ICanSleepWhenI'mDead Posted June 2, 2011 Posted June 2, 2011 (edited) I have frequently seen it stated here that the Bills have no debt service - - I tended to believe it because (1) the statements were made by rational and seemingly well-informed people, and (2) it meshed nicely with the notion that Ralph Wilson follows conservative, old-school business practices that have enabled him to make a profit even in a small and declining market like Buffalo. After all, he originally bought in for about what a new car costs these days, and has watched his investment grow. But is it true that the Bills have no debt service? Maybe not. Take another look at this August 25, 2010 Forbes chart on NFL team valuations that has been posted in several other threads: http://www.forbes.com/lists/2010/30/football-valuations-10_NFL-Team-Valuations_DOV.html Based on information for the 2009 season, Forbes estimates (after applying the information in the chart footnotes about how the terms are defined) that the Buffalo Bills had: 1. 2009 revenue of $228 million; 2. 2009 operating income (EBITDA) of $28.2 million; and 3. a then-estimated value (without deduction for debt other than any stadium debt) of $799 million. But there is a another column we never talk about. It says that if you include whatever stadium debt they may have had in the team's debt, then: 4. in 2009 the Bills had a debt/value ratio of 16%. How should we interpret that 16% number? For starters, although I welcome any additional information (regardless of where it leads), I am not aware of any source indicating that the Bills have any stadium debt. I haven't researched the original funding for Ralph Wilson Stadium, so maybe the Bills have some lingering original stadium debt that I've never heard about, but there doesn't seem to be anything in the current Bills lease to support the notion that the Bills have any stadium debt: http://www.erie.gov/billslease/stadium.phtml If my assumption that the Bills have no stadium debt is correct, then we can get rid of some of the qualifiers for the Forbes estimates, and it simplifies to - - the Bills have: 3. a then-estimated value (without deduction for debt) of $799 million; and 4. non-stadium related debt in the 2009 season equal to 16% of $799 million. ($799 million) X (0.16) = $127.8 million. $127.8 million is not a crushing debt load for a growing business with 2009 revenues of $228 million, but it's not totally insignificant, either. And certainly not the conventional wisdom around here. So why $127.8 million in debt in 2009? --- Lockout war chest? --- Didn't get much on the Taurus trade-in? --- Confidential loan from the closely held Bills to help his other business interests (that I never read much of anything about) survive the Great Recession? --- Al Davis needed another loan? --- ??? Comments welcome - and if I'm missing something (wouldn't be the first time), please point it out, especially if you have a link to support your ideas about what I missed. P.S. I've always been more comfortable with cash-based accounting, even though it's my understanding that nearly all large businesses use accrual-based accounting methods. Is there some feature of accrual-based accounting, as applied to the way the Bills do business, that would make their debt seem artificially high in the Forbes chart? If so, maybe that explains why Forbes thinks the Bills had $127.8 million in 2009 debt, even though the conventional wisdom is that the team has no debt service. Then again, maybe the conventional wisdom is just wrong. Wouldn't be the first time for that, either. Edited June 2, 2011 by ICanSleepWhenI'mDead
San Jose Bills Fan Posted June 2, 2011 Posted June 2, 2011 I think it's a relatively minor cost but I've read more than once that one of the disadvantages to smaller revenue teams is that they have less cash on hand. That leads to cash flow shortfalls. This comes into play when inking players with large signing bonuses (1st round draft picks… the Derrick Dockerys, Langston Walkers, Lee Evanses and Chris Kelsays of the world). As a result of having insufficient cash on hand to pay out these signing bonuses, some teams have to take out loans in order to finance the signing bonuses. So, one possible explanation of the debt could be player signing bonuses. As for other debt, I don't run a business but we have a very highly-accomplished group of people here on our board. I have no doubt that these people could explain why any business would actually want to carry some debt. I would guess it would have something to do with taxes.
Rubes Posted June 3, 2011 Posted June 3, 2011 All I want to know is, why is it called "debt service"? Why not just call it "debt"?
San Jose Bills Fan Posted June 3, 2011 Posted June 3, 2011 All I want to know is, why is it called "debt service"? Why not just call it "debt"? Again I'm not an expert but I would guess that the actual debt would be a lump sum… the principal balance… the total amount owed. I would guess that the debt service is the actual monthly cost to "service" that debt… in other words, the interest and fees on top of the principal. The monthly payment.
BuffaloRebound Posted June 3, 2011 Posted June 3, 2011 Hard to come up with any reasonable explanation other than Ralph banking some of his $700m+ capital gain.
jumbalaya Posted June 3, 2011 Posted June 3, 2011 Debt is how much you owe as a lump sum. Debt Service is your monthly/quarterly or annual payment.
KD in CA Posted June 3, 2011 Posted June 3, 2011 All I want to know is, why is it called "debt service"? Why not just call it "debt"? 'Debt ' is the balance owed, 'debt service' is the cash required to repay the debt per the terms of the agreement over a given period of time. So if you take out a car loan; the 'debt' is $20,000 and the 'debt service' is the $500 a month you are paying for the next four years.
Mark Long Beach Posted June 3, 2011 Posted June 3, 2011 I think it's a relatively minor cost but I've read more than once that one of the disadvantages to smaller revenue teams is that they have less cash on hand. That leads to cash flow shortfalls. This comes into play when inking players with large signing bonuses (1st round draft picks… the Derrick Dockerys, Langston Walkers, Lee Evanses and Chris Kelsays of the world). As a result of having insufficient cash on hand to pay out these signing bonuses, some teams have to take out loans in order to finance the signing bonuses. So, one possible explanation of the debt could be player signing bonuses. As for other debt, I don't run a business but we have a very highly-accomplished group of people here on our board. I have no doubt that these people could explain why any business would actually want to carry some debt. I would guess it would have something to do with taxes. A pretty reasonable answer for this. I don't know if it'll account for the (estimated) $100m+ estimated debt, but it absolutely could. Remember signing bonuses were one of the ways that Snyder was abusing the salary cap limitation. Giving large amounts of hard cash up front as opposed to promises in future years. But you need a boatload of cash to do this. Ralph doesn't have that kind of $cash$ to burn.
Rubes Posted June 3, 2011 Posted June 3, 2011 Damn economists. You guys are like lawyers with these special languages of yours. Now get off my lawn!
BuffaloBill Posted June 4, 2011 Posted June 4, 2011 I think it's a relatively minor cost but I've read more than once that one of the disadvantages to smaller revenue teams is that they have less cash on hand. That leads to cash flow shortfalls. This comes into play when inking players with large signing bonuses (1st round draft picks… the Derrick Dockerys, Langston Walkers, Lee Evanses and Chris Kelsays of the world). As a result of having insufficient cash on hand to pay out these signing bonuses, some teams have to take out loans in order to finance the signing bonuses. So, one possible explanation of the debt could be player signing bonuses. As for other debt, I don't run a business but we have a very highly-accomplished group of people here on our board. I have no doubt that these people could explain why any business would actually want to carry some debt. I would guess it would have something to do with taxes. Generally a healthy business will want to carry some debt because it leverages their investment opportunities. A business may be in significant trouble if it is using debt to pay for current operations. Think of it this way ... If you have the opportunity to buy an asset for $10k that will earn $2500 per year for a period of 10 years you would borrow the money to do it. It's never this straightforward in real life.
San Jose Bills Fan Posted June 4, 2011 Posted June 4, 2011 Generally a healthy business will want to carry some debt because it leverages their investment opportunities. A business may be in significant trouble if it is using debt to pay for current operations. Think of it this way ... If you have the opportunity to buy an asset for $10k that will earn $2500 per year for a period of 10 years you would borrow the money to do it. It's never this straightforward in real life. In other words, the rate of return on the investment would offset the cost of servicing that debt?
Mark Long Beach Posted June 4, 2011 Posted June 4, 2011 In other words, the rate of return on the investment would offset the cost of servicing that debt? yes, and the opportunity cost of using that money elsewhere.
BADOLBILZ Posted June 4, 2011 Posted June 4, 2011 (edited) I think it's a relatively minor cost but I've read more than once that one of the disadvantages to smaller revenue teams is that they have less cash on hand. That leads to cash flow shortfalls. This comes into play when inking players with large signing bonuses (1st round draft picks… the Derrick Dockerys, Langston Walkers, Lee Evanses and Chris Kelsays of the world). As a result of having insufficient cash on hand to pay out these signing bonuses, some teams have to take out loans in order to finance the signing bonuses. So, one possible explanation of the debt could be player signing bonuses. As for other debt, I don't run a business but we have a very highly-accomplished group of people here on our board. I have no doubt that these people could explain why any business would actually want to carry some debt. I would guess it would have something to do with taxes. I recall that Ralph once told the media about being willing to sell a valuable painting(Picasso I believe) to finance the signing bonus for a new contract for Andre Reed. Could have been BS by Ralph, but this was a time when bonuses were much smaller. Very possible you are right and that loans for bonuses are a big part of that debt service. This is definitely not uncommon for businesses to finance things they do not necessarily have to in order to keep cash on hand or provide avenues for their accountants to come up with creative tax solutions. Edited June 4, 2011 by Dick Drawn
BADOLBILZ Posted June 4, 2011 Posted June 4, 2011 (edited) yes, and the opportunity cost of using that money elsewhere. Speaking of opportunity cost, as much money and equity that Ralph has accumulated, I think he's left boatloads on the table with he and Jeff Littman's peculiar sense of timing regarding when to spend and when to cut cost. They've really excelled just by being part of the NFL. Could be worse, Ralph could have been Art Modell and bankrupted the franchise, but IMO he's taken a Green Bay-type opportunity and gotten Cincinnati returns instead. Edited June 4, 2011 by Dick Drawn
ICanSleepWhenI'mDead Posted June 5, 2011 Author Posted June 5, 2011 In other words, the rate of return on the investment would offset the cost of servicing that debt? The businessman's hope is that it MORE than offsets the cost of servicing the debt, thereby increasing the percent return on the amount of his own capital that the businessman actually invested. The shorthand term for this is "leverage." If you use leverage to buy an asset and it increases in value, you can get higher percentage returns on the amount of capital invested than if you paid 100% cash for the same asset. But leverage is risky, because it magnifies any losses too, not just any gains. A common use of leverage is buying a house. Most people make a down payment with their own cash that amounts to only 5% to 20% of the total purchase price, and use a mortgage to borrow the rest. But there are some people who just use cash they already have to make the purchase. The article below has a chart with straightfoward calculations showing how you can get a higher percentage return on the amount of cash you actually invest if you borrow money to purchase a house, as opposed to using 100% of your own cash to make the same purchase, if the house goes up in value. http://www.ipinglobal.com/ipin-live/article/278368/a-basic-guide-to-leverage So debt isn't always bad - - but it appears, at least from the Forbes estimates, that the Bills have more debt than a lot of people assume.
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