Jock Pay Advance Deals tests the hedging skills of investors, athletes and agents
Fernando Tatis Jr., is going to be a very wealthy man after he officially signed a 14-year, $ 340 million contract extension with the San Diego Padres on Monday. But it won’t be also rich as he would have been had he not pledged to share a portion of his career earnings with Advance in the big league (BLA). In 2017-18, ahead of his debut Double A season, Tatis agreed to part ways with an undisclosed stake in any future. MLB signed contracts, between 1 and 10%, Sportico declared, in exchange for an initial cash payment. Considering that BLA can now qualify for $ 34 million, it’s understandable why players’ agents insist that there are better ways for the best prospects to cover injury and long-term performance risks.
Our opinion : To be clear, there is nothing inherently wrong with a player signing a payout percentage agreement, as long as: it is done at the right time in a player’s career; its price is correct; and the player does not sell too large a percentage of their future winnings (a players agent we spoke to suggested not to exceed 1-2%). Athletes should be given the opportunity to cover their career risks and secure their financial future, especially in a sport where the majority of draft drafts do not reach the major leagues and where players remain under club control for six to nine years old. By accepting the deal, Tatis made sure he would do some money, even if he was injured and never played again.
But the agent we spoke to (who represents “dozens of players” who took money from BLA early in their careers) said that if a player can simply borrow capital from third parties, it is is almost always a better option than giving up a percentage of the current equity. and future earnings. Loan products offered by RockFence Capital (a Boston-based private lender that is a leader in athlete loans) provide players with up-front capital (think: $ 1 million to $ 5 million), secured only by their future income. The guaranteed money is repaid, with interest, over the life of the borrower. If the player is absent from baseball for some reason, he does not pay back the loan. The debt is canceled.
While the ready have been reported to carry high interest rates, and they are high compared to mortgage rates, at 10-14% per annum, they’re actually lower than, say, a credit card (think: 18%). Rates can remain relatively “low” as private market lenders use projection systems to quantify the future value of collateral (see: player career income) and the typical loan-to-value ratio is less than 10%. In other words, as long as the system is functioning, the risk of non-payment is low.
While no one could have expected Tatis to sign a $ 340 million contract in 2017-18, BLA named him the second-best prospect in a 15-year span. In other words, it was known that the potential of a nine-figure career was at least in the realm of the possible. Typically, a player who is expected to make $ 100 million in his career would receive $ 2-3 million pre-tax for selling 5-10% of his future MLB earnings. If this same player borrowed $ 3 million – money that wouldn’t be taxable because it’s a loan – and paid off five years later with interest, the loan would cost around $ 3 million after-tax ($ 6 million would be refunded in total). In this example, the private loan product would have cost about $ 30 million less than the profit percentage agreement. The Padres’ shortstop is certainly an extreme example, but unsecured loan products will almost always cost an elite MLB player less over the course of a career.
That won’t necessarily be the case, however, for your regular major league. “A player who will play three to five years, which is [the MLB] average, will do a lot less [on a loan than a percentage-of-earnings deal]”Said Michael Schwimer (Founder, Big League Advance).” Let’s say we give a player $ 1 million for 10% of their winnings and they continue to make $ 10 million over the course of their career. player would pay [BLA] get a million dollars back and end up earning the same amount as if he hadn’t closed the deal. As Schwimer calculates, if that same player borrowed $ 1 million at 14% interest, it would cost him an additional $ 396,000. Winning Percentage Agreements are often the best solution for minor league players who are expected to earn less than $ 10 million during their MLB career.
Now the reason we say “if a player can borrow money” is that not all MiLBers will have the opportunity. Only big league prospects with “earning potential” are likely to find lenders willing to bet on their success. Those who cannot borrow (think lower miners players) have no alternative to future income deals if they need the money and / or intend to lower their career risk.
Although options may be limited for MiLB players, MLBers who have yet to reach free agency should have no difficulty leveraging third-party capital – money that should be significantly cheaper than it would be for the player to sign a user-friendly extension for the team. Historically, early extensions have traded at a discount of 20 to 40% from fair market value. It’s not unreasonable to suggest that Braves stars Ronald Acuna Jr. (8, $ 100 million) and Ozzie Albies (7, $ 35 million) cost themselves a combined $ 100 million signing extensions. long term before becoming a free agent.
Not knowing Tatis’ financial situation (or the details of the transaction), it’s hard to suggest that he made the wrong decision to deal with BLA. Considering in particular five years ago, the player loan environment was significantly less mature (and focused mainly on the big players). But in an ideal world, the player would wait until they hit the major leagues to get a loan, go through arbitration year to year, and then hit free agency – and cash – at the youngest age possible. For what it’s worth, Tatis didn’t really answer the question of whether he would refer BLA to other prospects during Monday’s press conference.
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