Money Matters, Part 2: Have the Pohlads Solved Their Debt Problems?

[Peter Labuza]

Image courtesy of © Matt Krohn-Imagn Images

In Part 1 of this mini-series on the finances of the Twins and their small shift in ownership, we studied the two new investment groups heavily betting on the team. The other question worthy of our attention is how much of the Pohlads' debt is truly gone, thanks to this deal. It is certainly true that the debt for the team got out of hand at $500 million, though even that was not the highest in baseball.

There are plenty of reasons for teams to hold debt. If you look at the Atlanta Braves—the only team traded on a public market, which requires financial disclosures and quarterly earnings—you can see that they have $759 million in debt spread across its investments, though $483 million of that is related to the development of The Battery, their ballpark-adjacent real estate boondoggle.

The reason many teams like to hold debt is that MLB-backed debt is unique. While sports owners can often get lucrative deals on debt from banks, the leagues as a whole can secure even bigger ones. Currently, the Braves have $67.5 million in debt with the league at competitive rates: $30 million at a 3.65% interest rate and another $37.4 million at 5.4% and 5.71%. These payments to the league are at much better rates than the rest of their debt. Fitch Ratings assigned the debt an “A” rating, saying the Braves have a “stable revenue profile due to national media and shared league-level revenue streams, and they are insulated from the local media market.”

The problem, for the Twins, was that the amount of debt—even with a mix of debt at favorable interest rates—likely meant one of two things. First, that meant almost certainly eating profits. If the Braves earned $66 million in their baseball team over the last year (with a notably good TV deal from Diamond Sports Holdings, as well as the All-Star Game), the Twins almost certainly earned less. And if $27.5 million is going just to cover interest, that makes things complicated. Besides, the Internal Revenue Service has noted that it will do more investigations of teams with “significant tax losses, and review whether the income and deductions causing the losses are reported in accordance with the tax rules.” Given the administration's penchant for investigating personal enemies and the Pohlads’ political donation history, giving the administration an excuse could be a bad idea. 

Secondly, MLB does have rules about debt. Under the CBA with the MLBPA, “Teams are not allowed to hold debt more than eight times operating income, or twelve times for teams with new stadiums.” However, the league has always had a number of teams in violation of this term, and the Players Association has done little to combat it. The only time the league has used the rule was to force Frank McCourt to sell the Dodgers, which had more to do with their dislike of McCourt. This was a less vital and urgent consideration, then, but it did demand the team's attention.

Did the Twins get rid of all their debt? Probably not, but that's fine. Debt at low interest rates is good, when you can make money elsewhere by spending what you've borrowed. When the Pohlads imagined their future in 2019, it was likely using profits from real estate to cover any extra debt from the team. That just never materialized. But as long as the team can cover its interest payments and give itself some wiggle room to head toward profit, there is no reason to eliminate all the debt at once. That might mean that part of the investment is the reason why the Twins have spent more on payroll this winter than many predicted.

The question is: what does the team making a profit really mean, short-term and long-term? The Dodgers make a profit, and so do the Pirates. Only one of those teams relies on winning. As long as revenue-sharing agreements benefit teams that spend very little, the Twins may find themselves in the black by remaining in the $110 million range, rather than the $130 million or $160 million range. Fans would find that unhelpful, and distasteful—and rightfully so.

All of this leads me toward two speculative predictions:

1. The various partners think there are benefits to getting the Twins back in shape, both financially and (to an extent) on the standings page. That might not be done by immediate spending on payroll at levels commensurate with the media market, but by the same kind of moderate spending that produced winning teams in 2019 and 2020, rather than 2023. The Victor Caratini deal is a good example. If Ryan Jeffers posts around the same WAR as last year, he will certainly be making anywhere from $10 million to $20 million a year when he hits free agency. The Twins already know what they owe for their primary catcher in 2027: $7 million. 
2. More importantly, I do not think these minority owners expect to be in it for the long term. The Pohlads will almost certainly jump back into the market following the new collective bargaining agreement—whether or not there is a salary cap—and the signing of new media rights deals after 2028. With the collapse of Bally Sports Networks FanDuel Networks Diamond Sports Holdings Main Street Sports, the league is almost guaranteed to have a majority of team rights by that time; Manfred believes he can gain all of them. That will likely mean the league can sign a long-term agreement, cementing profits that are well-distributed throughout the league. If the team valuation inflates even further, the Pohlads will have a chance to get the truly bonkers number they sought but couldn't find this time. If anything, Tom Pohlad's goodwill tour is about raising the profile of the team, so as not to leave a cultural hole in the ground for the next set of owners, because people pay more for teams whose fans like them.

Like many, I found the announcement of the Pohlads ending their potential sale to be more dismaying than the fire sale of the trade deadline. Yet, I think there is perhaps a rainbow at the end of this dark tunnel. Sports fandom is built on pain. What's a few more years of it?

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[tony&rodney]

The most basic fact to understand about anything related to the Twins financial situation is that the public (us) does not know any hard numbers. There are quasi-valid guesses about revenues and expenditures as well as ideas about "other" expenses. We can probably make similar vague guesses about some person who lives in that green house three blocks away.

Here is what I think I know about the Twins and the Pohlads: 1. The Pohlads own the Twins. 2. The Twins increased payrolls steadily during the current front office era. 3. The Twins reduced payrolls the last few years. 4. The Pohlads were unsuccessful in selling the team for the price they wanted. 5. The Pohlads took on financial partners. 6. The Twins currently listed payroll is about the same as the 2015-2017 payrolls. 

MLB is a mess at this time in terms of discrepancies between the haves and the have nots. While teams like the New York Yankees and St. Louis Cardinals may have been dominant forces throughout the long history of the game, the factorial differences that exist today have even crushed the Cardinals. The unique aspect of MLB (as compared to other leagues such as the NBA, NFL, and NHL) is that actual club revenues are closely guarded secrets. Thus it is possible that any team can find ways to claim either profits or losses dependent on the expertise of their accountants. The Pohlads have claimed about $500M of losses. Tough to argue that point but the family doesn't explain the expenses either. 

I usually spend zero to very little time thinking about the owners. Owners going to do whatever. Billionaires rarely lose money. This is why I have stated in comments that it would be surprising if there was a lockout that extended beyond next April. The owners love money too much. So, have the Pohlads solved their debt problems? I could care less. 

[Richie the Rally Goat]

We have math problems. If $110m is the current projected payroll breakeven point (other costs relatively fixed) how did they accrue $500m in debt over 5 years with higher revenue and payrolls between $130 and 150m? The would have accrued somewhere in the $150m range in debt (20m in debt per year and 5% numbers being strewn about last article) if they never paid maintenance or principle at all.

 

[Jeff K]

And this just in:  Falvey launched by the Twins!  Huzzah.  Yes, I know the Pohlads are still owners, but for me this is very good news.

 

[srlarson]

one more year...then a lockout...no Baseball in 27.......something will get worked out... then hopefully the Pohlads will sell and get owners that will invest in the team....until then they might as well sell everyone off and just tank....  cash the checks from the teams that pay a luxury tax...and look at empty seats....

[Cris E]

I don't think the lockout will be long if it happens at all. the beef is between owners, not with the players, and anyone in business for long knows that businesses cut deals. This is a deal that has to be made, just as free agency had to be accepted in the 1070s and revenue sharing was implemented in 1994. You have to do some things to keep the golden goose alive. 

Also, I think the Pohlads might be setting up to sell most of their stake, but not all, for the reasons outlined yesterday: it's a stable investment in a sea of crazy, especially important for a family with such a large portion of their money tied up in commercial real estate. So in 2027 or whatever you'll likely see the family hang on to 29% and sell their other 51% to someone who wants to become the majority owner. It could be one of these minority guys who came on board in December or a new face, but as soon as the revenue questions are answered the market will pick up and they'll cash out a bunch of their chips. 

[tony&rodney]

16 minutes ago, Cris E said:

I don't think the lockout will be long if it happens at all. the beef is between owners, not with the players, and anyone in business for long knows that businesses cut deals.

This is exactly correct.

[David Maro]

It looks like both the Twins and the Vikings realize that they're GM's were the problem. Saw Falvey was told hit the road on MLB,then saw on Fox1 that Mensah was also shown the door. And yes Falvey was made President of Operations,but he was the one who blow up the BP at the deadline. And looking at what the BP looks like going into ST there is work to be done. That means the payroll is going to have to either go up or more trades will be needed.