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Moody's: Credit risks from big-time sports for universities are growing

Global Credit Research - 11 Oct 2013

New York, October 11, 2013 -- As big-time college athletics bring universities ever greater opportunities for improving their brand recognition and increasing revenue, they also are heightening risks, says Moody's Investors Service in a new report. These risks go beyond the financial and include reputational risks should a program become embroiled in scandal. Moody's also views the ultimate costs of these programs as uncertain, given exposure to potential litigation over head injuries as well as possible movement away from the amateur athlete model.

"Universities pursue high-profile sports programs for the opportunity to increase brand recognition, student demand, and donor support," says Moody's Vice President -- Senior Analyst Dennis M. Gephardt, in the report "Eye on the Ball: Big-Time Sports Pose Growing Risks for Universities," which looks at the credit implications of NCAA Division I athletic programs. "However, as the commercial success of big-time college sports has grown, so too have the potential risks to universities."

On the one hand, the size of television contracts with the five major athletic conferences have ballooned, with yearly TV revenues for each university in them ranging from $17 million to $23 million. On the other hand, the next largest conference payout is less than $5 million a year and the vast majority of athletic departments operate at a loss, requiring university subsidies.

These subsidies have increased by a median of 25% from 2008 through 2012, says Moody's.

Specifically, approximately 90% of athletic programs are not self-sustaining and require the growing subsidies, which divert funding away from other university operations. Moody's also notes athletic budgets have been increasing rapidly relative to other university expenses, a trend likely to continue given the growing commercial success of Division I sports.

Many universities have also undertaken costly improvements to their athletic facilities as they join new conferences. Universities that are unable to generate exceptional fundraising have financed athletic programs through issuing bonds.

Moody's also views future costs as uncertain. Changing standards around the treatment of football head injuries could increase the costs of college football programs. Meanwhile, costs could also increase if an expansion of the ongoing O'Bannon V. NCAA case were to incorporate current players as well as broaden claims on revenues from the media and licensing.

The numerous scandals involving recruitment, players, and coaching staffs that have rattled the reputations of some universities underscore the potential reputational risks the spotlight of big-time college sports can bring. Management of these risks requires strong oversight and governance, says Moody's.

At the same time, Moody's acknowledges the payoffs from successful college sports programs can be unmatched, especially in an environment where college enrollment nationwide is declining. For example, undergraduate applications increased at Texas Christian University by 60% from fall 2009 to fall 2011 after its remarkable 2009 and 2010 football seasons. The University of Alabama, in turn, has raised its percentage of first-year students from out of state to 52% from 35% in just three years during its recent run of football national championships.

For more information, Moody's research subscribers can access this report at https://www.moodys.com/research/Eye-on-the-Ball-Big-Time-Sports-Pose-Growing-Risks--PBM_PBM158834.

***

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: New York +1-212-553-0376, London +44-20-7772-5456, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, São Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

Dennis M. Gephardt
Vice President - Senior Analyst
Public Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
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Kendra M. Smith
MD - Public Finance
Public Finance Group
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Moody's: Credit risks from big-time sports for universities are growing
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