Frank McCourt has taken Dodgers deep in debt

Since buying the Dodgers for $430 million six years ago, Frank McCourt has so heavily leveraged the team — $433 million in debt as of last year — that he has struggled to find additional financing.

The debt load has limited how the Dodgers can pay their players and could affect the team’s ability to sign talent.

McCourt was turned down at least three times — by Citibank, by a Chinese investment group and by a Southern California infomercial king — in trying to secure additional financing last year, according to documents filed in the divorce case between him and his estranged wife, Jamie.

In a deposition, Dodgers Chief Financial Officer Peter Wilhelm said Citibank declined even to engage in serious negotiations.

“They did not feel that the Dodger organization had the capacity to take on more debt,” Wilhelm said.

Frank McCourt bought the team for $430 million in 2004, according to an approval memorandum from the commissioner’s office. Under McCourt ownership, the Dodgers’ revenue has nearly doubled — from $156 million in 2003 to $286 million last year, according to court documents.

McCourt pledged on his first day as an owner that the Dodgers would maintain a player payroll among the top quarter of major league teams, but the business plan he submitted to Major League Baseball — revealed in court documents Wednesday — called for cutting the payroll from $100 million in 2004 to $85 million in 2006.

In fact, although the payroll was $98 million in 2006 and a club-record $119 million in 2008, the Dodgers opened this season with a $95-million payroll. That figure ranked 11th among the 30 major league teams, just behind the Minnesota Twins.

“Every dollar he makes is going to pay his debts,” said Raman Sain, a principal at Holthouse Carlin and Van Trigt, the largest accounting firm based in Southern California. The firm, with $59 million in annual revenue and 250 employees, analyzed tens of thousands of pages of documents filed in the divorce case for The Times.

Sain calculated that the Dodgers had $29 million in free cash before debt service last year and said virtually all of it went toward interest payments, hampering the team’s ability to acquire players.

MLB Commissioner Bud Selig declined to comment, saying through a spokesman that he would not discuss the finances of an individual club.

McCourt spokesman Steve Sugerman, presented with the findings about the lack of available cash and the struggle to find new financing and asked how the Dodgers could continue to field a top-tier team, issued a statement in response.

“The Dodgers have consistently demonstrated a commitment to fielding a team worthy of fan support, and the four division championships in the last six years are indicative of that,” the statement read. “There’s a commitment to winning, and that continues.”

What the documents say

The analysis conducted by The Times and the HCVT accounting firm was limited to documents available in court files, including internal financial documents through 2009 and personal statements of net worth but not including audited financial statements.

The firm concluded that, if the Dodgers were sold today and the McCourts were to split the proceeds, the debt and tax burdens would be so great that each of the McCourts might walk away with about 10 cents on the dollar.

The documents showed:

— The Dodgers generated $72 million in operating revenue last year but had a net profit of $8.4 million, largely because of $28 million in debt service and $34 million in revenue-sharing payments. Baseball requires the teams that generate the most money help support the ones that generate the least.

— The debt is not projected to drop significantly until at least 2013. The Dodgers’ business plan is based on selling 3.8 million tickets every season, a number the club has hit once in six years. The team is projected to sell 3.6 million tickets this year, based on current attendance.

— Bank of America, the Dodgers’ lead lender, last year restricted the team to $66 million in deferred player compensation at any one time, a provision called “unusual but not unprecedented” by a high-ranking baseball official, speaking on condition of anonymity because of the court case.

The Dodgers have routinely signed players to contracts in which payments are deferred, most notably Manny Ramirez. The Dodgers signed Ramirez to a $45-million contract for the 2009 and 2010 seasons but deferred $30 million through 2013. (The Dodgers saved $3.8 million by sending Ramirez this week to the Chicago White Sox.)

The Dodgers also owed about $30 million in deferred money to Andruw Jones, Rafael Furcal, Hiroki Kuroda, Jason Schmidt and Orlando Hudson at the time the bank capped deferrals.

Sports teams rarely disclose their financial records, but the Dodgers’ debt load can be compared to six other baseball clubs — the Angels, Florida Marlins, Pittsburgh Pirates, Seattle Mariners, Tampa Bay Rays and Texas Rangers — whose statements were leaked last week to the website deadspin.com.

The total liabilities for those six teams ranged from $104 million to $234 million, with the Angels at $129 million. Court documents showed that the Dodgers had a debt load well within the range of those teams, a liability of $153 million as of September 2009.

However, the $153 million is but a fraction of the $619 million in total liabilities held by the team’s parent company, LA HoldCo LLC. That figure includes $433 million of long-term debt, with both figures obtained from a September 2009 balance sheet.

HoldCo is where revenue and expenses from the Dodgers’ assets are consolidated. Court records — including statements by Jamie McCourt, the team’s former president and chief executive — show that the company has no significant source of income to service the debt besides the Dodgers and no significant HoldCo operations aside from the Dodgers.

Accumulating debt

LA HoldCo’s net losses for the first 11 months of 2008 and 2009 were $15.5 million and $5.9 million, respectively. Its $20.6 million in cash and liquid assets at the beginning of 2008 had dwindled to $5.5 million as of Nov. 30, 2009 — a 73% decline in less than two years.

The holding company went into technical default on its bank line of credit after the second quarter of 2009, because the cash available to pay its debts was less than required. The banks could have shut down the credit line at that point but did not, financial reports show.

In a court declaration, Wilhelm, the Dodgers’ CFO, identified “borrowed funds” as the primary source for the “operation of the business enterprise as well as a source of potential distributions” to the McCourts.

The McCourts took $108 million in personal distributions from the Dodgers from 2004 to 2009, primarily from the borrowed funds, court records show.

For example, in 2006, Blue Land Co. — the McCourt entity that owns the Dodger Stadium parking lots — took out a $60-million loan against the parking lots, according to Wilhelm’s declaration. The McCourts invested $10 million in the Dodgers and used about $50 million for personal mortgages and purchases of residential real estate, Wilhelm said.

The money to repay that loan comes from the rent payments the Dodgers charge themselves on land they own, shifting team revenue to the Blue Land entity, according to Wilhelm’s deposition.

In his declaration, Wilhelm said he was aware of only two McCourt business assets that had been sold to generate funds for the Dodgers organization in the last six years — the sale of a Boston commercial building for about $3.9 million, and the sale of the minor league Vero Beach Dodgers for about $3.1 million.

In 2008, the McCourts were told that the sale of a minority ownership stake in the Dodgers could raise “a significant amount of money,” according to an e-mail from McCourt Group Chief Operating Officer Jeff Ingram.

“If you sell, you also have to be very comfortable with [the] notion of cash in bank buys the peace of mind and is worth taking on the fiduciary responsibility and aggravation of having a partner[s],” Ingram wrote to the McCourts. “That’s only a question the two of you can answer.”

The McCourts chose to retain full ownership of the team.

Finding new money

Citibank was not the only entity to turn down McCourt in his search for financing last year, according to court documents.

McCourt asked Chinese investors for $150 million, in exchange for a stake in an international sports partnership. McCourt would have run the joint venture, which he hoped would have been made up of the Dodgers, a Beijing soccer team and, later, an English Premier League soccer team. The investors declined.

McCourt also approached Bill Guthy, whose Guthy-Renker firm pioneered the infomercial, for a $25-million loan. Guthy declined.

In addition, Ingram discussed with Bank of America the possibility of obtaining $125 million in financing. McCourt said he abandoned the process because of the tightened credit markets. (In court papers, Jamie McCourt said he postponed the plan so that she could not get any of that money in the divorce proceedings.)

When McCourt bought the Dodgers in 2004, he got $8 million in loans from friends from Massachusetts, an electronics executive named Franklin Weigold and a couple named Paul and Linda Carter.

McCourt had the option to pay back the loans with interest or convert the money into a small ownership share. The Dodgers owed $9.4 million on those loans as of June 2009, according to court filings.

Dodgers attorney Marshall Grossman said full repayment is not yet due. In an e-mail to McCourt last October, Ingram wrote of the “need to extend or pay off carter/weigold.”

McCourt and his estranged wife might have a tax bill to pay off as well. The state of Massachusetts is seeking $10.1 million from the couple in a dispute arising from their 2006 tax return, according to the deposition of McCourt accountant David Merfeld. An appeal is pending.

Hope for the future

The outcome of the trial — or a settlement, in which Frank McCourt would be expected to retain control of the team — should point the Dodgers to the future.

If McCourt retains control, the Dodgers could get an immediate cash infusion from Fox Sports. The Dodgers’ television contract with Fox expires in 2013, and McCourt has considered launching a team-run cable channel, similar to the highly profitable channels run by the New York Yankees (YES) and Boston Red Sox ( NESN).

However, McCourt has discussed a long-term extension with Fox, in which he would abandon the plan for a Dodgers channel in exchange for a front-loaded deal that could significantly increase the Dodgers’ annual revenue from television rights, according to three sources briefed on the discussions but not authorized to talk publicly about them.

The deal could be structured so McCourt could cash in without waiting until 2014.

Dodgers spokesman Josh Rawitch and Fox Sports spokesman Dan Bell each declined to comment.

Sain, the accountant, acknowledged a new and more lucrative TV deal could free up enough cash for McCourt to service the debt and improve the team.

“That would solve a lot of his problems,” Sain said.

If Jamie McCourt wins the trial and the team is ruled community property, one of the McCourts could buy out the other by joining forces with deep-pocketed investors, or the McCourts could sell. In either case, a new ownership group could be in place.

In a June 2009 financial statement, Frank McCourt valued all of his assets at $965 million and valued the Dodgers — the team, the stadium and the surrounding parking lots — at $859 million. (In court papers, Jamie McCourt argued the Dodgers’ value should be much higher, based on the possibility of increased future revenue from broadcast rights and development of the parking lots.)

According to that financial statement, if Frank McCourt liquidated his assets, he would be subject to $113 million in currently deferred taxes and would be left with about $163 million after paying off debt and taxes.

The tax liability would be greater if Congress allows tax cuts enacted under President George W. Bush to expire as scheduled at the end of this year, said Philip J. Holthouse, a name partner in the accounting firm.

Even without any additional tax liability, if Jamie McCourt were to persuade the court that the Dodgers are jointly owned and the team were to be sold based on the numbers on Frank McCourt’s financial statement, each of the McCourts would get half the proceeds — or little more than $80 million.

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