On NHL Teams On The Rocks

We mentioned earlier today that the New Jersey Devils may be in financial difficulty. According to the New York Post, “the attendance-challenged, heavily indebted team missed its Sept. 1 loan payment, giving its lenders a breakaway chance to push the team into bankruptcy.”

Maybe that Ilya Kovalchuk contract was a bad idea after all.

All jokes aside, this is bad news for the NHL. The New Jersey Devils have won three Stanley Cups in their history and, outside of last season and a few other exceptions, they’ve been one of the most consistently successful hockey teams in the league. They are almost always a threat on the ice and you can rarely ever count them out as a contender for the Stanley Cup.

They also play in the Atlantic Division, one of the toughest divisions in the NHL. It’s also one of the divisions with several “big name” teams, as the New York Rangers, Pittsburgh Penguins and Philadephia Flyers play in the Atlantic. These teams are fixtures of the NHL on NBC and thus the division as a whole an its success is important to the league.

More from the New York Post:

Some lenders are already considering selling their stakes to vulture investors, the source said.

“This is going to be a very difficult situation.”

If the Devils, who along with the arena operation company, owe 15 percent more than the team is worth, according to Forbes, are declared bankrupt — and one source speculates that has already happened — lenders cannot repossess the team and force a sale for at least 180 days.

Of course, the Devils are not the only hockey team that is in trouble right now. The New York Islanders struggles to secure a new arena have been well-documented and everyone has heard a little too much about the Phoenix Coyotes situation at this point. The Dallas Stars are still looking for an owner and so are the St. Louis Blues. We’ve already seen the Atlanta Thrashers pack up and move to Winnipeg.

At first glance, it seems a little strange that so many NHL franchises would be on unstable ground. The game continues to bring in strong ratings, from the All-Star Game to the Winter Classic to the Stanley Cup Final. The big ratings on Versus and NBC led to the league’s record-setting TV deal with NBC Sports Group.

The salary cap, which is tied to league revenue, has risen every year since the lockout.

Okay, maybe that last one is a bit of a problem.

The salary cap was designed so that rich, big market teams couldn’t simply buy every talented free agent available, crippling smaller, less profitable franchises. It’s been successful in that regard and parity is much more common in the NHL these days than in the past. However, because of revenue sharing, the league also instituted a salary cap floor. And that floor is now pretty high.

The increase in the cap floor has made things difficult for many NHL teams. From Puck Daddy:

The salary cap floor was a win for the union in 2005. Since then, it’s managed to become a boon for veteran free agents and bust for teams with low revenues struggling to keep pace with its growth. Which leads us to an essential question:

Is the salary floor good for hockey?

The salary floor, in theory, isn’t a bad idea. It expands the options for players in the free market. It becomes a fail-safe against owners of low-revenue teams taking welfare from the Original Six and then not reinvesting back into the franchise. And above all, it encourages competition on the ice, so that we don’t have one team spending to the cap humiliating a collection of minimum wage plugs whose owner just wants to cut his losses before selling.

The problem with the floor was how it worked within the NHL CBA. It inflates the salaries of mid-range talent, as teams overspend just slightly to make sure they’re over the minimum.

We’ve seen quite a lot of overpayment recently as some teams try to reach the floor and other teams try out outbid those teams for certain players.  The rising floor has made it difficult for small market teams to be profitable. Remember, the salary cap is tied to league revenue, not the revenue of any individual team. If you’re a struggling team that is trying to make it in the NHL, you still have to spend a good chunk of change to be able to play.

Most struggling teams spend just enough to go over the floor, but that’s still a lot of money. Then, because the cap is so high, richer teams are spending even more than those team. At this point in time, the Philadelphia Flyers are spending about $16 million more than the New York Islanders. That’s the difference between a competitive team and one that will likely struggle. We’re in a two-tier league once again.

When teams struggle, fans stay away. When fans stay away, teams can’t make money. When teams can’t make money, they try to cut costs. When teams try to cut costs, the struggle on the ice. Repeat until disaster.