Cash Poor

One of the worst kept secrets around the National Hockey League is that the Ottawa Senators are in a financial bind. To what degree is up for debate, but cash flows are a huge problem for the organization right now.

The organization is asset rich and cash poor. What they carry in PP&E is offset by a lack of liquidity. And what that means is a big piece of the organization’s net income is utilized to service loan payments – loan payments with high interest rates.

I wrote about this in depth during the summer of 2013, where the Ottawa Senators were in a similar cash flow bind. Those series of posts have since been, uh, erased, but a quick Google search can turn up at least seven or eight posts on Ottawa’s bleak financial outlook from back then.

The Ottawa Citizen covered it a few months later, and wrote in pertinent part:

The result was that last autumn the Senators faced a series of financial stresses, including ongoing losses on operations, higher-than-usual debt interest payments, and probably more than $10 million in additional costs related to the lockout and the resulting loss of ticket sales. The financial squeeze affected every level of the Senators’ organization, from payroll to marketing. Loose talk, misplaced as it turned out, held there wouldn’t be enough cash on certain weeks to settle paycheques. “There is no truth to the rumour that we had a payroll issue at any time under Eugene’s leadership,” said Senators president Cyril Leeder during a recent interview. It was only after the league returned to action, allowing the Senators to generate revenues from ticket sales, that Melnyk finally arranged $150 million in fresh financing — this, according to Davies, the law firm that helped to negotiate the deal. He signed a four-year deal in April 2013 with a pair of U.S. specialty funds. By this time, the mantra of conservative spending was even more firmly embedded in the Senators’ financial culture. This posture would be an important factor in the ill-fated contract negotiations involving the Senators’ long-serving captain, Daniel Alfredsson.

You will note that ownership arranged $150mm in fresh financing on a four-year deal in mid-2013. Depending on the terms of the agreement, it’s likely that loan lapsed or is close to lapsing.

I provide this brief background because I think it provides important color behind this past weekend, where ownership used the biggest platform possible to complain about the team’s financial situation married with thinly-veiled threats to relocate the team. It didn’t go over well with anyone. But, it must be noted that much of what was said is either accurate in totality or accurate to a reasonable degree – ticket sales are slow, the team’s hemorrhaging cash because of debt issues, et al. (SensChirp took a swing at building core financial statements based on publicly available financial data last week, if you are interested in further reading. It’s worth your time.)

This story has been around for some time. But 2017 is different. Four years ago, Ottawa was struggling. Mightily. And it led to a painful level of discussion about team-imposed budgets and corner-cutting (it’s worth noting here that ownership and team executives individually have said that this has occurred). But with a re-pop through fresh financing, the team was allowed to ‘punt’ on addressing core financial issues. For four years, anyway.

But those loans with high interest (perhaps bordering on predatory) rates have only served to cripple the team’s bottom-line in the long-run, as these loans tend to do in any industry. So when an owner comes out and says that he’s cut everything to the bone, he can probably be taken at his word.

When money is tight, like it is in Ottawa right now, you hear a lot of stuff. And when you hear a lot of stuff, it’s difficult to differentiate between what’s real and what’s not. At aggregate, it’s clear that Ottawa’s corner-cutting on the cost side is having a real (and very negative) impact within the organization. But that doesn’t mean every single rumor about a potential investor or potential sale is real.

I’ve spent the last few weeks talking to people and players around the league trying to differentiate between signal and noise. Some items of interest:

1a. A story of significance that I don’t think has been written about enough? Daniel Alfredsson’s second-exit from the organization. As a quick refresher: Ottawa, some years ago, had Alfredsson extend on a team-friendly contract with a verbal guarantee of a true-up deal down the road. When Alfredsson’s deal expired, he hunted for that true-up deal, and Ottawa told him to kick rocks. Alfredsson ended up in Detroit for a little bit, then returned to the organization after reconciling most of what happened with most of the team executives.

His second go-around with Ottawa had him working in an advisory role in hockey operations. From talking to people you get the sense Alfredsson liked his job and liked working for GM Pierre Dorion – this was a pretty consistent refrain. Nevertheless, Alfredsson unexpectedly left Ottawa, again, in the summer of 2017. He vaguely cited family reasons as the driver of his exodus.

It’s worth revisiting a quote of his from the summer of 2016 regarding the position:

“This job has turned out to be exactly what I am looking for – the opportunity to be flexible and see so many of different requirements of working in an NHL front office.”



Is it possible that Alfredsson fatigued from the position in one year’s time? Surely. But many people seem to think that his exit was of the acrimonious variety. The prevailing theory was that money may have again driven Alfredsson from town.

I’m not entirely sure what that means. Did they not want to renew his contract? Did they low-ball him on an annual salary? Did they refuse to stipulate to his requests for clawbacks or equity in merchandise sales? Is Alfredsson running with another ownership group with an interest in acquiring the team? This is where the theories divide – most people think it (a) ended on sour terms; and (b) had again to do with money; but © aren’t sure exactly what happened.

To recap: I’m not entirely sure why Alfredsson left, even today. And I believe that Alfredsson does want to spend more time with his family. But I also believe that pay – the contract, the structure, a potential non-offer, a refusal of a request for a piece of the margin on merchandise sales – was a negative factor here. And I don’t think all of the relationships between Alfredsson and the team were truly repaired.

1b.) On that Alfredsson rumor about his involvement in a potentially competing ownership group? I’m not sure I buy it. Not yet, anyway.

2a.) I have extremely high confidence that we have only seen the beginning of Erik Karlsson vs. the Ottawa Senators.

First, some housekeeping: I genuinely believe Karlsson loves the city of Ottawa and wants to spend another decade there. And I believe the Ottawa Senators – regardless of their financial situation – recognize the importance of keeping a player of his magnitude around. That may mean cutting corners elsewhere, but Karlsson is just simply in a different stratosphere. If Hockey Ops had it their way, he’d probably be extended on the first possible day next summer.

But, this situation is much more complex than that. First, Erik Karlsson’s comments about hunting for a max contract a few weeks ago weren’t off the cuff – they were extremely planned and have been brewing for some time. He’s not kidding when he’s saying he’s searching for top-dollar, and I have every reason to believe he’ll hold out until Ottawa or another team pays him. And if Ottawa doesn’t, about 28 other teams will be in-line to give him whatever he wants … and then some.

You don’t even need to infer anything from Karlsson’s viewpoint to know that he understands how the organization is going to squeeze him. His best friend was pushed out of the team once (and perhaps twice) on financials. His other best friend was traded to Nashville and thinks that the owner didn’t want to sign him over money. And now the owner is publicly bragging about a “bare bones” hockey operation, with additional threats to cut SW&B from the roster in future years.

This cuts at Karlsson two ways. One, he is extremely pro-player (and, perhaps fair to say, extremely pro-union). The mere thought of a player taking a ‘hometown discount’ for a team that’s spent to the cap approximately zero times since he’s been drafted is surely unacceptable. Perhaps Karlsson would stipulate to a smaller contract if the team promised to re-invest that saved money in other players. (Then again, promises, like the Daniel Alfredsson v1 exit, haven’t been in the team’s wheelhouse.)

Two, he is as passionate about winning as any superstar player in the league. You never know how much a player values pay vs. winning and how that seesaw balances, and that ratio historically changes over time. Karlsson, 28 next May, has played in zero Stanley Cup games.

And if Karlsson wasn’t happy with where things were a month ago, one only can wonder how he’s feeling today.

2b.) In one of life’s biggest coincidences, Karlsson had to produce a list of teams on his limited no-trade clause just days after he mentioned he was hunting for a max contract. This would make all of the sense in the world if Ottawa was candid about their inability or sheer lack of desire to retain Karlsson in future periods.

The justification provided was, well, neither of those:

Melnyk also weighed in on the increasingly interesting Erik Karlsson situation and his submission of a non-trade list, which, according to Melnyk, was all part of trying to balance the club’s finances. “This is where the (Karlsson) contract request emanated from,” said Melnyk. “All material contracts are reviewed in a process called due diligence - from snow removal to food and beverage to players.”

I have an impressively hard time believing this to be accurate. The biggest endorsement I received from anyone in the investment banking, corporate finance, or hockey media circles was that it was plausible, but unlikely. (Even if Karlsson provided this list as a result of a lender request in the summer, pre-dating his ‘max contract’ claims, the story doesn’t seem to hold up.)

Let’s assume, arguendo, that Karlsson’s limited no-trade clause is material. Fine. i struggle with understanding why a lender would have any care in the world as to whether the league’s best defender would rather accept a trade to Tampa Bay and Arizona versus Montreal and Minnesota. No one in the industry is ever going to properly evaluate the marginal cost/benefit of that limited list – I don’t even think it’s possible for someone in the industry with an incredible sense of the state of hockey and their fingers on the pulse of potential returns on investment. I have also never heard of this happening in any other sport, ever, but there’s always the possibility of it being the first time.

Oh, one other thing: Derick Brassard, eight days ago, said Ottawa hadn’t asked for his list of teams as it relates to his limited no-trade clause. Odd, that.

2c.) People around the league feel quite certain that Karlsson has little intention of re-signing with the team under the current structure. I’m not as far down that road as others, but I do think that there is a strained relationship here in desperate need of immediate repair. Perhaps that was why team officials met with Karlsson last week – though, if you take Elliotte Friedman at his word, that meeting was “tense”.

One thing I will say – a different ownership group and a different financial outlook would be big ‘good guys’ in terms of retaining Karlsson. That much is certain. But right now, the situation appears dire.

3.) Hockey players have mostly been insulated from Ottawa’s cash issues. Team executives and lower-level employees, not so much.

Less than a year ago, longtime executive Peter O’Leary (story previously mentioned Cyril Leeder here) sued the Senators and cited, among other things ‘friction with Melnyk’. A series of severence agreements were reached with Senators executives this summer, but not O’Leary – as far as I’m aware, that’s tied up in litigation. It’s a messy suit.

The folks working on revenue-generating items have been at the brunt of much of the internal criticism. In one way, it’s been described as a “kill room”. This passes my smell test, since again, the owner is on-record with his frustration about how things are moving on this front.

Ticket sales, or lack thereof, are the most prominent driver of organizational consternation. As just one example: I believe at least one team executive in Tom Anselmi was left behind from the Sweden trip as punishment for slow ticket sales.

It’s also impacting the small-salary/waged employees. My (very high-level) understanding of how they manage their day-to-day work is through not your standard revenue software program, but a simple Microsoft Excel spreadsheet. This, as you might imagine, leads to an awful lot of litigation about what did or did not actually happen.

There was plenty of separate reporting done this week by TSN regarding expense reports for scouts. The story was that these scouts were not being reimbursed for general travel expenses. Ownership shot that story down this weekend, for what it is worth.

I will say this: if there’s any truth to it, you wonder if some scouts are going to start sitting home in lieu of traveling….

4.) The team does have a new CFO – Brian Crombie has been ‘Acting CFO’ since Stephen Brooks, uh, resigned. Crombie’s background includes prior work for PurGenesis, Trimel, and Biovail.

5.) Like you, I have heard a gazillion different stories about a sale. Ask ten people and you hear ten different versions. I’m not sure we are at a point where we can conclude anything on this particular item, though I will say it’s interesting that there’s so much speculation around this and that so few people who may or may not be involved refuse to answer questions or talk, generally, about potential interest in the team. But unfortunately, I haven’t heard anything outside of your garden variety rumor mill talk.

And to that end, I’ll leave this one alone.