The National Football League recently raised the debt limit for individual franchises from $150 to $200 million. Many expected the NFL to raise the limit by approximately $25 million. The greater than expected increase reflects the overall financial health of the NFL and the NFL's confidence in its own business model.
The debt limit does not refer to how much individual franchises may borrow. Rather, it restricts how much teams may pledge as collateral, and any borrowing above the debt limit cannot be collateralized by the value of the franchise. The move to raise the limit follows on the heels of a new 10-year collective bargaining agreement that promises to reduce the risk of labor disputes or work stoppages for at least the near term. The NFL has also seen franchise values rise to an average of over $700 million.
Raising the debt limit will make it easier and less expensive for teams to make valuable, long-term investments, particularly for things like stadium improvements, which can now be financed using more of the team's value as collateral. Several years ago, the NFL tried to lower the debt limit, but faced opposition from the players, who viewed the move as an excuse to rein in player compensation. Today, however, it is not clear that an increase in the debt limit will have any impact on player compensation, particularly with the new collective bargaining agreement in place which continues to tie the amount players receive to NFL revenues.
Team owners would be wise to reassess the value of their franchises and their borrowing goals. The ability to collateralize more of the franchise increases the value of the team since teams can borrow more at a reduced cost. As team revenues and the debt limit increase in tandem, franchise owners should consider whether now, while the NFL's financial outlook appears strong, may be an ideal time to make capital improvements.
