I love this site. Without a lot going on in this so-called hot-stove league period, it is difficult to come up with topics that generate any interest. But then Dodgerrick provides an article that piqued my interest anyway. I have been harping that the Dodgers are in a cost control mode, meaning keeping payroll below the CBT threshold for reasons outside of the Dodgers operations.
The article may give fans the warm feeling that all is right in the world with the Dodgers finances, but I still hold out that there are reasons to be skeptical. The key paragraphs in the article are as follows:
“The CEO of Guggenheim Partners and his business associates are pledging more than $20 billion of their personal wealth to backstop insurers associated with the firm should they experience financial troubles, according to a Wall Street Journal report.
“In what S&P Global Ratings senior analyst Deep Banerjee told The WSJ was “an unusual concept,” the group is using a vehicle called Safe Harbor to provide the funds. The Journal could find no insurance filings referencing Safe Harbor.
“However, another investor, Guggenheim outside lawyer Dan K. Webb, said the arrangement makes the Guggenheim-affiliated insurers “likely among the safest” in the country, according to the WSJ. Assets pledged through Safe Harbor include stakes in the Dodgers, another firm that operates one of the biggest Wendy’s hamburger franchises in the country, and shares in Carvana, an online car dealer.
“Guggenheim’s Dodger connection came under scrutiny after two annuity holders sued in 2014, saying the firm was using the insurance companies to buy the Dodgers and then hiding the transactions in regulatory filings. The suit was quickly withdrawn, but did attract scrutiny from regulators, who ultimately concluded nothing was amiss.
“Walter told the Journal that Safe Harbor’s purpose is to provide security in the event credit markets turn sour. The vehicle makes off-balance-sheet investments in higher yielding instruments that aren’t typical for insurance companies, whose risk-taking is limited generally to investment-grade bonds.”
Mark’s statement that the Billie Jean King’s and Llana Kloss’ net worth was $31MM got me to thinking (which is always dangerous). He is undoubtedly correct that a $3MM capital infusion is not a dent in any liquidity issues. That is true even if the investment was $10MM. The team generated $522MM in 2017, second only to NYY and their $619MM. They should be able to handle a salary level in excess of the CBT threshold if it meant winning, unless there was something else driving the decision to stay below it. Is it MLB or outside Guggenheim investors? Insurance regulators are going to keep an eye on the value of the pledged assets, including the Dodgers. That value has to stay high, and one way to keep it high is to keep salaries low enough that the revenues are sufficient to manage them.
Anytime I hear off-balance-sheet investments, the hairs on the back of my neck go straight up. Enron ring a bell? I am not trying to equate the Dodgers with Enron. It is just how major companies want to “hide” actual or potential liabilities. The Dodgers now have potential liabilities
Bottom line is that the Dodgers’ assets are pledged against a market turn for insurance investors (potential liabilities). The insurance regulators are happy that they have an asset valued at more than $3B to protect the insured. But I bet that MLB is not happy with the arrangement. How can Guggs keep MLB out of their business? Keep the salary level below CBT threshold as they told MLB they would do. Keep their heads down, and do not raise any red flags.
The point that the Journal could find no insurance filings referencing the Safe Harbor is also troubling. The original intent was to use the insurance company’s assets to buy the Dodgers, but when caught (law suit), they needed to devise another vehicle to support the acquisition. Now they have MLB, Insurance Regulators, and Guggenheim Investors meddling in their operations, and will continue to do so until operations are stable (meaning salaries). The Dodgers and their $3B value, and their $522MM in revenues, exemplifies why the team should be able to stay above further scrutiny as long as they stay below the CBT threshold. That is why next year they will be able to spend, but not this year.
The Dodgers are currently scheduled to be $13MM below the CBT threshold, before Kenta Maeda’s incentives. Not enough to absorb a high cost game changing player. Andrew & Co. are not stupid baseball executives. They cannot trade for a high salaried pitcher, RH bat, or reliever unless they offset that cost by purging existing salaries. They are also not going to give away their player assets just to acquire someone else. The existing contracts that can be moved are Puig (estimated $11.3MM), Wood (estimated $9.0MM), Joc (estimated $4.8MM), and one of CT3 or Kike’ (estimated at $3.2MM). Yimi Garcia and Josh Fields are potential non-tenders which will free up another $3.7MM. I would not be in favor of non-tendering Fields. I doubt that they could find a similar reliever for less money.
JT Realmuto is scheduled to earn $6.1MM in 2019. The Dodgers will have to offset at least $6.1MM PLUS provide prospects. Doubtful.
Kluber and Gomes will earn $20.283MM ($11.533MM AAV). Unless the Indians are willing to match the salaries with Puig and Wood, they are not going to be able to make the deal. The Indians would require Puig, and the salary difference with prospects might entice the Indians. They would still have to move Wood, and he would require non-roster prospects in return. Maybe they could up the return by working with NYY and moving Wood and Muncy for prospects. Is Kluber and Gomes worth it? Doubtful that Andrew & Co. thinks it is. It would benefit NYY in 2019, but not LAD.
No, I think a more realistic scenario is that Wood gets traded for prospects, and that Andrew & Co. signs Martin Maldonado as the 2nd catcher.
Bellinger (1B, CF, RF)
Muncy (1B, 2B, 3B)
Freese (1B, 3B)
CT3 (2B, SS, 3B, LF, CF)
Kike’ (2B, SS, 3B, LF, CF)
Seager (SS for me – Others think he will not be able to play SS)
Kemp (LF, RF)
Barnes (why limit him to catcher)
Farmer (why limit him to catcher) or Maldonado
Verdugo and Toles back to OKC. The Dodgers value that depth and need to keep these guys a phone call away while they get consistent AB’s, because “we” cannot let loose of Puig, Joc, CT3, Kike’, or Muncy. In 2018 the team lost 11.5 games to the 2017 record and have no replacement for Grandal in 2019. They will get Seager back, so they should be good enough to win the NL West. But that team is not good enough to beat Boston, NYY, and probably Houston. Atlanta, Philadelphia, Chicago, St. Louis, Milwaukee are all planning on spending.
Without Wood Starting Pitching:
Or maybe they keep Wood and put him in the bullpen and send Fields to OKC with his one option remaining. Bottom line, IMO, Andrew & Co. will make due with “the makings of a championship team already in place” and forego any significant change. The financial constraints are there for all to see if they want to open their eyes and read a little between the lines in the reports. I hope I am wrong and that the Dodgers will be creative enough to find some improvement even if it means exceeding the limit for one more year. Next year they should be well under the limit and make any changes that Andrew & Co. feel are warranted.