The NCAA's credit outlook is taking a hit from the ongoing anti-trust suit it faces about the use of athletes' names, images and likenesses, as well as the damaged reputation of its enforcement unit.
Moody's Investors Service issued a statement Monday saying it has revised the NCAA's ratings outlook to negative due to the potential for future financial judgments against the organization. The move by Moody's was first reported by The Wall Street Journal and Bloomberg News.
However, Moody's affirmed the NCAA's Aa2 credit rating, the investor service's third-highest rating. The credit outlook is a long-range projection separate from the current credit rating.
Last Thursday, U.S. District Judge Claudia Wilken held a hearing on whether the lawsuit against the NCAA, video game manufacturer Electronic Arts and the nation's leading collegiate trademark licensing and marketing firm, Collegiate Licensing Co., should be certified as a class action.
Wilken did not immediately rule on the matter. If the suit is granted class-action status, thousands of former and current football and men's basketball players could join a case that now is confined to roughly a dozen plaintiffs, led by former UCLA basketball star Ed O'Bannon.
A large class would create the possibility of a damages award in the billions of dollars, as well as the establishment of an entirely new compensation arrangement for current NCAA Bowl Subdivision football players and Division I men's basketball players. If the plaintiffs prevail, the athletes would share in huge broadcast and other revenues, with the money being held in trust until their end of their college playing careers.
The NCAA, in a statement released by spokeswoman Stacey Osburn, did not express great concern about the move by Moody's.
"Although the outlook change is a long-range projection, the NCAA's financial rating did not change," the NCAA statement said. "As a result, we do not anticipate any substantive issues based on the Moody report."
The NCAA also remains under pressure for its enforcement staff's handling of an investigation of alleged rules violations by the Miami (Fla.) athletics program, a concern Moody's noted in its analysis.
A little more than six months ago, in the notes accompanying its most recent audited financial statement, the NCAA reiterated its confidence in its ability to prevail in the suit. The notes stated, in part: "The NCAA and its legal counsel are defending against lawsuits and claims arising in the normal course of its day-to-day activities. The NCAA does not believe the ultimate resolution of these matters will result in material losses or have a material adverse effect on the consolidated financial position, change in net assets or cash flows of the NCAA."
This is normally relatively routine language, but it stands in contrast to Monday's statement from Moody's.
"The outlook change to negative reflects increasing litigation and regulatory risks that could potentially alter the NCAA's operations," the Moody's statement said. "The escalation of risks reflect the growing perceived disconnect between the amateurism of student-athletes, as codified by the NCAA, and the commercial success of high profile college sports. Increased public discourse about the best interest of student athletes combined with highly publicized litigation could destabilize the current intercollegiate athletic system and negatively impact the NCAA and its member universities. The negative outlook also incorporates the long term reputational risk arising through alleged improprieties related to enforcement of complex rules.
"The negative outlook incorporates the potential for negative financial pressure that could result from legal judgments, settlements, regulatory change, or self-imposed policies. While we do not expect a precipitous decline in the financial position of the NCAA at this time, litigation-related risk or other changes could materially impact the credit profile of the NCAA."
The Moody's statement specifically cited the Miami investigation as an example of a situation in which the NCAA's reputation is at risk. It also said that one of the NCAA's "challenges" is an "ongoing need to manage potential conflicts of interest as the various members have to manage the sometimes conflicting interests of the association and the universities they represent."
Regarding the O'Bannon case, Moody's said that if the case receives class-action status, the NCAA's credit rating "could be pressured as the likelihood of an ultimate outcome that would materially damage the Association and its members would increase."
The NCAA had nearly $872 million in total revenue in fiscal 2012, according to its most recent financial statement, and nearly $801 million in total expenses. The statement was dated Nov. 29, 2012, and reflected the NCAA's finances for the fiscal year ending Aug. 31, 2012.
The $71 million surplus, an all-time best for the organization, increased its year-end net assets to more than $566 million, roughly double where they stood at the conclusion of the 2006 fiscal year.
Among the NCAA's $530 million in unrestricted assets was an endowment fund that had grown to more than $282 million. That's more than double what the fund was worth six years earlier.
"While the Association maintains healthy operating performance, manageable leverage and growing reserves," the Moody's statement said, "we believe there is potential for increased claims on assets or revenues over the medium term rising from judgments, settlements or policy changes."
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