College football realignment spurs stadium upgrades

January 22, 2014

College football stadiums are undergoing upgrades and renovations. Wells Fargo senior analyst Randy Gerardes writes that this is a response to recent conference realignments and increased media revenues:

[C]olleges and universities have been undergoing significant athletic conference realignment to increase visibility and capture additional revenue from lucrative media contracts for the major football conferences. As universities enter new conferences, competition for top recruits stiffens, inspiring additional investment in athletic facilities, particularly for football.

Gerardes says that the investment is hoped to improve the fan experience, increase university brand recognition, meet rising student demand and spur financial support from alumni and donors.

Improvements to college stadiums are typically funded by tax-exempt bond offerings by the college or university, which uses its own credit to finance the project. This differs from professional stadiums that generally rely on the revenues generated by games to repay bondholders. Here is what Gerardes says about the college stadium funding model:

For instance, Texas A&M (Aaa/AA+/AA+) pledged revenue provided 13.6x pro forma maximum annual debt service coverage [for the stadium financing]. This type of structure allows universities the ability to leverage their credit to develop athletic facilities. Investors have no exposure to stadium revenues; rather, overall operations of the university provide security and source of repayment.

This is a strong source of repayment for college stadium bonds. Another smart thing about college stadium financing is that they are renovating existing structures, rather than building new facilities:

In addition, most universities expand, renovate or improve existing infrastructure rather than develop new facilities that can reduce costs and complexity. Lastly, perhaps the biggest difference in college stadium infrastructure financings is the inextricable tie of the sports program to the university (i.e., no relocation risk).

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I do not disagree with your piece on College Stadium Financing. However, I would like to point out that it is a bit misleading in that gross revenues to debt service isn’t a good measure of an institutions ability to make debt service payments because it is based on gross revenues as opposed to net. In addition, Texas A&M’s deal was not typical as the University was able to back the bonds. Depending on state law, a university may not be able to issue debt for non-essential purposes; i.e. non-instructional projects. Therefore, they use auxiliary enterprise systems which actually may depend on very volatile revenues such as ticket sales and concessions which move in the direction of winning and losing. K-State would be a good example of this.

Thank you for your posts. I enjoy following your commentary.

Posted by JarrodTaylorCFA | Report as abusive