Jock Pay Advance Deals Test Hedging Skills of Investors, Athletes and Agents
Fernando Tatis Jr., is going to be a very wealthy man after officially signing a 14-year, $340 million contract extension with the San Diego Padres on Monday. But he’s not going to be as wealthy as he would have been had he not committed to sharing a portion of his career earnings with Big League Advance (BLA). Back in 2017-18, prior to his first season in Double A, Tatis agreed to part with an undisclosed stake in any future MLB contracts signed—somewhere between 1-10%, Sportico reported—in exchange for an upfront cash payment. Considering BLA may now be entitled to as much as $34 million, one can understand why player agents insist there are better ways for top prospects to hedge long-term injury and performance risk.
Our Take: To be clear, there is nothing intrinsically wrong with a player signing a percentage-of-earnings deal, so long as: it is done at the right time in a player’s career; it is priced properly; and the player isn’t selling off too great a percentage of their future earnings (one player agent we spoke to suggested no more than 1-2%). Athletes should have the opportunity to hedge career risk and secure their financial future, particularly in a sport where the majority of those drafted do not reach the major leagues and players remain under club control for six to nine years. By taking the deal, Tatis ensured he would make some money, even if he got hurt and never played again.
But the agent we spoke to (who represents ‘dozens of players’ that took money from BLA early in their careers) said if a player can simply borrow third-party capital, that is almost always a better option than giving up a percentage of current and future earnings. Loan products offered by the likes of RockFence Capital (a Boston-based private lender, leader in the athlete lending space) provide players with upfront capital (think: $1-$5 million), secured only by their future earnings. The guaranteed money is paid back, with interest, over the course of the borrower’s career. If the player is out of baseball for any reason, he does not pay back the loan. The debt is forgiven.
While the loans have been reported to carry high interest rates, and they are high relative to mortgage rates, at 10-14% annually they are actually lower than, say, a credit card (think: 18%). The rates can remain relatively ‘low’ because private market lenders use projection systems to quantify the future value of collateral (see: the player’s career earnings) and the typical loan-to-value ratio is below 10%. In other words, as long as the system works, the risk of non-payment is small.
While no one could have anticipated Tatis would sign a $340 million contract back in 2017-2018, BLA had him pegged as the second-best prospect over a 15-year period. In other words, it was known the potential for a nine-figure career was at least within the realm of possibility. Typically, a player projected to earn $100 million in his career would receive $2-3 million in pre-tax money for selling 5-10% of his future MLB earnings. If that same player borrowed $3 million—money that wouldn’t be taxable because it is a loan—and paid it back five years later with interest, the loan would cost roughly $3 million in after tax dollars ($6 million would be paid back in total). In this example, the private loan product would have been about $30 million less costly than the percentage-of-earnings deal. The Padres shortstop is certainly an extreme example, but unsecured loan products are almost always going to cost an elite MLB player less over the course of a career.
That’s not necessarily going to be the case, though, for your run-of-the-mill major leaguer. “A player that will play three to five years, which is [the MLB] average, is going to make way less [on a loan than a percentage-of-earnings deal],” Michael Schwimer (Founder, Big League Advance) said. “Let’s say we give a player $1 million for 10% of their earnings and they go on to earn $10 million in their career. That player would pay [BLA] back a million dollars and end up making the same amount as if he didn’t do the deal.” As Schwimer calculates it, if that same player borrowed $1 million at a 14% interest rate, it would cost him $396,000 more. Percentage-of-earnings deals are often the better solution for minor league players expected to earn less than $10 million in their MLB careers.
Now, the reason we say ‘if a player can borrow money’ is because not every MiLBer is going to have the opportunity. Only big league prospects with “earning potential” are likely to find lenders willing to bet on their success. Those unable to borrow (think: players in the lower minors) lack an alternative to future earnings deals if they need the money and/or are intent on de-risking their career.
While options can be limited for MiLB players, MLBers yet to reach free agency should have no trouble tapping third-party capital–money that should be significantly cheaper than it would be for the player to sign a team-friendly extension. Historically, early extensions have traded at a 20-40% discount to fair market value. It’s not unreasonable to suggest Braves’ stars Ronald Acuna Jr. (8 years, $100 million) and Ozzie Albies (7 years, $35 million) cost themselves a combined $100 million by signing long-term extensions before they hit free agency.
Not knowing Tatis’s financial situation (or the details of the transaction), it is difficult to suggest he made the wrong decision to deal with BLA. Particularly considering five years ago, the player-lending environment was significantly less mature (and focused primarily on big leaguers). But in an ideal world, the player would wait until reaching the major leagues to secure a loan, go year-to-year through arbitration and then hit free agency—and cash in—at the youngest age possible. For what it’s worth, Tatis didn’t really answer a question about whether he would refer BLA to other prospects at Monday’s press conference.
More from Sportico.com
