Iconic sports brand faces foreclosure, Chapter 11 bankruptcy | Official Website of Louis Velazquez, entrepreneur, finance guy and tech innovator

The cord-cutting phenomenon has devastated regional sports networks. Under the old cable model, where pretty much every household felt compelled to subscribe, these networks were cash cows.

They provided a service — coverage of local National Basketball Association, National Hockey League and Major League Baseball franchises — that many customers wanted, and they were able to charge all customers. If you have a traditional cable package, you almost certainly pay a sports-programming surcharge.

You can’t opt out of that fee, and at the height of cable it was essentially a license for regional sports networks, many of which were owned by the cable companies in partnership with teams, to print money. That fountain of cash enabled the network owners to pay high fees for broadcast rights.

In many cases, like in Boston with NESN and the Red Sox and in New York with MSG Networks and the Knicks and Rangers, the team’s owners also owned the regional sports networks. In that incestuous situation, consumers got a really bad deal.

Cable-company owners got cash to buy programming that many subscribers wanted, which led more people to subscribe. Team owners essentially got to pay themselves from those sports-programming fees, creating artificially high rates for rights.

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As people began to cut the cord in favor of streaming, however, the system has collapsed on itself. Cable companies have fewer subscribers, collect much less in fees, and can no longer afford to pay what they once did for rights.

That has already led to the collapse of the Diamond Sports Group’s Bally’s sports networks, which filed for Chapter 11 bankruptcy. Now, an arguably bigger name is considering a filing of its own.

The Sphere itself has been a success but construction overruns drained the company’s coffers.

Image source&colon; Sphere Entertainment&period;

MSG Networks has huge debt

The Dolan family owns the New York Knicks, the New York Rangers, and a large piece of Sphere Entertainment (SPHR) , the company that houses the MSG Networks, regional sports networks that televise Knicks and Rangers games, among other events.

Building Sphere cost $2.3 billion. That’s $1 billion more than was originally planned. Those cost overruns forced the Sphere’s original parent, Madison Square Garden Entertainment, to lay off workers and eventually sell its stake in Tao Group Hospitality.

The new company, Sphere Entertainment, has been wildly successful staging events in the Las Vegas Sphere, but it still has a massive debt problem.

“Turning to our balance sheet. As of December 31, we had approximately $502 million of unrestricted cash and cash equivalents, including approximately $104 million at MSG Networks,” Chief Financial Officer Robert Langer said on the company’s second-quarter-earnings call. “Our debt balance was approximately $1.36 billion at quarter-end. This reflected $259 million in convertible debt and a $275 million credit facility related to Sphere in Las Vegas.”

More bankruptcy:

Sphere, it should be noted, generated $169 million in revenue with an adjusted operating loss of $800,000.

Langer continued to comment on the company’s debt.

“It also reflected approximately $829 million outstanding on the MSG Networks term loan, which, as a reminder, a step that is recourse-only to MSG Networks,” he said. “In February, MSG Networks made a principal repayment of $25 million using cash at MSG Networks, bringing total principal outstanding under the term loan to approximately $804 million. As you know, MSG Networks is pursuing a refinancing through a workout with its lenders.”

MSG Networks could file for Chapter 11 bankruptcy protection

Chief Executive James Dolan said during the call that the regional-sports-network model no longer works.

“Clearly, the traditional methods which really did a great job of monetizing the product are no longer as viable as they used to be. So, we do have to find under way, but I don’t think that that path is clear yet,” he shared.

Dolan also made clear that the problem was not unique to his company.

“I mean, obviously, there’s a reduction in cable subscribers, right? There’s the launch of the streaming product. But in the end, it comes down to monetization of product and what’s the best way to monetize the product,” he added.

The company said that a Chapter 11 bankruptcy filing, which would affect only MSG Networks, not the Las Vegas Sphere and other assets, remains a possibility.

“If MSG Networks is not successful in negotiating a refinancing or workout of its indebtedness, the Company believes it is probable that MSG Networks and/or its subsidiaries would seek bankruptcy protection or the lenders would foreclose on the MSG Networks collateral securing the credit facilities,” the company wrote in its most recent earnings release.