Lawsuit Threatens Future of NCAA: Moody's

CHICAGO -- Moody’s Investors Service revised its outlook to negative on the National Collegiate Athletic Association Monday, warning that the organization faces operational risks from litigation tied to the growing public debate over the best interests of the student athletes.

Moody’s rates the Indiana-based NCAA Aa2. It has $40 million of outstanding tax-exempt debt.

The organization is in the midst of a high-profile legal case with former UCLA basketball player Ed O’Bannon, who, with two dozen other plaintiffs, has sued the NCAA in federal court over the use of student athletes’ likenesses in broadcast rights and video games.

The case centers on whether the student-athletes should be paid for their work. The athletes currently are not allowed to profit from their games while in school.

The NCAA has said that the revenues it gets from the lucrative men’s basketball games allow the organization to finance less-popular sports, like golf.

Moody’s revised its outlook to negative to reflect the threat the litigation or other regulatory changes pose to the NCAA’s operations.

“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,” Moody’s analyst Dennis Gephardt rote in the outlook report. “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.”

A federal judge is expected to announce soon whether O’Bannon v. NCAA is eligible to become a class-action lawsuit, If so, that could further pressure the NCAA and possibly lead to a downgrade, Moody’s said.

The NCAA reported $857 million of operating revenue in 2012. It has television and marketing agreements through 2024 worth $10.8 billion that should support “top line growth,” Moody’s said.

In addition to litigation tied to its student athletes, the organization also faces possible challenges because more than 80% of its revenue comes from the Division I Men’s Basketball Championship event, analysts said.

Standard & Poor’s maintains an AA-plus rating on the organization.

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