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23 Mar 2020
New York, March 23, 2020 -- Moody's Investors Service has revised the outlook on the National Collegiate Athletic Association, IN (NCAA) to negative from stable. At the same time the Aa2 rating has been affirmed. The NCAA has $9.6 million of debt issued through the Indiana Finance Authority.
The outlook revision to negative is driven by the financial impact of the cancellation of the Division I men's and women's 2020 basketball tournaments, as well as all remaining winter and spring NCAA championships in response to the coronavirus pandemic. The social risk evidenced by the disruption of the public health emergency directly impacts the NCAA through the loss of television and marketing rights revenue it receives related to the Division I men's basketball championship. The projected revenue from its media partners for fiscal 2020 was $827 million. With the cancellation, the NCAA will receive 30% of the expected $827 million. The recovery plan from that loss will be aided by insurance recoveries, a reduction to Division I member distributions, expense savings and a likely draw on an operating line of credit. Operating performance will weaken materially in 2020 and likely turn mildly negative. Investment losses during the current year will also weigh on credit quality should they persist.
The affirmation of the Aa2 rating reflects the NCAA's reduced but still very strong liquidity compared to relatively low fixed costs and a very modest amount of debt outstanding. Availability of a potential line of credit adds to the association's ability to respond to near term shocks. Favorably, the association's governance and risk management has long recognized and planned based on its revenue reliance on the men's basketball championship. The NCAA will be guided by its Financial Recovery Plan in making expense adjustments following the revenue loss.
The rating also recognizes the NCAA's established role as a large and prominent membership organization with over $1 billion in operating revenue reported in fiscal year 2019, valuable multi-year media rights contracts, and normally breakeven operating performance. In addition to ongoing litigation risks, the rating is constrained by significant revenue concentration with more than 75% of revenue tied to a single, annual championship event. While the NCAA's role in intercollegiate athletics is well established, it also faces multi-faceted pressures including its enforcement role for complex safety and other rules and the perceived disconnect between the amateurism of student-athletes, as codified by the NCAA and the increasing commercial success of high profile college sports.
The rating and outlook incorporate Moody's current base case macroeconomic scenario, including that disruption in economic activity in the first half of the year will be followed by some recovery in the second half. However, uncertainty will remain for at least several months as to how long it will take to contain the spread of the virus and how businesses and households will cope with the resulting financial losses.
The negative outlook incorporates expectations of weak operating performance in fiscal 2020 and potential increase in debt through an operating line of credit as the association responds to its event disruption revenue contraction through reduction to its Division I member distributions and other expenses. The outlook could return to stable following the receipt of 2021 basketball championship revenue especially if any amounts drawn on the line of credit are repaid and financial reserves remain relatively stable.
FACTORS THAT COULD LEAD TO AN UPGRADE
- Significant rebound in financial reserves to serve as a buffer for potential future shocks
- Favorable resolution of litigation risks and reduction in business model risks
FACTORS THAT COULD LEAD TO A DOWNGRADE
- Additional disruption in contractual payments from media agreements or marked decline in viewer demand
- Material erosion of financial reserves
- Unfavorable outcome of litigation or contingencies likely to translate into decline in financial resources of operating performance
Bond repayment is a general unsecured obligation of the NCAA.
The National Collegiate Athletic Association is a voluntary membership organization for over 1,200 colleges, universities, athletic conferences and other members. The NCAA serves as the primary rule-making, enforcement, and sports certification body for intercollegiate athletics. The high profile of the Association is supported by its membership because the president of each participating college or university serves as the primary representative.
The principal methodology used in this rating was Nonprofit Organizations (Other Than Healthcare and Higher Education) published in May 2019. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
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