What happens when the GTAA can't pay back its debt?

[floridajacket]

Plenty of corporations do not issue dividends. The NPV of future cash flows still have value and inflate the stock price. Owners gain value from stock price increasing because, eventually, the corporation has to issue dividends or perform a buyback.

The difference between, say, Amazon and GTAA is the Articles of Incorporation. GTAA, as it currently exists, can *never* pay dividends. Here are the incorporation documents of the GTAA.

https://ecorp.sos.ga.gov/BusinessSe...5&businessType=Domestic Nonprofit Corporation

Such a strict Article of Incorporation is necessary for non-profit status. Some organizations have moved from non-profit to for-profit by amending their articles, but the past donations and assets become radioactive because the previous donors took a tax deduction. It would have to be started anew, without any of the previously donated assets.

The Packers can issue nominal shares because it's always been for-profit. GTAA, as a non-profit corporation, has no owners. Non-profits have "members" instead of shareholders, who vote for directors. The GTAA's governance structure is 16 members and 16 directors.

A brand new GTAA could raise enough capital to buy the assets of the old GTAA. But losing the tax deduction hurts much more than what the GTAA could raise with equity.

 

[gtphd]

The difference between, say, Amazon and GTAA is the Articles of Incorporation. GTAA, as it currently exists, can *never* pay dividends. Here are the incorporation documents of the GTAA.

https://ecorp.sos.ga.gov/BusinessSearch/BusinessInformation?businessId=450255&businessType=Domestic Nonprofit Corporation

Such a strict Article of Incorporation is necessary for non-profit status. Some organizations have moved from non-profit to for-profit by amending their articles, but the past donations and assets become radioactive because the previous donors took a tax deduction. It would have to be started anew, without any of the previously donated assets.

The Packers can issue nominal shares because it's always been for-profit. GTAA, as a non-profit corporation, has no owners. Non-profits have "members" instead of shareholders, who vote for directors. The GTAA's governance structure is 16 members and 16 directors.

A brand new GTAA could raise enough capital to buy the assets of the old GTAA. But losing the tax deduction hurts much more than what the GTAA could raise with equity.

Create a foundation that stays non-profit. Donations are funneled through the foundation.

 

[floridajacket]

Create a foundation that stays non-profit. Donations are funneled through the foundation.

There are a lot of complications. As I understand it, you are proposing the current, non-profit GTAA to assign the trademark rights and nominal leases to a new, for-profit GTAA. Then there is also a new non-profit, which solely exists to gift its proceeds to the for-profit GTAA.

For one thing, the trademark rights and nominal leases are probably not assignable. If they are not assignable, then the assignment needs BOR approval. Even if the assignment does happen, it clearly violates the bond covenant with GTAA linked earlier. The bond specifically says that the GTAA can only transfer substantially all its assets if the reformed organization is also a non-profit. The bond also has to be assumed as a liability of the new organization. Page 23 here, FWIW. Chrome won't copy text from PDFs.

https://emma.msrb.org/ER583151-ER452962-ER855645.pdf

Accelerating all of the payments from the bonds will create a judgment against the previous GTAA. It devolves then to the laws of fraudulent conveyance and the fiduciary duties of (old, non-profit) GTAA's directors. The law on fiduciary duties of directors of non-profits is unclear. The fiduciary duty of directors is owed to the "mission" of the non-profit. But probably a bad faith fraudulent conveyance, versus a bankruptcy filing or other recourse, would be considered a breach of fiduciary duty.

Even if all these complications could be bypassed, it's far from clear how your proposed structure would work. For one thing, a shareholder in the for-profit GTAA could not make a donation to the non-profit GTAA foundation.

Sorry for the typical "you must be fun at parties" response. I understand what you're saying from a corporate finance POV, but all the corporate finance stuff is really a simplification of complex legal duties.

 

[18in32]

There are a lot of complications.

Dude didn't listen to me, maybe he'll listen to you.

Then there is also a new non-profit, which solely exists to gift its proceeds to the for-profit GTAA.

Non-profits are not allowed to make distributions to for-profits unless they receive something of equal value in return.

For one thing, a shareholder in the for-profit GTAA could not make a donation to the non-profit GTAA foundation.

Why is that?

 

[floridajacket]

Why is that?

It would be self-dealing. The tax-deductible donation would come back around as dividends to the same donor.

 

[18in32]

It would be self-dealing. The tax-deductible donation would come back around as dividends to the same donor.

Gotcha — you were still thinking the non-profit was making distributions to the for-profit (which it's not allowed to do).

 

[Yukonwreck]

Bernie gonna make it all go away

No sure that even Bernie Madoff could make this go away.

 

[texstinger]

Any chance we just try and sell more tickets?

 

[FatJacket]

Any chance we just try and sell more tickets?

Waa?

 

[gtphd]

It would be self-dealing. The tax-deductible donation would come back around as dividends to the same donor.

Happens all the time. I have a for-profit company that has majority board seats of a non-profit foundation. The non-profit doesn't issue dividends to the for-profit, which is the point of a non-profit (dividends = dispersement of profit to owners).

 

[floridajacket]

Happens all the time. I have a for-profit company that has majority board seats of a non-profit foundation. The non-profit doesn't issue dividends to the for-profit, which is the point of a non-profit (dividends = dispersement of profit to owners).

For-profit -> non-profit payment or ownership is fine.

If GTAA was for-profit, then a non-profit wrapper would have to go Non-Profit -> For-profit. You can't go the other direction.

 

[The M-Train]

In corporate finance literature, the primary reason for issuing debt is that the payments limit the free cash flow of management. That's not what we want for GT.

Uhhh, what? The primary reason for issuing debt is because it is cheaper than equity, provides an income tax shield, and because increased leverage yields increases equity returns.

The AA's debt is unsecured. A default would result in a massive hit to the AA's ability to borrow in the future, and it's likely the school or school's endowment would bail the AA out. A downgrade of the AA's credit would impact the school, since the two organizations are closely intertwined. Right now, the AA has an average annual debt service (AADS) of around 22% of the annual budget through 2043. There are 2 $30MM bullet payments due on bonds in the next few years (2020 and 2023) that will cause some heartburn, but nothing drastic, especially in light of increased giving this year.

Now, if giving from private individuals and GT's endowment drops off, you'd have a problem. But it's highly unlikely.

 

[ramblinwise1]

. A downgrade of the AA's credit would impact the school, since the two organizations are closely intertwined.

Is that a legal term?

 

[18in32]

Uhhh, what? The primary reason for issuing debt is because it is cheaper than equity, provides an income tax shield, and because increased leverage yields increases equity returns.

Can't we all just agree there are lots of reason to issue debt?

 

[gtphd]

Uhhh, what? The primary reason for issuing debt is because it is cheaper than equity, provides an income tax shield, and because increased leverage yields increases equity returns.

Modigliani and Miller (1958) presented their most basic insight as their Proposition I

The market value of any firm is independent of its capital structure and is given by capitalizing its expected return at the rate r appropriate to its risk class.

The problem is that empirically firms issue debt and equity, and firms in the same industry tend to have similar leverage ratios. To understand this, academics have relaxed each of the 4 key assumptions: no taxes, no cost of bankruptcy, information symmetry, and no conflict of interest between managers and shareholders.

The weaker research stream looks at the first two assumptions. Modigliani and Miller (1963) relax their own first assumption looking at corporate and personal tax rates (the tax shield, you mention). The problem is that their model incorporating a tax shield shows that a corporation should optimally issue only debt and no equity. To adjust for this, models were developed that included the cost of bankruptcy to balance the benefit of a tax shield. Korteweg (2010) has the most recent model, and even in that model, empirical researchers find the effects to be insignificant. Further, the model misses several scenarios seen in practice: first, Strebulev and Yang (2013) shows that this model rules out the commonly seen conservative debt ratios by multinationals paying tax. Second, these models show a positive association between profit and debt that is not seen in practice.

The more respected research looks at the last two assumptions. Bharath et al (2009) argues for signaling hypothesis, that says that issuing debt is positive because it indicates a positive future value of the organization. The second is Jensen & Meckling (1976) and Hillier et al (2016) who argue that a conflict of interest inherently exists between managers and shareholders, and shareholders can force managers to issue debt as a means to restrict free cash flow, thus limiting the funds managers can allocate. These models incorporate the cost of bankruptcy and generally produce empirically sound results.

 

[floridajacket]

GTAA has a huge reason to fund as much as possible with debt and contributions. Both are tax-deductible for the other side. The bond covenants are centered around the interest payments being tax-deductible. For Georgia residents, they're deductible for both federal and state taxes.

M-M would generally have debt issued to an absurd level because of unequal tax treatment of dividends. The adjustments to M-M like phd cite get too academic. Most shareholders for most non-financial companies would not want management to leverage to M-M levels, especially with all the tools to reduce corporate tax. Aside from corporate tax, dividends and interest are taxed equivalently after profits.

To get back to sports, for *GT fans*, the obvious thing is to keep GTAA non-profit.

- The "profits" of GTAA do not have corporate tax.
- The interest on bonds and contributions are tax-deductible.

The "equity" financing of GTAA is the ticket revenues which are not tax-deductible. Obviously, it's in our interest for GTAA to rely on debt and contributions as much as possible, versus non-tax-deductible ticket revenues.

It wasn't a bad decision to use bonds to finance the north endzone. The bad decision was building the north endzone.

 

[18in32]

It wasn't a bad decision to use bonds to finance the north endzone. The bad decision was building the north endzone.

Grant Field's seating capacity before 2002 was 43,719 (and is now 55,000, obviously). Since 2002 we've averaged home attendance in the general range of 5,000-7,000 more per game than was possible without the north stands renovation. (Some years higher, some years lower.)

The north stands renovation was the right idea, perhaps not executed as gracefully as we might've wished. But then again, I'll bet the prettier options were more expensive.

 

[GTLiebs]

Grant Field's seating capacity before 2002 was 43,719 (and is now 55,000, obviously). Since 2002 we've averaged home attendance in the general range of 5,000-7,000 more per game than was possible without the north stands renovation. (Some years higher, some years lower.)

The north stands renovation was the right idea, perhaps not executed as gracefully as we might've wished. But then again, I'll bet the prettier options were more expensive.

Less an issue of prettiness and more an issue of overly optimistic. Increasing seats good, increasing seats too much not so good. I'd imagine a lot of people's idea of the north stands being ugly is cause we tend to actually be able to see those stands more

 

[floridajacket]

Grant Field's seating capacity before 2002 was 43,719 (and is now 55,000, obviously). Since 2002 we've averaged home attendance in the general range of 5,000-7,000 more per game than was possible without the north stands renovation. (Some years higher, some years lower.)

The north stands renovation was the right idea, perhaps not executed as gracefully as we might've wished. But then again, I'll bet the prettier options were more expensive.

It would be tough to rehash the construction decisions for the north endzone. I don't know all the options.

But looking at games other than Clemson and UGA, attendance rarely goes much above the 43,700 number. Pitt and NC were slightly less than 43,000. WF was 45,000. Even VT was 48,000. The pattern was similar the previous year.

A back-of-the-envelope calculation is $80 per ticket for UGA and Clemson, for 12,000 more seats. That's $960,000 per year, with on average one game a year. The construction cost was $75 million and interest alone is about $3-4 million. Spreading the principal over 30 years adds $2.5 million. $960,000 is less than $6.5 million.

The $960,000 is also debatable, as without the north endzone the remaining seats can be priced higher.

There must have been some possible, less ambitious capacity upgrades. In 2002, when I toured Tech as an HS junior, the tour guide said GOL demanded the north endzone project to play with the big boys. He got his wish and then left for ND (or, well, didn't). Whether that's true, Tech certainly had a "build it and they will come" mindset. There are a ton of ill-advised construction projects which happen with that mindset.

 

[GT flunkout]

It would be tough to rehash the construction decisions for the north endzone. I don't know all the options.

But looking at games other than Clemson and UGA, attendance rarely goes much above the 43,700 number. Pitt and NC were slightly less than 43,000. WF was 45,000. Even VT was 48,000. The pattern was similar the previous year.

A back-of-the-envelope calculation is $80 per ticket for UGA and Clemson, for 12,000 more seats. That's $960,000 per year, with on average one game a year. The construction cost was $75 million and interest alone is about $3-4 million. Spreading the principal over 30 years adds $2.5 million. $960,000 is less than $6.5 million.

The $960,000 is also debatable, as without the north endzone the remaining seats can be priced higher.

There must have been some possible, less ambitious capacity upgrades. In 2002, when I toured Tech as an HS junior, the tour guide said GOL demanded the north endzone project to play with the big boys. He got his wish and then left for ND (or, well, didn't). Whether that's true, Tech certainly had a "build it and they will come" mindset. There are a ton of ill-advised construction projects which happen with that mindset.

That mindset would have been accurate had we sustained the success of 1998-2001. Going 7 years without a win over UGA after 3IAR didn't seem likely. Every game in 2001 was a virtual sellout. Still, making most of those seats in the upper North, while reducing capacity on the East sideline, was definitely a mistake.

*for those that remember, Bobby Dodd had an advertised capacity of 46000 since the Wardlaw was built. When they came up with the expansion plans in 2000 it was somehow realized that actual capacity was just shy of 42000.