Sports Illustrated it was reported that the The University of Tennessee Volunteers athletic department is $200 million in debt, according to a report by Sports Illustrated. This got me thinking about the ramifications of such a staggering amount of leverage.
As a student of finance and history, I cannot help but think back to 2007, when Lehman Brothers was carrying a leverage ratio of 31 (assets to equity ratio) and Bear Stearns was carrying a ratio of 34. By the time 2008 ended, both banks had failed and been relegated to footnotes in Michael Lewis books.
The SI article reports that UT athletics only has about $2 million in reserves to backstop the massive debt load, effectively carrying a leverage ratio of 100:1. Could the athletic department of a large public university and traditional sports powerhouse conceivably fail?
After some thought (and without actually analyzing the debt terms and projected revenues in depth) it seems extremely unlikely, because of the SEC’s television contracts with ESPN and CBS and the stable revenue stream they provide.
According to the Sports Business Daily there are some steps Tennessee is taking to remedy the situation, such as merging the men’s and women’s sports programs and halting annual transfers to the University’s general fund.
Tennessee’s situation makes frighteningly clear the high cost of bad coaching hires, as the athletic department owes $7 million to recently fired coach Derek Dooley and his staff on top of $11.4 million paid out in buyouts to other football, baseball and basketball coaches. Declining attendance has also taken a toll on Tennessee’s financial situation as it has proven difficult for the school to fill the stadium when losses outnumber wins. Ironically, improvements to the stadium that sits partly empty helped drive the expansion of the debt.
Incoming coach Butch Jones is faced with a monumental task. Not only does he have to get the team winning again to satisfy a fanbase, he has to fill a stadium and restore an athletic program to solvency.
In the darkest days of the financial crises, Lehman was picked apart and wound up part of Barclays. Bear Stearns was purchased by J.P. Morgan for a laughably low price and the investing public spent a harrowing few weeks wondering who would be next. While UT athletics is not a public company that can be acquired by a competitor, the Gump in me harbors fantasies of a certain Alabama coach who is undoubtedly more liquid than the UT athletic department purchasing its debt for pennies on the dollar. Tennessee’s situation is a stark reminder of the speed and magnitude that leverage can turn a rosy situation into a dire one.