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Canadian Dollar Bolsters Bottom Line

Friday, 16.05.2003 / 8:10 AM / News
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Canadian Dollar Bolsters Bottom Line
(TORONTO) CP -- The surging loonie has come at a great time for the Toronto Blue Jays and Montreal Expos. But for Canada's NHL teams and the NBA's Toronto Raptors, the dollar's gains has left them with a dilemma.

To hedge, or not to hedge?

"That's the thing,'' says Jeff Citron, a corporate finance lawyer and a sports business analyst with Goodmans LLP in Toronto.

"Unless you're thinking the dollar has a lot further to go, that it's going to 76 or 77 cents, teams may say I'll take the rate now and have the certainty that I'm going to get the dollars at that rate, rather than gamble that the dollar is going to go to 75 cents and that I'd be even better off.''

There's plenty at stake.

For the Blue Jays, whose payroll is about $52 million US this season, each penny the loonie goes up saves the team about $400,000, says Godfrey.

Teams generally do some sort of hedging on their currency needs in order to gain cost certainty for the following season. They need U.S. dollars to cover player salaries and benefits plus a majority of scouting, accommodation and travel expenses.

With NHL and NBA teams starting their financial planning for 2003-04 now, they have to decide whether to hedge now, or hedge later.

"We follow it daily and to say, `let's lock it in' or `let's not,' you start to be a speculator and we're not currency experts - I'm not sure anyone is, frankly,'' says Richard Peddie, president and CEO of Maple Leaf Sports and Entertainment, which owns both the Maple Leafs and the Raptors.

"Next year's currency will be an improvement on this year's currency. We hedged (over 50 per cent of next year's needs) already and it won't be a 72-cent dollar, that's for sure.''

Sports teams tend to do their hedging through derivatives called currency swaps, or forward contracts. Since most clubs don't have spare piles of cash lying around that could be converted into American dollars, they sign contracts that allow them to buy a currency in the future at current rates.

And since the dollar is at its highest rate in six years - it opened at 72.68 Thursday - now seems like a good time to make a deal lest the dollar take a tumble. In November, the dollar was trading below 63 cents US.

"We're looking at it right now, it's strengthened so much lately,'' says David Cobb, chief operating officer of the Vancouver Canucks. "We're getting a lot of advice from economic and currency experts and we're probably going to make a purchase for next year.

"We're going to make a decision in the next couple of weeks.''

Cobb says the Canucks tend to buy American greenbacks on a month-by-month basis and that allowed them to save some money late last season when the dollar began its climb. He adds the Canucks prefer buying currency outright over entering into forward contracts, thereby avoiding the two-cent fee per dollar charged by the derivative's vendor.

"Depending on where you feel the dollar's going to go, you may want to save the two cents,'' he says.

Fans going out to games may even benefit from the stronger dollar. If teams save enough on the currency exchange they might be able to keep ticket prices at current levels.

"The dollar has been one of the reasons we've had to raise ticket prices,'' says Peddie. "If your costs are truly coming down, maybe our revenue expectations will come down, so there's a balancing act that needs to be done here.''

The Blue Jays and Expos, meanwhile, have watched the loonie rise at the perfect time. The baseball season is just over a month old, so with the bulk of their player contracts still to be paid, they have an opportunity to capitalize on the dollar's surge. Rogers Communication Inc., which owns the Blue Jays, makes periodic currency buys and will be able to use the stronger dollar later in the season.

"You have to guess when is the right time, it's like buying a stock,'' says Paul Godfrey, the Blue Jays president. "Do you buy when it's just starting to rise? Do you wait and chance that it turns around?

"I know (Rogers) has been doing some hedging, which has helped but you can only hedge to a certain degree before it becomes a problem if it continues to rise.''

The Blue Jays suffered operating losses of $84 million in 2001 and $54 million last season but should the dollar keep improving, a more beneficial currency exchange combined with a reduced payroll could help reduce this year's targeted loss of $26 million.

"But it's got stay up for a prolonged period of time,'' Godfrey cautions. "I've been telling people that once it gets to parity you'll see me do a victory lap at SkyDome and I say that jokingly, but at the same time, this team can get to profitability very quickly if the Canadian dollar continues to rise.''

Currency exchange is virtually a non-issue for the Canadian Football League and the Canadian Baseball League.

Since both leagues pay their players in Canadian dollars, they don't have to worry about converting dollars to meet payroll. They will however find themselves with happier American players, who suddenly find themselves taking more money home.

The CFL does have one expense in American dollars - the payments on its loan from the National Football League. The balance on that is believed to be about $500,000 US and the CFL is scheduled to complete paying that back at the end of 2003.

Despite the dollar's rise, Canadian teams are quick to point out that their financial problems are far from solved.

There are no guarantees that the dollar will maintain its current level long-term, meaning teams doling out multiyear contracts could find the tail end of those deals being more expensive than they thought. The average players earns about $1.7 million US in the NHL and $4.4 million US in the NBA.

"The dollar has been as low as 63 cents, we like it at 72 cents,'' says Peddie. "But as we always point out, it's still 28 cents offside to 29 other basketball teams and 24 other hockey teams.''

Adds Cobb: "Seventy-two isn't 82 or 92 or par. Compared to last year it's fantastic, really. It helps but the problem is not solved.''
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