OT: the future of contracts? Nets' Spencer Dinwiddie turns new deal into digital securitization
https://deadspin.com/report-spencer-dinwiddie-gives-me-a-migraine-with-comp-1838084960
Fascinating premise. I hope it works out for him and am curious to see whether this becomes a trend. Note, The Athletic has the best breakdown of this, but since not everyone has a subscription, I didn't post the link. The big question is what is he going to invest his lump sum in.
So for all you MGoQuants out there, is this a smart move or an unnecessary risk, for both the player and his investors (assuming he doesn't shoot somebody and get the contract voided)?
September 13th, 2019 at 10:28 AM ^
My first question: how does this count against the salary cap?
Otherwise, kudos for Dinwiddie for pushing new boundaries. I assume he has a sound investment strategy that will pay off. If not, I have a few penny stock ideas for him.
September 13th, 2019 at 11:43 AM ^
Zero impact on the salary cap. The Nets are paying him just the same as they would any other player. The tokenized bond business is all on Dinwiddie's end. In other words, the Nets are going to give him $x at whatever interval they've agreed to. Dinwiddie could put that money in the bank or open a restaurant or go to Vegas and put it all on red, but he's chosen to use it to pay back his investors.
September 13th, 2019 at 11:48 AM ^
Got it. Thanks. I thought this was arranged through the Nets, but this is totally Dinwiddie's move in an effort to capitalize further on future earnings. I think former NFLer Arian Foster did a similar thing.
I'm obviously not good at finance things, although I just did a sweet home refi that locked in a 3.0% rate!
September 13th, 2019 at 10:29 AM ^
Thanks for the link... I’m at work though so could you describe what we are looking at because I can’t click on those links.
September 13th, 2019 at 10:42 AM ^
I don't have the Athletic subscription so some of this is supposition.
The concept is interesting, but I'm curious how much he could borrow money for against his contract right now? He's going to get a better rate than Johnny Mortgage, I know that. Interest rates are really low. I'm assuming his lump sum is greater than the borrowing costs of his contract, but I'd be curious by how much inclusive of any fees involved.
Some of the Deadspin comments seemed to question why anyone would buy these bonds, but off hand I think they will be somewhat popular. Yields around the world are extremely low (there are junk bonds in Europe with negative yields) and this is a guaranteed contract regardless of his injury status meaning the money should be there. Provided there's some legitimate yield here, I think he won't have much of a problem selling them.
September 13th, 2019 at 10:56 AM ^
I would need to know more about this. What portion gets paid out? What is the interest rate? What happens if he gets injured?
I don't think he is the first to do this, I remember a football doing this a few years back and if I recall correctly it was more of an insurance contract; the player gets full contract guaranteed and the people take risk if he gets injured they get less than expected return.
edit - I don't have access to the Athletic, but from the deadspin article they are taking it from the time value of money and an investment spread, but I don't think thats what this is trying to achieve (unless the interest rate on this is super low in the 2-4% range)
September 13th, 2019 at 11:03 AM ^
In general the premise pays off with lottery winners, but they're weighing immediate vs long term payouts, his contract is only a few years.
September 13th, 2019 at 12:24 PM ^
It only pays off for lottery winners on the time value of money theory which depends on many factors going right including that you largely leave the principal intact, invest responsible and don't get robbed by crocked accounts, investment advisors, lawyers, hookers, pit bosses, etc. Most lottery winners are far better off taking the annual payments based on the real world experience theory (TM pending) e.g. if you have no experience managing or having significant assets you are much better taking the annuity and learning how to handle the money over time vs. taking it all and being a feeding frenzy for sharks.
September 13th, 2019 at 12:35 PM ^
totally agreed. time value only comes into play because the lottery (i believe) uses a risk free rate to calculate and discount the payout so its an easy decision if you can eve be remotely good with money.
I totally agree with you that the average (or almost all) lottery winners should take the annuity
September 13th, 2019 at 12:01 PM ^
From Dinwiddie's side, I find it hard to believe he thinks his investments can outperform the bonds he's selling after fees etc. But good luck to him I guess.
On the bond buyer side, it doesn't seem like a great investment, but neither is sports gambling. At appropriate amounts it could be fun though. I would pay something for a token cut of Jordan oole's future contract, for example, as something fun to follow and have a small stake in his career. I wouldn't consider it a serious investment, however.
September 13th, 2019 at 12:54 PM ^
Couldn't resist.
September 13th, 2019 at 12:07 PM ^
Given the track record of athletes and money, immediate liquidity of an entire contract is probably not a great concept to be promoting in the industry.
On the bright side, 30 for 30: Broke, Part II will have plenty more people to choose from.
September 13th, 2019 at 12:16 PM ^
"This offering is highly speculative and the securities involve a high degree of risk." from the 2013 Form S-1 Registration Statement for "Fantex Series Arian Foster Convertible Tracking Stock" at https://www.sec.gov/Archives/edgar/data/1573683/000104746913009713/a221…
Go to sec.gov, company filings, search "Fantex" to learn everything you want to know about these types of offerings. Other notable aspects include high fees (5.21% for Arian Foster), lack of liquidity, no public market, complete dependence on the honesty and good will of the investment sponsors, managers, and parent corporation, its the opposite of diversification, depends on a single persons whims who could die or quit at any time, no operating history, significant losses since inception, and on and on. Its basically an unsecured promissory note - the highest of high risk investments.
The FWP or S-1 for Dinwiddle will likely state, "Gauranteed contracts do not mean 'gauranteed' in the common sense of the word."
Run away.
September 13th, 2019 at 12:19 PM ^
ah yeah thats right, I knew it was a football player, but couldn't remember which.
This is 100% an injury / quitting insurance and has nothing to do with investment spread, unless he has a can't miss start-up he needs capital for
September 13th, 2019 at 12:27 PM ^
Well, it will be a hell of a deal for him. He will get all that money now with no future liability. The investors will buy into some LLC. Dinwiddle gets paid a little bit less but upfront, the investment sponsors and managers will get paid, the lawyers and accountants will get paid, and if it doesn't work out, the only loser is the investor.
September 13th, 2019 at 12:34 PM ^
I mean that is typically the case no? presumably there is a big discount to his total contract though, like he gets 80% up front (there are 5% fees using your other cited example) and the investors get the full 100% if he plays through his contract.
If that is the way this is structured, thats a 20% return, or about 6+% a year, which is not bad. Not the right return for the risk profile, but if you want a chance to say you own part of a contract of an NBA player.
However, if the discount is less than 20% then its an even bigger risk to the investor. No clue who would buy this other than as a something "cool" thing that could earn a little on it.
edit - holy smokes - just googled around, according to another article, looks like he is raising 30 of the 34 (so only 10% discount) and is looking to invest a good chunk in bitcoin.... yikes
September 13th, 2019 at 1:07 PM ^
It appears as if the structure of the investment is the offering company purchases X% of future earnings (contract plus endorsements) for Y$. The investor is not guaranteed any periodic payment, so its NOT like a promissory note. The manager of the particular tracking stock can declare a dividend or perhaps make a payment at the end, but they don't even provide financial projections to guess what the ROI might be. Apparently there is a Vernon Davis series from 2013 that is more developed than the Arian Foster series which was pulled, but I'm out of time to keep reading fun SEC filings for today and figure out the history since 2013. In any event, among the worst investments you could make IMHO for an investor but could be a pretty decent deal for the athlete.
September 13th, 2019 at 1:28 PM ^
I know, all very fascinating. I am impressed you went to the SEC filings. I didn't have it in me for a friday to pine through it, but meh.
Agree, great for athlete, terrible for investor.
Although, I feel like for the Arian Foster one, wasn't there talk about it being all future earnings? Now if you start to think of it like that then it gets interesting from an investor standpoint. That would definitely be athletes as stocks.
September 13th, 2019 at 1:33 PM ^
Right, the Arian Foster bond was an investment in the Arian Foster "brand". The investor would get a slice of his contract income, endorsement deals, etc... Risk-wise Dinwiddie's guaranteed contract-backed bond seems like a Treasury note compared to betting on how much money a football player would make on commercials n years from now.
September 13th, 2019 at 1:39 PM ^
true - I mean I don't know NBA contracts all that well; how guaranteed is that guarantee? Does he get it inspite of injury, misconduct, etc? Where would it fall on a bankruptcy hierarchy, with payroll or is it a retention bonus?
If it was 100% gauranteed no matter what then sure, from an investor, giving out 30 to get 34 is an ok 3% return / year, which is better than other risk free returns over the same time horizon
September 13th, 2019 at 1:53 PM ^
NBA contracts are generally guaranteed in the event of on-court injury, so if he's unable to play because he turns a leg into a pretzel against the Knicks, he'll still get the money from the Nets. But there are plenty of clauses that will void the deal. For example, if he rides a motorcycle into a retaining wall at 100mph, he's not getting his money. There are certainly various other clauses concerning being found guilty of a felony, etc... But as long as he doesn't do anything stupid, the Nets have to pay out. That said, buying Dinwiddie bonds is still going to be quite risky compared to doing other things with your money for similar returns. (I'm guessing wildly at what his bonds will earn, of course.)
September 13th, 2019 at 3:10 PM ^
Excluding fees, it looks like they would earn 13% over 3 years (his contract is 3 years for 34mm and he is raising 30 off his whole contract). So I mean at 4ish% for 3 years you are looking at something slightly better returning than a BBB bond (I see around 3.5%) and a BB (which I am seeing around 5%).
So I mean, I dunno? Maybe thats the right risk profile?
September 13th, 2019 at 1:24 PM ^
Bitcoin?! That seems like a colossally bad idea.
September 13th, 2019 at 1:28 PM ^
lol I know. Whatever though, there are worse things (maybe) people who all of a sudden came into 30mm have spent their money on (probably?)
September 13th, 2019 at 12:48 PM ^
Yep, hell of a good deal for him. Not only does he get all his money now and have the opportunity to come out ahead by investing at a higher rate of return than whatever his bond is paying out, he's also presumably shifting all or most of the contract risk to the investors. If the Nets go bankrupt or his contract is voided or the Barclays Center is blown up or whatever, he'll still have his money. (I say "presumably" because the available reporting is light on details, but that's certainly what I'd try to do if I were him.)
September 13th, 2019 at 1:14 PM ^
Most of the deals are in the area of 10-20% of future brand earnings for whatever amount of $ the sponsor arbitrarily values those future earnings at. The athlete is only shifting a portion of the risk and even then, he simply has no downside. The athlete is the one who needs to figure out the time value of money and such, but if you want cash fast for whatever reason this is one way to do it. The Arian Foster stock said something to the effect that if he quits or gets injured within 2 years he needs to pay back a certain % of the $ to the offering company, but other than that 0 downside to the athlete except what else he could have done with the 10-20% in the future.
September 13th, 2019 at 1:16 PM ^
Also, the bond part of this is mildly interesting because of its relative novelty, but I'm much more interested in the crypto part of the story. Why not just issue a traditional bond? Is there a significant cost saving to Dinwiddie to create the bond as a cryptographic instrument? Or perhaps he's doubling up on the novelty to generate more free publicity like the ouch-my-brane Deadspin article? Whose platform is he going to use (surely he's not reinventing Ethereum, etc...)? Is this all just a bunch of bullshit?
September 13th, 2019 at 1:32 PM ^
Considering its not a company issuing this, and not something that is trading it, there isn't really a digital platform for this (like say the way there is to buy / sell a Treasury Bond), and to do this via paper would probably be a nightmare.
Doing it via a block chain type technology at least lets you keep track of who has what and helps facilitate payments.
I am sure there is an mgobanker or mgofinancelawyer who will keep me honest on the above
September 13th, 2019 at 1:43 PM ^
I think he could issue it as a traditional bond with a CUSIP and all that and find a broker willing to do all the leg work. Treasuries and some corp bonds are exchange traded because there's a market for that, but many (most?) corp bonds are just OTC.
Regardless, Dinwiddie's deep interest in crypto is probably the answer to my question. He's issuing his bond as a token because he's super into that.
September 13th, 2019 at 2:53 PM ^
These are definitely securities and I'm not sure an individual can issue private placement securities. He could do it in the form of promissory notes personally, but those are likely to be considered securities. In either event, you wouldn't want to do it personally - if you make an LLC and do it correctly he has zero exposure. If you issue personal promissory notes, he can be sued left and right. And you would need offering materials, prospectus, etc. all that stuff to CYA from the fraud and securities fraud claims. The Adrian Foster and other athlete investments are all issued by an offering company Fantex as different series of stocks. Fantex is essentially a holding company, which has sub-corps and LLCs that are responsible for different issues of stock. You aren't really buying into Dinwiddle, you are buying into a company that has some deal with Dinwiddle. I just think the articles are short on the details at this time.
September 13th, 2019 at 3:05 PM ^
fair - thanks! Been a fun / enlightening finance nerdy discussion. I appreciate it! lol
September 13th, 2019 at 3:09 PM ^
Yeah, the ouch-my-brane Deadspin article mentions that he's starting a company, which makes it sound like he's out looking for office space and someone to make sure the coffee pot is full, but really it's just an LLC that'll only exist on paper in his lawyer's office. As you point out the key part is in the source phrase of LLC: limited liability company. Spencer Dinwiddie the person is going to have a contract with Spencer Dinwiddie LLC that will specify that Spencer Dinwiddie the person will turn over the money he gets from the Nets to the LLC. The investors will buy their tokens from the LLC and never, ever have any sort of relationship with Dinwiddie the person.
September 15th, 2019 at 12:11 PM ^
David Bowie did something similar in 1997.
"Bowie Bonds" were bonds collateralized on future funds flows from his pre-1990 catalog:
https://www.investopedia.com/terms/b/bowie-bond.asp
September 16th, 2019 at 11:25 AM ^
Thanks for pointing this one out. Its fundamentally different than the Arian Foster/Fantex type deals and I imagine the Dinwiddle deal on several fronts. Bowie's was structured like a traditional bond, it was secured by an established asset (current and future royalties), had been evaluated and rated by 3 rating agencies (in 1997 rating agencies were still believed to be impartial vs. 2007 CDO, CMO, MBS, etc.). An interesting side note, the Bowie Bonds used "credit enhancements" sometimes called "yield enhancements to ensure the 7.9% return was paid. In essence, if the underlying asset wasn't performing, the sponsor had a separate revenue stream they would use to "enhance" the return to ensure 7.9%. What's interesting is that Prudential Bache, a division of the Bowie Bond's sponsor, had just been hammered a few years earlier by regulators failure to disclose the use of yield enhancements, among other things. In the Pru Bache case, the enhancements consisted of the undisclosed return of the investors own capital investment to prop up the yields. In Bowie's case the enhancement was a guarantee from a third-party. I've been doing securities litigation for a few years and never heard of the Bowie Bonds so found it interesting. While it appears the Bowie Bonds were legit, there were a number of other companies that purported to have celebrity IP (music rights, royalties, masters, etc..) as collateral that turned out to be complete frauds.