In the months since purchasing the Chicago Cubs in a highly leveraged, $845-million deal, new owner Tom Ricketts has used his investment banking experience to shore up the team's financial structure, securing major funding from investors who rarely dabble in sports franchises.
After closing on the deal in October with $674 million in debt, Mr. Ricketts and his financial advisers brought in institutional investors — such as insurance companies, pension funds and banks — to refinance $250 million in short-term debt provided by three banks, according to a Ricketts family spokesman.
Mr. Ricketts, who was traveling and unavailable for an interview, is founder and CEO of Chicago-based Incapital LLC, an investment banking firm that specializes in fixed-income securities such as bonds and certificates of deposits. His father, J. Joseph Ricketts, founded Omaha, Neb.-based online discount broker TD Ameritrade Inc.
Documents related to the acquisition of the Cubs provide a glimpse into how Mr. Ricketts orchestrated the highly complex deal, creating an unusual structure at a time when credit markets were nearly inert.
"There's a whole lot of juggling and experimentation in the financial markets because of the financial tsunami that we've been through," says Andrew Zimbalist, a sports economist and professor at Smith College in Northampton, Mass.
The move means Mr. Ricketts will avoid refinancing that debt in four years, and it diversifies the pool of lenders, easing the pressure on the Ricketts family to manage the team's heavy debt load. However, the Cubs remained highly leveraged at a time when the club's cash flows are likely to come under intense pressure from a consumer-spending slump and the league's third-highest player payroll.
The $250 million raised in the private placements goes toward a $425-million bank loan that would have matured in October 2013, leaving $175 million that will likely be refinanced at that date. The new private placement notes have staggered maturities out to January 2022, according to deal documents that also show the debts are secured in part by all Cubs' assets, including Wrigley Field.
The remaining $249 million of borrowing in the deal is subordinated debt, with the Ricketts family itself providing at least $175 million.
"Building capital structures is something Tom Ricketts knows," a spokesman for the Ricketts family says. "This is what the family is really expert at."
Joining Tom Ricketts in overseeing the Cubs will be his sister Laura and his brothers Todd and Pete, a one-time Senate candidate in Nebraska.
The Ricketts' spokesman says that converting the term loans into private placement notes with longer maturities provides "flexibility" for the family, and he insists that despite the heavy debt load, the team won't cut payroll. Mr. Ricketts also has said that in the near future he plans to plow any profits back into the club.
The team, now interviewing candidates for the new position of chief financial officer, still intends to raise additional money, upward of $100 million, by selling "investor notes" to wealthy individuals, the spokesman says. That money would go to pay for capital projects, he says.
While the use of private placement debt in a sports franchise deal is novel, Mr. Zimbalist and other experts say the high-profile nature of the Cubs and the team's strong following probably bolstered the sale and helped lower borrowing costs for Mr. Ricketts.
"This is A-grade paper," says Andrew Kline, founder and managing director of Los Angeles-based Park Lane, a sports investment banking firm that wasn't involved in the deal. "The strong tradition and stable financial standing of the Cubs made this a legitimate investment opportunity even for institutional investors and insurance companies that would not conventionally consider lending capital to a professional sports franchise."
[This story first appeared in Crain's Chicago Business, a sister publication to InvestmentNews.]