04/28/2011 12:41PM

Breeders' Cup still faces hurdles with debt


In 2009, Breeders’ Cup Ltd. tapped a $5.9 million line of credit at a time when the value of its investment portfolio had plunged 31 percent and its nominations revenue was expected to plummet because of the recession. The run to the bank was a troubling signal. Members were critical of the organization’s financial management and its hasty decision – quickly reversed – to drop a $5 million program providing purse supplements to stakes races.

Two years later, Breeders’ Cup’s credit debt has swollen to $7.7 million; nomination revenues have declined from $21.5 million in 2008 to $12.1 million in 2010, a drop of 41 percent; the supplemental stakes program has been scrapped; and the organization is seeking a new chief executive, following the resignation of Greg Avioli, the president since 2006. So is Breeders’ Cup worse off than it was two years ago, at the height of the recession?

Not necessarily. Boosted by record revenues at its year-end event at Churchill Downs, a significant uptick in sponsorship revenue, and a slight gain on its investment portfolio, total revenue jumped 14.9 percent in 2010, to $50.1 million, and expenses held steady at $44.9 million. The financial results reversed a decline in net assets and boosted Breeders’ Cup’s cash position by $2.3 million.

But the organization is not out of the woods. Nominations revenue may continue to decline over the next several years because of the contraction in the foal crop and the depression affecting the bloodstock industry. The $7.7 million debt remains on the books, and Breeders’ Cup officials do not have any firm plans to pay it down. And a host of new amenities tied to its expanded Challenge series have a potential to depress revenues and increase expenses.

Fortunately for Breeders’ Cup, another event at Churchill Downs is on the horizon for 2011. Host of the Breeders’ Cup on seven previous occasions, Churchill typically produces more revenue than any other site in large part because the track draws the largest crowds, according to Matthew Lutz, Breeders’ Cup’s interim chief executive officer and chief financial officer. The majority of revenue from the year-end event is produced by ticket sales, Lutz said.

Revenue from the Churchill Downs event last year was $27.9 million, well above revenue of $20.2 million from the Oak Tree at Santa Anita event in 2009 and $21.2 million at the Oak Tree event in 2008. Most important, the strong Churchill result has taken some of the financial pressure off of Breeders’ Cup, Lutz said.

“The growth in revenue from the event is important because it allows us to maintain purse levels and other event enhancements, despite the challenge of declining revenue from nominations due to corresponding declines in the foal crop,” Lutz said.

Declines in nominations revenue present one of the big problems when linked with existing debt. Nominations revenues are not expected to rebound anytime soon despite a revamping of the international nominations program this year that is budgeted to produce $1.5 million in foreign nomination fees, up from $750,000 last year, according to Lutz.

Nominations revenue is the organization’s second-largest source of income, followed by sponsorships – which generated $6.4 million in revenue last year, up from $5.6 million in 2009. It’s not likely Breeders’ Cup can grab a substantially larger share of the sponsorship market this year so the organization will probably tread water in 2011. How, then, can the organization start paying down its debt?

One answer would be to reduce expenses. But the largest portion of its budget is devoted to purses, which aren’t likely to be cut; the rest of the expenses couldn’t be reduced so far to make a significant impact.

Breeders’ Cup did eliminate one large expense, the supplemental stakes program, which distributed approximately $3 million in 2009 and 2010. However, those savings are now being directed into new amenities tied to the organization’s Challenge series, which awards horses automatic berths in one of the 14 year-end races. The cost of those amenities could exceed the cost of the purse supplements.

This year, the series has 68 stakes – 15 of them at overseas tracks. As part of the new amenities, winners will receive a pass on entry fees into one of the year-end races and an allowance for travel. The person who nominated the horse to the Breeders’ Cup will receive $10,000 when the horse wins one of the 68 challenge races.

Entry fees to Breeders’ Cup races are 3 percent of the purse. If all 68 races were won by different horses, and all those horses participated in a Breeders’ Cup event, the hit to Breeders’ Cup’s revenue from lost entry fees would be $4.215 million.

Obviously, some horses will win more than one of the challenge races, and some of those horses will not participate in the Breeders’ Cup, so that number figures to be lower than the theoretical total. But there’s more: travel allowances − $10,000 for North American horses and $20,000 for overseas horses – could potentially total $830,000, and the nominator awards will total $680,000, making the total potential outlay $5.725 million, significantly higher than the $3 million budgeted to the supplemental stakes program.

“We’ve modeled several scenarios based on the last few years, and we’re confident that this is a better use of our program revenues,” Lutz said.

As to the line of credit, Lutz said Breeders’ Cup went back to the bank in 2010 to fill in the cash-poor gap between the time that Breeders’ Cup collects nominations revenue and the year-end event. Breeders’ Cup employed similar timing when it took the $5.9 million advance in 2009.

The Breeders’ Cup investment portfolio, valued at $33.9 million at the end of 2010, provides secure collateral for a low-interest loan. Interest expense on the $7.7 million debt was only $77,277 in 2010, up from $57,464 in 2009. And despite drawing on the line of credit, Breeders’ Cup improved its cash position from $1.1 million at the end of 2009 to $3.4 million at the end of 2010.

Lutz declined to comment directly when asked if Breeders’ Cup planned to pay down any of the debt in 2011, underlining the fragile state of finances.

“Like most business, we have times when we need to use our revolving credit line to manage cash flow,” Lutz said. “We are generally conservative about how we do that and comfortable that the organization has been responsible about managing that process.”