The Bowie Bond (Part 2)

by Frank Thomas Blaze / Trail for Athelete Bonds

5th August 1998

Frank Thomas, the Chicago White Sox first baseman, is slumping at the plate, yet his long- term baseball contract is secure enough for Wall Street to devise a new kind of security — athlete bonds.

In the $600 billion asset-backed securities market, one of Wall Street’s fastest growing businesses, the idea of selling securities backed by payments on superstar athlete contracts isn’t far-fetched. Last year, rock star David Bowie sold $55 million of bonds backed by future music royalties. A sale of $20 million of nine-year bond which Thomas is negotiating with SPP Hambro & Co., a New York-based securities firm, will give him a large lump of untaxed money immediately, while reducing his share of $7 million annual salary he collects through 2006.

Analysts point to several obstacles that similar bonds must overcome. “There are outs in any athlete’s contract,” such as for immoral behavior, a career-ending injury and strike clauses, that could stop the salary payments backing the bonds, said Todd Kumble, who helps structure and sell bonds for Hambro. He bought insurance to protect against events that could stop his salary, a Hambro spokesman said.

Among athletes, “there is a very limited market” for Wall Street’s expertise, Kumble said. Most of those earning enough to satisfy the $10 million minimum for a securities sale “don’t need the money.” The Thomas bonds come 1 1/2 years after Bowie sold his bonds. That sale led investment bankers to recommend similar sales for athletes, said Curtis Polk, president of Falk Associates Management Enterprises, or FAME, a Washington, D.C.- based sports agency that represents Michael Jordan, among others. A Junk Rating Tony Decello, a vice president at Investment Advisors International in Cleveland, said he heard that the Thomas bonds will carry interest payments of 7.5 percent to 8.0 percent. That’s about the same as utility bonds with a junk rating of “BB3.” Some athletes, including tennis legend Bjorn Borg, have wound up in bankruptcy because of bad investments. “If you’re going to embark on a speculative venture, you better limit your investment to money you’re prepared to lose,” said Barry Axelrod, an Encinitas, California baseball agent. Not Interested Among team-sport athletes, bond issues make the most sense for baseball and basketball players, because their contracts contain more guarantees, said Decello.

Yet Polk of FAME, which represents about 40 basketball players, and Axelrod, who represents about 12 baseball players, said they aren’t interested in bonds for their clients. Polk expressed concern about the fees athletes would have to pay to insure the contract clauses that could stop the salary payments. Insurance to continue salaries in the event of a strike, disability or cancellation for immoral behavior costs at least 2 percent of the amount insured, agents and bankers said. “You will have to pay such a high premium that it will outweigh the benefits of doing” a bond issue, Polk said.

Bonds from entertainers like Bowie are much more appealing than athlete bonds, analysts say.

The Afterlife

“There will be no diminishment of revenue (from Bowie’s record sales) if he dies, gets in a car accident or is committed to drug rehabilitation,” Polk said. “If he dies, sales might even spike up. But with an athlete, the revenue stops. What you’re securing the bond with is gone.” Rather than relying on salary payments, Decello said his firm is working with two individual-sport athletes who are considering bonds backed by their endorsement contracts.

Because those contracts are contingent on the athletes maintaining a high level of performance, investment banks are quoting higher interest rates than for the Thomas bonds — 9.5 to 11.0 percent, Decello said. Those rates are roughly the same as for very speculative corporate bonds, rated “CCC” or lower. IMG represents many golfers and tennis players, including Tiger Woods and Pete Sampras. There are 5-10 athletes in each of those sports earning enough to issue bonds, Decello said.

So don’t expect many deals soon, analysts say. “We have been looking into athlete deals for the last year, but are being very selective,” said David Pullman, who invented the Bowie bonds and heads a group named after himself at Fahenstock & Co., an investment bank. “This is something that will happen over years,” he said.

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