Penn State Financial Fallout Continues

Submitted by justingoblue on July 25th, 2012 at 1:32 PM

There's an article today on ESPN reporting that Penn State football lost State Farm as a sponsor for the upcoming season. The same article claims GM hasn't finished their review, while Pepsi, PNC and Highmark Inc. have decided to stick with Penn State for the time being. The article also states that Penn State apparel sales are down from about $80m before the scandal, $60m since the scandal broke and an analyst is predicting a number as low as $45m for this upcoming year. Personally, I think it will be interesting to see who is advertising by the time the season rolls around.

Also, more importantly, Moody's Investor Service has put Penn State's Aa1 rating under review. This press release cites concerns over University governance, as well as "student demand and fundraising" issues. According to Bloomberg, investors have already begun penalizing Penn State by asking for additional basis points in exchange for buying PSU bonds. With over $1b in bonds, a credit rating downgrade would be very costly for Penn State.

Comments

Hannibal.

July 25th, 2012 at 1:58 PM ^

Depending upon how many defectors they have, that could still be a pretty tough game, beause they had a really good '10 recruiting class and an '11 class about on par with ours.  I don't expect PSU to fully tank to Bowling Green level until about 2015.  Maybe a bit earlier if lots of guys leave.

JayZ1817

July 25th, 2012 at 2:46 PM ^

I live in PA and every year Michigan plays in Happy Valley my family and I head up there for the game. The last time Michigan played there was the 2010 "McGloin shredding of J.T. Floyd" game. Even though it didn't end well for the good guys, it was still just a wonderful atmosphere to be apart of. Now I wonder if that atmosphere will ever be the same after all these awful happenings. I'll be heading up next year as well, but I will be very curious to see just what state the football program is in at that time.

State Street

July 25th, 2012 at 2:00 PM ^

NCAA penalties were really totally up in the air for the last cycle though.  Now, with the sactions set, bad publicity in full swing, and stigma attached how much less attractive does being a PSU student sound?  Especially to an out-of-state student with no connection to the school, didn't grow up a fan, etc.

Recruiting these students is just like recruiting football players - how many comparable schools are there academic wise that can offer a better atmosphere, a football team, and campus culture?  A ton.

It's hard not to see the number of applications they get this next cycle absolutely plummet. 

yzerman19

July 25th, 2012 at 3:55 PM ^

i sat on a plane with two PSU accounting students and they both had their interviews cancelled at big 4 (or 6 or whatever that number is now) accounting firms.  this scandal is affecting PSU grads so it willc ertainly affect enrollment no question.  yes this ancedotal evidence is science and applicable to other facts so don't even question my methodolgy.

Feat of Clay

July 25th, 2012 at 5:22 PM ^

Are you kidding me?  That is awful for them.  I find it hard to believe that a recruiter would roundfile a promising applicant (sufficiently promising that they'd arranged interviews) on the basis of this.  What the hell does the Accounting department--and the fitness of its students to contribute to a firm-- have to do with the scandal?  

If this is true, and they were right about why their interviews were cancelled, I'm gobsmacked.  And I feel tremendously sorry for those students.

WolvinLA2

July 25th, 2012 at 6:28 PM ^

That was before all of this came out, and before their football team sucked.  They had great fundraising because they thought nothing would come of this but bad press and if the alumni all rallied they'd get through it unscathed.  Now that there are actual sanctions, we'll see if that great fundraising continues.

His Dudeness

July 25th, 2012 at 1:46 PM ^

I was wondering about those fines. The NCAA Ewok guy said that $60 MIL was one years gross for the program... that is quite a bit and will probably put the program back a while with regards to facility upgrades when it comes time in a few years, right? One years gross isn't pocket change for any business.

justingoblue

July 25th, 2012 at 1:57 PM ^

those apparel sales are a big, big problem. If they lose $35m in clothing revenue this year alone, imagine the consequences that could have down the line in terms of program revenue.

For the University, I imagine getting a credit rating downgrade could have effects way more far reaching than $60m. That goes to the core of being able to build classrooms, labs, hospital buildings, everything they need to update and stay relevant in the educational world. That said, I don't work in or have a degree in finance and I'm not sure what kind of cost would be associated with one service bumping their rating down one degree, especially since they'd still be in a top tier.

jmdblue

July 25th, 2012 at 1:57 PM ^

that anything close to legitimizing Barry Switzer needs banishment.  Joe Paterno proved himself to be a badly flawed guy who also did some great things.  The contributers to this board could likely come up with a list of 100 similar individuals, some of whom appear on our currency, others who won wars, and others who were just terrific parents, friends or coworkers.  Barry Switzer did nothing to bring honor to anything (unless winning lots of football games by any means necessary somehow qualifies as honorable).

96goblue00

July 25th, 2012 at 1:48 PM ^

Next thing you know, the school will lose its accreditation. It sure would suck to be a student at PSU right now. You have to feel for all those students/athletes.

jmblue

July 25th, 2012 at 1:54 PM ^

The financial aspect of the punishment is something that I think a lot of people are underestimating.  Having to pay that $12M annual fine for five years, at a time when their revenue is going to decrease (no Big Ten bowl revenue, and I suspect season-ticket sales are going to take a hit in 2013), is going to leave them seriously cash-strapped.  That could mean no facility upgrades and no big coaching hires.  They probably won't want to splurge to hire an assistant of the caliber of Mattison, and even if Bill O'Brien falls on his face, they're not likely to buy out his contract.   They may have to de-emphasize football out of necessity.

 

 

 

WolvinLA2

July 25th, 2012 at 2:06 PM ^

My guess is Bill O'Brien will be able to keep his job as long as he wants it. If they suck, it wont be because of him. For the better part of a decade, they'll have to run their football program as if it were a MAC program, spending less than any other Big Ten school on salaries, recruiting, etc. until they're passed all of this. After four years, they'll get bowl revenue again, they'll still get the ever-growing BTN revenue, and they'll still fill most of the seats based on student body size and alumni alone.

Point is, smaller programs still survive without bowl revenue, much apparel revenue or sponsorships. They'll struggle for a few years, but they'll be all right.

Needs

July 25th, 2012 at 3:01 PM ^

The real danger will be if, after a couple semi-successful seasons in which Penn State looks offensively creative, O'Brien gets an NFL job. At that point, his buy-out is lower, and Penn State's looking at hiring a coach with limited financial resources and three years of sanctions remaining.

WolvinLA2

July 25th, 2012 at 3:31 PM ^

Although it's possible, I doubt that's a concern. It would have to be a head coaching job in the NFL because he's not going to leave to be an assistant, and since he hasn't been a HC anywhere else, he'd have to be really impressive in two years at PSU to get a HC offer. And if PSU is that impressive despite the sanctions, it will be a lot easier to find a new coach.

Volverine

July 25th, 2012 at 1:59 PM ^

Eh, we're still talking about the school that started a hockey program because of a single familiy's donation of $88M. PSU has rich alumni and one of the tightest alumni networks of any school that size--the alumni donations will pick up to keep PSU through these next few years. 

Volverine

July 25th, 2012 at 2:10 PM ^

Who knows. I only know about three people affiliated with Penn State, but one is an accountant (himself a PSU alumnus) who handles the accounts of several well-off PSU alumni and his impression is that this will galvanize a large part of the alumni base. PSU is really good at fundraising so I'm not sure they'll be affected too much. 

LSAClassOf2000

July 25th, 2012 at 3:24 PM ^

The coupon rate on Penn State bonds is actually 5.0% for most series, so if they have $1 billion in total bonds out there (one in Series A has a price of 111.3 with the yield listed as 2.792, according to one listing which highlights Pennsylvania's municipal and government bonds. There are multiple listings with different prices and yields depending on series), I definitely see a scenario where even a 0.5% increase (50 basis points) on even a few series causes some rather significant damage to their books, and of course, the lowering of the rating will magnify that some.

As for rights and licensing (which, by their figuring, includes corporate sponsorships and royalties for merchandise), the data I had for Penn State shows them at about $36.45 in the black in 2011 for this portion of total revenue, so I have to wonder if that all but disappears and then some in the years ahead. 2011 also saw about $35.63 million in ticket sales for Penn State, and I imagine this might take an observable hit as well.

I actually didn't really think of this secondary but hardly insignificant financial hit. There will not be much in the way of building or substantive hiring at Penn State for a while, I would imagine.

Shakey Jake

July 25th, 2012 at 8:39 PM ^

child molesters and those that enable them will pick up the financial slack by buying PSU items.

I also hear NAMBLA is asking to be a sponser.

that's sarcasm for those impaired on here.

I am utterly disgusted with PSU for covering this up and I hope Joe is rotting in hell for protecting a child molester.

As for Sandusky, he better pray he gets solitary confinment in prison.