Reports have surfaced recently that the Phoenix Coyotes are in trouble financially and may be facing bankruptcy if new investors cannot be found soon. (Two reports are here and here.) In this uncertain economy, many sports teams are facing financial problems; consumers are spending less, and that includes spending a small fortune to attend a game. It's not surprising then to see rumors of bankruptcy floating around a sports franchise.
What would happen if the Coyotes actually filed for bankruptcy? First, the Coyotes would have to decide whether to file a pre-packaged plan. In a pre-pack, the Coyotes and their creditors would negotiate a refinancing structure for the Coyotes' debt before filing, and then to make the deal work, the Coyotes would file Chapter 11 to take advantage of Bankruptcy Code provisions needed to carry out the plan. A pre-pack would resolve the case rather quickly. In the sports context, a pre-pack would likely involve transferring ownership to a new group which would assume most, if not all, of the team's debt. The L.A. Kings used a pre-pack during their bankruptcy in 1995.
If the Coyotes filed a full-blown Chapter 11 petition instead, the team's management would continue to run the franchise during bankruptcy. (This may seem intuitive, but consider that in England, outsiders manage the company when it is in administration, the English Chapter 11.) Filing for bankruptcy would trigger an automatic stay, which would stop almost all lawsuits against the Coyotes, including any creditors' attempts to collect debts.
During the case, the Coyotes would have to find post-petition financing to meet their operating capital needs. The team would also have to decide what to do with any executory contracts and unexpired leases, as the Coyotes would be able to decide whether to perform or not perform such agreements. This would be especially important for the Coyotes; their arena lease is one of the worst in the NHL and is a primary reason why they are financially unstable. Bankruptcy would allow the team to break the lease, or at least renegotiate it like the Pittsburgh Penguins did in 1998. Next, the Coyotes would have to negotiate with the creditors committee, which, among other things, participates in the formulation of a reorganization plan. Finally, the Coyotes would have to get the bankruptcy court to approve a reorganization plan. Plan confirmation is the ultimate goal in Chapter 11. The plan would likely address the financial reorganization of the company, pare down debts, and, most importantly for creditors, include the terms by which creditors would be paid. Secured creditors would receive at least as much as their secured claim, but unsecured creditors may get far less. After plan approval, the Coyotes' debts would be discharged (subject to completing any payments required by the plan) and the Coyotes' creditors would be barred from further pursuing their claims.
So would it work? The Coyotes would have a few issues. First, securing post-petition financing may be problematic given the credit markets' continuing tightness. The repayment priority guaranteed by the Bankruptcy Code to post-petition lenders may not be enough to entice some to lend to a Chapter 11 debtor. Second, rejection of the arena lease would give rise to a pre-petition claim for breach of contract that would be treated as an unsecured claim that would be paid according to the reorganization plan terms. Finally, Chapter 11 would likely allow the team to bring in the new investors it desperately needs. The L.A. Kings, Pittsburgh Penguins, and Buffalo Sabres (the three previous American professional sport franchise bankruptcies since 1978) all emerged from bankruptcy with new owners. The Coyotes have been seeking new investors; perhaps Chapter 11 could facilitate the process. In the end, bankruptcy may work for the Coyotes. However, they should be aware (and I'm sure they are) that not all Chapter 11 reorganizations are successful, and sometimes they become Chapter 11 liquidations.
Some people may see the closing of the Sports Museum of America, located on Wall Street in New York City, as just another example of a business falling victim to the recession and downturn in consumer spending. But is that really the case?
The Sports Museum of America, by all accounts, was a magnificent display of sports history. Located in New York City, it was the home to the Heisman Trophy and had exclusive relationships with more than sixty sports halls of fame and other organizations. Sounds like the makings of a solid business plan, except for one small detail. The museum was located on Wall Street. Huh? Wall Street? This location doomed the museum right from the start. Wall Street is not exactly a location that screams "weekend foot traffic." The truth is that Wall Street is busy during the work week when people go to Wall Street to work. When people go into New York City on a weekend, they go to Midtown, Central Park, etc. - not Wall Street. Bill Dockery, the president of the Heisman Trophy Trust, even recognized this, saying that the traffic flow to the museum didn't allow the museum to continue as planned. If the museum was located in an area of Manhattan that catered to tourists and weekend visitors, perhaps it would have had a better chance of success. Unfortunately for the museum, it was located in a place that has minimal foot traffic on the weekend, and even less now given the economy. Maybe a better idea would have been to find a place near Madison Square Garden. The museum could have played off the popularity of the "world's most famous arena" while simultaneously being right next to Penn Station.
Another problem facing the museum (which it acknowledged) was a lack of marketing and consumer awareness. The museum's founder even said that 95% of New York City was unaware of the museum due to a poor marketing campaign. All entertainment businesses in the tri-state area are in a constant cutthroat competition for consumers' entertainment dollars. In the area of sports alone, a New Jersey resident can spend his entertainment dollar on the New Jersey Devils, New Jersey Nets, New York Knicks, New York Rangers, New York Islanders, New York Liberty, Seton Hall and Rutgers basketball, and countless other local events. The failure of the museum to market itself doomed it from the beginning.
With that said, one wonders whether a Chapter 11 filing was explored by the museum's board of directors. A Chapter 11 filing, via a reorganization plan, may have given the museum an opportunity to renegotiate the terms of $57 million in tax-free bonds the museum incurred in opening. Granted, any renegotiation would have had to have been agreed to by the creditors or at least given them as much as they would have received in a hypothetical liquidation. And given the fact that the museum was unable to renegotiate the debt during the past six weeks, such a renegotiation within the confines of Chapter 11 was probably unlikely. A Chapter 11 filing may have also allowed the museum to relieve other debt burdens, and thus be able to come to an acceptable arrangement with the bond creditors. However, without knowing the debt situation of the museum beyond the $57 million in bonds, it is difficult to speculate.
In the end, it seems that the closing the Sports Museum of America is more a product of bad business planning than the recession. Indeed, if the museum had acted in a similar fashion during the boom times of yesteryear (i.e., poor location selection, poor marketing, etc.), it would have closed within the same ten months it did now. At least for once, the recession isn't to blame for a business closing.
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