September 24, 2012

Bizball

Astros Will Use Money to Pay Down Debt, but Is That a Bad Thing?

by Maury Brown

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Back in August, I asked, How Low Can Jim Crane Go?—a reference to Houston’s player payroll. In the article, I tracked how the club has been dramatically cutting player payroll in recent months. Since then, there has been more cutting, a continued emphasis on player development (congrats to our BP colleagues Mike Fast on going to Houston and Kevin Goldstein joining him as Pro Scouting Coordinator), and increased revenues that will be available via Comcast SportsNet Houston. The team (along with the Houston Rockets) will own just over 77 percent of the network and will receive an annual $26.28 million raise, beginning in 2014, on the $23.72 million they  currently receive as part of the league’s national television contract.

The Astros are approaching the end of their second consecutive 100-loss season, and a move into the AL West next season (where the bar for spending has been set high by the Rangers and Angels) means continued losing is likely for the foreseeable future. Since that article of mine in late August, a number of sources close to the club have said that there are have been grumblings within the organization regarding how the increased television revenues will be used.

The Astros will not emulate the Marlins, spending lavishly in free agency the second new money arrives at their door. Instead, sources indicate that the club will choose to pay down debt rather than put it toward free agent player contracts. After all, Crane took out a $220 million loan from Bank of America and a $55 million loan from the league facility fund to assist in his purchase from Drayton McLane. The $220 million loan was one of (if not the) first post-recession sports loan, so it was conservatively structured and highlighted that, in this day and age of sports franchise sales, everyone will have debt in one form or another.

So, is this a “bad thing?” Is paying down the debt rather than putting toward on-field personnel the wrong thing to do? First off, there are no rules forbidding the use of television revenues to pay down debt (as an aside, it is against the CBA to use revenue-sharing to pay down club debt, but that’s not the case here). There have been some references to former Texas Rangers owner Tom Hicks and former Dodgers owner Frank McCourt, who recently sold the franchise amidst controversy, but Crane’s situation is much different. In the case of both Hicks and McCourt, the two had fallen into bankruptcy and then wanted to use television rights fees to bail them out. In the case of Crane, he sees a club that is on the wrong side of the amount of revenues going toward player payroll, not getting a return on those players, and deciding that it’s better to strip it down to the axels and build it back up.

In speaking with a senior league official, even after the trimming of player payroll the last couple of seasons in advance of the sale to Crane, I’m told the Astros put 55 percent of their revenues this season toward player payroll. According to the source, that 55 percent is higher than the league average.

That begs the question, “Is it really worth spending the new revenue in free agency given that the club will be rebuilding?” One could easily argue that it’s not. For a club in this position, spending for the sake of spending makes no sense. Houston is clearly looking to develop young talent through the draft and trades, so you could use the analogy that it would be like spending $10,000 on a new bathroom in a 500-square-foot fixer-upper home. Sure, it increases the value some, but until you make the entire house more valuable, it’s not going help.

In turn for paying down the debt, the Astros will be in a better position to be active in free agency once player talent is developed and beginning to mature. The problem for (some) fans is that this process will take time, which means that the Astros will not be in the best position to be competitive next season… and possibly longer. As the senior league official said, however, “Paying down the debt now gives flexibility in the future when player talent is where it needs to be. Educated baseball fans should see that that direction makes sound baseball sense in the long term.”

Indeed, there is some precedence for this. The Pirates had been trying to slowly wean themselves out of bad free agency contracts, and when Frank Coonelly came over from the Commissioner’s Office to be president at the end of the 2007 season, it was finally decided that blowing the roster up and starting over via player development was more prudent. Today, the Pirates are two games under .500, which gives them a chance for winning 2012 season. That is certainly an improvement over last season—the team was 17 games under .500 at this point in 2011—and has the team headed in the right direction.

While the Astros using the new revenue to pay down debt doesn’t help the team now, it will in the future. In the meantime, the club jumps to the American League next year, and Mike Fast and Kevin Goldstein will be part of Jeff Luhnow’s plans, which will also include hiring a new manager. That appears to be nearly in the offing, if reports are true. Whoever the new manager is, he’ll be working with a lot of fresh talent. That might make things painful now, but one can argue that it will help the team in the long run. How “long” is long, is the question.

Maury Brown is an author of Baseball Prospectus. 
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