FanHouse Canadian Dollar

Last night between games on HNIC, NHLPA executive director Paul Kelly was interviewed by Ron MacLean (link to HD video of the entire interview). The first thing they discussed was the rumor that escrow payments made by the players would be rising from 13% of their pay to 17-20%. Kelly wouldn't say exactly how much the payment would rise, but he did answer in the affirmative that the 17-20% range was accurate.

It is the escrow system that allows for the NHL to have both guaranteed contracts and a Salary Cap tied to a percentage of revenues. What this rise in escrow means is that the players contracts in total will likely be much more than the 56.5% of league revenues for the year. It was already pretty much taken for granted from the beginning of the season that the 13% that was being taken out of their checks and held in escrow would be returned to the owners at year's end.

Following up on my post from last week about the US Dollar's rise potentially affecting the salary cap, Tom Benjamin had a short post today about this issue. On the subject of revenues vs. the cap Tom B. has this to say:

If revenues actually do fall we are into uncharted waters, but the cap formula includes an automatic 5% increase. As a result revenues have to fall a lot to actually drop the salary cap. A zero increase in the cap is probably my worst case scenario. I don't think that would cause significant problems. It would, however, help the Russian league compete for players.

His point about the Russian competition is an excellent one, especially in light of Alexander Radulov's recent statements. Given that I believe there is a paradigm shift in world finance underway with the power-base shifting eastward towards Russia, China and the Arab world any drop in revenues for the NHL would be yet another data point in favor of that analysis, a potential nail in the coffin of the NHL's dominance over the hockey world.

But, that said, I have to take umbrage with Tom's assertion that it would take a large drop in revenues to drop the cap. On the contrary, given what we know about the league's revenues last year, the $56.7 million salary cap for this season includes the 5% kicker, so any drop in revenue would cause the cap to drop. Unless the numbers being bandied about are way off ($2.56 billion), the only way for the cap to be $56.7 million was if the 5% kicker was added to the cap for 2008-09. If the NHLPA waived the 5% increase, then the cap would have been set at approximately $54 million. If I'm wrong about this, please someone correct me.

Now, the likelihood of league revenues contracting is subject to much debate, and the more I discuss this the less convinced I am that revenues are likely to drop a lot. As I pointed out last week, even in a revenue neutral setting the current spending on salaries means that the escrow payments would stay with the teams as that equals ~59% of revenues where the players are due only 56.53%. This does not bode well for next year's extension of the CBA.

For those who follow the goings on in the financial markets closely, the recent rally in the US Dollar in terms of the trade-weighted index was quite an event, considering the extreme weakness of world's reserve currency over the past 7 years. The blast upwards to 76 on the index has some people proclaiming (and I'm not one of them, mind you) that the Bear Market in the dollar is over:

"This is the watershed week for the US dollar," said Marc Chandler, currency strategist at Brown Brothers Harriman. "The magnitude of the dollar's moves and the breaking of key technical levels suggest that a major shift in the outlook towards the dollar is occurring as massive positions are adjusted." Other analysts described the widespread buying of dollars as "capitulation"

One might be wondering what this has to do with the NHL, and, as the title of this post suggests, the salary cap? Allow me to build my case slowly if you would. Considering that according to this article in the Toronto Star I found at this post by my old blogging buddy the EclectEcon over at the Sportseconomist.com, the driving force behind the >10% rise in the salary cap for each of the past two seasons was the strengthening Canadian Dollar:

The increase in the value of the Canadian dollar may be responsible for as much as half of the league's revenue gains since the NHL went through the lockout of 2004-05, say several sources familiar with NHL finances.

"If you take out the Canadian teams, which have done so well since the lockout largely because of the Canadian dollar, the league's revenues are actually only growing at a 2 per cent clip per year," says an executive with a U.S.-based NHL team, who requested anonymity.

With the Loonie averaging near parity with the $USD over the past year and having broken down out of the box formation that held it in check between $1.02 and $0.97US for the past 9 months to its closing price as of this writing to $0.938, there is a real possibility of a contraction in league revenues due to this breakdown of the exchange rate.

When you think about influential figures in Canadian sports and the world of hockey, who comes to mind? Gary Bettman? Brendan Shanahan? Sean Avery? Chris Chelios? Sidney Crosby?

While all five of those men have had quite an impact on our favorite sport, it seems that none of them is considered the most powerful force in Canadian sports, bowing down to the almighty Canadian dollar on The Globe and Mail's Power Players of 2007 list.

While Sidney Crosby has single-handedly forced the NHL to change its unbalanced scheduled, convinced many kids to buy the numerous products he endorses, sold a plethora of NHL merchandise, and shell-shocked many an NHL goalie, the one thing he cannot do is effect the economy of an entire country.

The impact of the loonie, which hit par this year and exceeded the value of the American greenback before falling back, was profound.

For professional clubs, which earn Canadian money but pay out in U.S. salaries, it produced millions in additional revenue. It helped clubs pay off debt. It turned the Southern Ontario market ripe for NHL relocation. And it made the pursuit of a NFL franchise for Toronto even more attractive.

For years, Canadian teams had to suffer with a very weak dollar, and it made it hard for them to compete with their American counterparts for free agent signings. The Oilers could not be on 'par' with an American club if they were both offering $6mil to some young man. Now, the tide has turned, and Canadian clubs are raking it in.

Other NHL people on the list: Gary Bettman at #5, Chris Chelios at #8, George Gillett Jr. at #10, Jim Balsillie (wanna-be owner) at #11, Colin Campbell at #15, and Eugene Melnyk at #21.