[UPDATE: The Fed cut its benchmark interest rates by half a percentage point Wednesday afternoon, surpassing widespread expectations of a quarter-point reduction.]
Later Wednesday the Federal Reserve Bank is expected to announce the first cut in interest rates in more than four years. For most everybody in the sports business, there’s little downside to it.
“Rates coming down will benefit everybody,” Steve Vogel, managing director and head of the sports finance group at U.S. Bank, said on a phone call.
The Fed probably will announce a quarter-point rate cut after its regular meetings conclude in mid-afternoon. In practice that means the central bank cuts the amount of interest it pays to commercial banks on their deposits with the Fed, a rate that then reverberates throughout the economy. The Fed Funds Rate is currently 5.5%, its highest level since early 2001 when regulators were eager to throttle down the dotcom stock boom. Rates rose to their current level combating the inflation seen after the government slashed rates to just 0.25% to sustain the economy during the pandemic. High interest rates have affected everything from the decision to renovate or build a stadium to the price of insuring player contracts.
“There have been situations I have seen over the last couple of years where rates being at such a high level have caused a team to slow down and wait and see if rates would come down before executing a refinancing or potentially using a different financing structure,” Peter Dorfman, managing director of the sports banking group at Wells Fargo, said on a phone call.
While high rates may have slowed some business, by seemingly all accounts, the Fed has hit its goal: The Consumer Price Index for August showed inflation at 2.5%, well off the long-term peak of 9.1% reached in June 2022. But, if the Fed cuts rates by a quarter-point as widely anticipated, don’t expect fireworks in the market.
“It’s been long anticipated and in some ways it’s already built into the market,” U.S. Bank’s Vogel said. “The leagues and team CFOs have been monitoring this, the market is anticipating this and some teams and leagues have taken advantage of this.”
Indeed, securities that anticipate U.S. interest rates—mainly Treasury bond yields—have been easing since April. In fact, the 10-year Treasury bond is signaling the market expects a full point of interest rate cuts into 2025. Yields on 10-year “Govies” have dropped from about 4.6% in April to 3.6%. That means even if the Fed surprises with a half-point cut, the market reaction will be at least partly muted. Similarly, stocks, which benefit from lower rates for a variety of reasons, are up nicely from April: The Sportico Sports Stock Index has gained 13%.
Still, the reality of lower interest rates will bring real benefits. “In some situations, debt service costs are one of the larger expenses for a sports-related company, so to the extent there is a rate reduction, assuming they’re borrowing on a floating rate basis, that will lower their debt service costs,” Dorfman said. “That will provide them with more flexibility to spend money on other things to generate a higher profit margin.”
Teams, leagues and other businesses typically finance large expenditures in one of two markets. For shorter term needs up to a few years, such as league financing on behalf of clubs and stadium construction loans, organizations get commercial loans based on SOFR—the secured overnight financing rate, the cost banks charge each other overnight to lend money using Treasury bonds as collateral. Commercials loans based on SOFR then add a premium on top of the rate, based on the creditworthiness of the borrower. Loans based on SOFR usually have rates that reset each month, so interest rate cuts today will mean lower payments next month.
Longer term loans, like those used to finance a completed stadium, are usually fixed-rate loans based off Treasuries, also with a risk premium added on top. “Teams and owners with large [capital expenditure] projects, especially large renovations or new stadiums … have the ability to refinance at lower rates,” Vogel said.
Just as important will be the effect of rate cuts on fans. While recent consumer spending data has shown Americans spending just as strongly as ever as a group, it also shows spending by poorer people has been affected by high rates. Today’s anticipated cuts and the expectations the market holds for a series of future cuts make for a “neutral to positive outlook,” Wells Fargo’s Dorfman said. “They’ll be able to spend money on various elements of the sports ecosystem—attending games, spending more money on tickets, concessions and media content. Those obviously drive revenues and generally there has been a strong correlation between revenues and franchise values.”
There are of course, potential downsides to lowering interest rates: Inflation could be reignited by overheated spending and demand, requiring rates to go higher once more. But for now, falling interest rates should only be a positive for sports, media and entertainment ventures.
“It’s a bonus to teams and owners that they’re going to benefit from lower rates,” Vogel said.
