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3 Ways the S&P's Downgrade on US Debt Could Impact the NHL

Tonight, the credit rating agency Standard & Poor's took the unprecedented step of downgrading their rating on U.S. government debt, generally considered the safest financial security in the world, from AAA to AA+. The financial and political worlds are abuzz with speculation about what this will mean for the global markets, and by extension, for American households. This, from CNBC:

U.S. Treasurys, once undisputedly seen as the safest investment in the world, are now rated lower than bonds issued by countries such as the UK, Germany, France or Canada.    

While there is plenty of speculation about what impact this will have on mortgage rates, credit card interest, and other financial parameters that people have to deal with every day, there are more important considerations on the table.

So follow after the jump as we review just how this development could impact the NHL...

One of the main business challenges that the NHL has to deal with is currency risk between the US and Canadian teams. While all player salaries are paid in greenbacks, and by extension the salary cap & revenue sharing mechanisms are dealt with in US currency, the six seven Canadian teams receive the bulk of their income in loonies (ticket sales, local TV/radio deals, and corporate sponsorships).

Back during the 1990's, when the Canadian dollar sunk to extreme lows relative to the US, the league had to create the Canadian Assistance Plan to help shore up smaller market teams like Calgary and Edmonton, who were having trouble keeping up with the times. Their costs (mostly in US dollars) were growing rapidly compared to revenues (mostly in Canadian dollars), due to factors which were completely outside their control.

Over the last 10 years, however, the situation between the two currencies has largely reversed - the Canadian dollar has rebounded from a low of around 63 US cents, up to the point now where the loonie is worth slightly more than $1.00 US. It's that kind of tailwind that has the Canadian NHL teams among the league leaders in revenue, as their incomes have grown by more than 50% simply due to currency conversion relative to the American teams.

In light of tonight's news, then, one likely impact is that the Canadian/US exchange rate could tip even more heavily in the loonie's favor, to the extent that either US Treasuries become less attractive on the world financial stage, or Canadian bonds appear more so. Any significant shift in the exchange rate would further increase those seven teams' prominence within the league structure, and have the following consequences:

1. More Canadian teams spending closer to the cap

While Vancouver, Calgary, Toronto and Montreal have been among the league's big spenders in recent years, Edmonton and Ottawa have been lower on the spending charts, and Winnipeg is currently near the salary floor. A windfall gain due to currency shifts could make it easier for those teams to boost their player salaries for the upcoming season, and/or increase off-ice spending to gain edges elsewhere (Calgary recently hired Chris Snow to conduct video & statistical analysis, while Toronto has a front office loaded with ex-GM's from around the league).

2. Small market American teams face an additional challenge

One of the criteria that small-market teams must meet in order to qualify for full revenue sharing is to grow their local revenues at a rate at least as large as the league as a whole, and if seven already high-revenue teams suddenly receive an extra boost (again, their Canadian revenues would be converted into US for these calculations, but at a higher rate), that could create a steeper obstacle for those teams to meet in order to claim their full share. 

For a team which earned a full share in 2010-2011, missing that target next year would mean they'd only get 75% for 2011-2012, a hit which could easily amount to $3-5 million depending on individual circumstances. Teams missing those targets for the second consecutive year only get 60% of their share, and for 3-year (or more) offenders, they get 50%.

3. Players may benefit from decreased escrow

The salary cap midpoint is set based on the previous year's league revenues, and each summer the NHLPA votes to bump that figure up by 5%. What happens afterward is that teams, on average, spend much more than that midpoint level in salary (just look at how many teams end up close to the cap as opposed to the floor), and the players have to give back the difference through escrow, an amount which is withheld from their paychecks all season long. That ensures that in the end, the players get 57% of league revenues, as the CBA requires.

Again, since all those figures are expressed in US dollars, if you take those seven high-revenue teams, and suddenly convert their revenues into US dollars at a higher exchange rate, that has the effect of boosting overall league numbers, and elevating that 57% figure as well. In that case, the players would have to give less of their paychecks back to the owners in escrow (the exact mechanism is that they'd find out in the summer that they had too much withheld over the course of the season, and receive a refund of that overage).

Of course, the downside is that these players would still be receiving their pay in US dollars, which would be worth less relative to Canadian, but at least through the escrow mechanism they'd get a little bit of relief.

For now, we watch & wait

This weekend we're sure to see a great deal of analysis and discussion regarding this debt downgrade, and the currency effects noted above could take weeks or months to play out. Individual investors, corporations, mutual funds and central banks around the world will adjust their strategies not just in light of this downgrade, but the actions which result from it as well.

So stay tuned, and keep an eye on those US/Canadian exchange rates this season!