes gets $60 mil and the city of Glendale gets their claim taken care of in full (since the new owner assumes the lease). in fact, quite arguably the creditors get more as a group even if Moyes gets nothing, since in Moyes’ scenario the city would get nothing on an even larger claim. Instead of Moyes getting paid his $100 mil claim in full and the city getting nothing on their lease claim, the city gets their $100 mil + claim taken care of and Moyes gets nothing.

    It will be very challenging for the bankruptcy judge to allow Moyes to get from under his lease (and stiff the taxpayers) for nothing and yet walk away with $100 mil, regardless of how much Moyes has lost.

  4.  

    So, what you are saying is that I could come in and offer to buy the team for $100 and assume all of the existing contracts and debt and the bankruptcy judge would accept that as a better offer? The creditors get everything, or at least a promise of everything, which should be good enough for the judge. I can afford the $100 but in no way is the business viable so I’ll be declaring bankruptcy again a few weeks from now. Are you trying to say to me that the judge in no way would consider the viability of the business in that situation?

    In the end, it is likely that no one will put in an offer and assume the current lease. It is too costly and too limiting of options long term. Bill Daly has all but said the team isn’t viable without changes to the lease but has said that the city was willing to do that. So in essence I think we can consider the current lease null and void because no plan will be presented to the judge without a new lease agreement (negotiated with the city or otherwise), or an outright termination of the lease altogether (so it seems anyway, unless I decide to offer $100 bucks for it).

    One question I have is this. In the Balsillie bid, is he assuming any of the existing debt? As I understand it, the NHL has advanced the Coyotes money they would get at some point (i.e. revenue sharing, national TV contracts, etc.). Is Balsillie is assuming this ‘debt’ in the sense that the team would not get that money again or will the Balsillie bid pay that advanced money back, only for the NHL to pay it back to the team at the original scheduled date. So many questions. It’s not a trivial situation.

    Ultimately though, won’t the NHL have to come up with another entity to submit a proposal to purchase the team or else the judge won’t have any other option but accept the Balsillie bid?

  5.  

    No, that is not what I am saying. You are extrapolating from my comments.

    You referred to the judge’s role and what he might “deem” regarding the “viability” of a team in Phoenix. That is not what the judge does. What he does is address the rights of the creditors.

    In determining the best means of addressing those rights, the judge will assess various options. One option is via the assumption of the obligations to those creditors, in whole or in part. the seocnd is satisfying them out of a pot of money via the section 363 sale of the business. A further option is a combination of paying some of the creditors out of a pot of money via the sale of the business and assuming some of te indebtedness. Needless to say, there are a wide number of other options, such as restructuring debt (a la Chrysler) or any of an almost infinite number of combinations of the above, but let’s stick with the real options on the table here.

    In connection with the assumption of debt by a third party, the judge will indeed look at the creditworthiness of the party assuming the debt. However, that is quite a separate and distinct thing from looking at the “viability” of the business. To take a broad example, if a billionaire (Reinsdorf, for example) comes along and the judge looks at his net worth and determines that he is capable of satisfying the indebtedness that remains after he buys the team with whatever cash he is prepared to put forward, then it is competely irrelevant whether the Coyotes are a good investment. To put it broadly, if someone would be prepared (and capable) to come in and finance the team’s losses, it is not for the judge to rule on the quality of the team as an investment. That is beyond his scope of addressing the rights of the creditors. This would particularly be the case if the creditors themselves regard the potential purchaser as creditworthy and are prepared to go with the guy who would keep the team there.

    Given that the JB proposal is to ditch the lease and leave Phoenix, ANY other offer that keeps the team in Phoenix is better than JB’s offer as far as the city is concerned. As for the day-to-day creditors, any offer that gets them current on the team’s bills is better as well, as they would have an opportunity for more business (whereas with JB they will also get paid most of their bills but have no further chance to make money).

    I should also mention that, of the $212.5 million offered by JB, $22.5 is allocated to Gretzky under his contratual arrangements. If another purchaser would be keeping the team in Phoenix, presumably they would also be taking on Gretzky’s contract, as it is associated with the team. Simply by keeping Gretzky on as coach and taking on his contract, they match that part of the offer. $14.5 million of it is simply a payment that Gretzky can invoke under the change of control clause in his contract, which was undoubtedly put in there in case the team were to ever leave Phoenix (since he would have no desire to move away from LA). If he stays on, that clause is simply not invoked. Mind you, if he were to decide he didn’t want to coach for the new owner in Phoenix (an unlikely decision IMO), he would not even be due that payment.

    To answer your last question, his proposal does not involve assuming any debt. The indebtedness would be satisfied from the sale proceeds.

    Regarding the NHL sums owed, there is an adjustment mechanism in the JB purchase agreement for the advanced monies. If the monies eventually due from the NHL to the team are less than $25 million, there is a price reduction, if memory serves.

  6.  

    To put it broadly, if someone would be prepared (and capable) to come in and finance the team’s losses, it is not for the judge to rule on the quality of the team as an investment.

    I never once said it was up to the judge to determine if it was a good investment, but rather said whether it was a viable business, specifically in reference to the likelihood the business would be able to pay off the creditors. If Reinsdorf’s business plan is to fund the teams losses then yes, that has added value to the creditors above and beyond the actual dollar amount he is paying for the franchise. If Reinsdorf’s business plan is to assume all the debt and assume the current lease, but not be willing to put a penny into the franchise, that wouldn’t put the creditors in any better position because the business model has proven unsustainable.

    As for the day-to-day creditors, any offer that gets them current on the team’s bills is better as well, as they would have an opportunity for more business (whereas with JB they will also get paid most of their bills but have no further chance to make money).

    Is it the judge’s duty to take into consideration any future business the creditors might get? How can a judge estimate future business? It may be better for those day to day creditors if the Coyotes stay in Phoenix, but I can’t see the judge being tasked to preserve unknown future business that the creditors may or may not have with a Coyotes team that remains in Phoenix.

  7.  

    If that is what you are referring to when you use the term “viable” (in the sense that the new business owner will be creditworthy enough to actually make good on their obligation to assume and pay off the debts), we understand each other.

    Once we are not discussing a section 363 sale, then such considerations do for all practical purposes come into play. Any restructuring decision comes with significant input from each class of creditors. Obviously some creditors (such as the City, in particular) will give substantial importance to that factor.

  8.  

    For creditors, such as the city, who have long term contractual arrangements with the team, then yes, I can see future business being a factor in the judges decision because he’ll have to factor in the tearing up of contracts. But for those that are likely to get future business from the team, but that do not have contracts in place, I can’t see the judge factoring that in much at all. I think we are pretty much on the same page.

Sorry, the comment form is closed at this time.