Lawsuits can not only be bad for business -- but really take a toll on your credit rating.
The NCAA found this out on Monday, when Moody's Investors Service -- a credit ratings agency -- downgraded the NCAA to "negative" in light of its ongoing legal battle in federal court. The NCAA is engaged in an anti-trust case with former UCLA basketball star Ed O'Bannon, who is suing (with nearly a dozen other plaintiffs) the NCAA over using former college athletes' likenesses to sell video games and make money off college players who were not eligible to profit from their ability while in school.
"The report marked the first time that litigation has emerged as a risk in a Moody's report for NCAA debt," according to the Wall Street Journal.
O'Bannon's case has been ongoing, first filed in 2009, and is currently in limbo and awaiting a class-action designation by a judge in Oakland, Calif. If it becomes a class-action lawsuit, the NCAA is potentially in for a massive struggle, economically and structurally. This looming action is what spurred Moody's to slap a "negative" tag on the NCAA's credit. A win for O'Bannon's side would mean millions of dollars being handed over by the NCAA to former players.
"If the O'Bannon case gains class certification, Moody's says the NCAA could face greater danger of a downgrade from the third-highest Aa2 rating, which would affect $40 million in debt the association took out in 2005 and 2010 to buy rights to basketball's National Invitation Tournament and renovate its Indianapolis headquarters, among other expenses," according to the Journal's story. Here's more:
"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," the agency's report said. "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."
This credit classification for the NCAA -- an Aa2 credit rating, third-best for Moody's -- will hold for the next two years.
"Although the outlook change is a long-range projection, the NCAA's financial rating did not change," an NCAA spokeswoman said. "As a result, we do not anticipate any substantive issues based on the Moody report."
On the whole, the NCAA has taken on a damage-control approach in recent years. The biggest actual threat to its way of operation/existence as we know it is the O'Bannon case, however. The credit dip is significant, even if it lacks actual, tangible effect now. This is another PR hit for the NCAA, which in recent months has seen criticism levied against it for its handling of the Miami infractions case. The report from Moody's specifically mentions concern over the Miami case.
"The outlook change to negative reflects increasing litigation and regulatory risks that could potentially alter the NCAA's operations," Moody's report 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."
Reports have the NCAA garnering nearly $872 million in revenue for the 2012 fiscal year and $801 million in expenses. According to USA Today, the $71 million in profit was the highest ever in a fiscal year for the organization.