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What can Josh Whitman do to reduce the risk with Illinois’ massive debt burden?

Good mojo, a little diversification, and timing will go a long way.

Josh Whitman’s recent announcement that the Illini would be undergoing an upgrade to the basketball facilities, on top of the numerous other projects involving Illinois Athletics, received mixed reactions. On one hand, the announcement was a welcome relief for those looking for the Illini to throw their hat in the college sports arm race.

On the other hand, the announcement calls attention to the Illinois’ Athletics massive debt burden of $260 million. Our own Brandon Birkhead captured the oscillating pendulum of reactions.

But when you combine all these ambitious projects on a condensed timeline together, it becomes a very daunting task for Illinois. Raising funds with a lethargic donor base, where many of the dollars would need to cross over between projects is challenging. Illinois also isn’t making money right now, and these projects will add more expenses with higher operations cost, unforeseen expenses in construction, and staffing for hockey. But even still, the risk could be worth it.

These reactions are natural as the incurrence of debt of captures the mix of hope and promise with the fear of risk. So, what can Illinois Athletics do to reduce the risk associated with it’s massive burden? We have a few suggestions.

Create a positive perception of the Illini’s Future.

All lenders want evidence that borrowers will be able to repay their debts. Sometimes this evidence comes in the form guaranteed revenue streams into the future. This is where TV revenue comes into play. According to recent reports, Big Ten schools will receive $51 Million in TV revenue in 2018. This revenue stream is one of the reasons the Illini can borrow the amount they are borrowing. In addition, this stream is independent of whether the Illini are winning.

However, there are revenue streams that are dependent on the Illini’s ability to win. These include merchandising, ticket sales and donations. So, to a certain extent, the Illini have to show how the future can show an increase to all of these revenues.

The TV money is easier to ascertain than merchandising, ticket sales and donations. Well then, how do the Illini show promise in the latter? This where the perception off the program comes into play. Whitman has to demonstrate his vision to lenders, as well as Illini fans. Every time the Illini demonstrate proof of concept of Whitman’s vision, they must market the hell out of it. Whether it’s commitments in football or basketball, the hirings of coaches, high profile merchandise deals, large donations or wins in any sport, the Illini must show that it’s evidence of the vision coming to fruition.

An example of this is how Michigan capitalized on the hiring of Harbaugh to land an apparel deal and increase donations.

BYU v Michigan Photo by Doug Pensinger/Getty Images

The positive perception of everything that came with Harbaugh will put Michigan in a position where it can show increases in revenue that provide the Ann Arbor brass leverage to refinance its debt.

The interest part of the equation is purely theoretical. [University of Michigan executive vice president and Chief Financial Officer Kevin] Hegarty’s office is constantly seeking lower rates to drive down payments. The athletic department currently has $131 million in interest payments on the books through 2048, but Hegarty stresses that the amount will change as the university seeks to refinance debt... “We are constantly in the market, looking for opportunity to take advantage of reduced interest rates,” Hegarty said. “We’ll manage that down as much as we can.”

Develop revenue streams not associated with Illini Athletics

The Illini are using debt to finance an investment in their future and smart investors look for asymmetric risk reward. Basically, the concept requires the investor to look for investment opportunities where the reward greatly outweighs the risk. If an investor invests in several opportunities with favorable risk, then over time, the investors will spread out the risk and only need to hit on a few opportunities to net a positive results.

How does this work concept in the college sports arms race? It’s simple diversification. Illini Athletics needs to think beyond Illini Sports for ways its facilities can generate revenue.

This can come in many forms, from concerts, music festivals and comedy shows to inviting pro sports teams and international league teams to play exhibitions in Champaign. With the 2026 World Cup coming to North America, international soccer is one potential revenue stream. Whitman can try to lure LA Liga or English Premiere teams to Champaign or International teams looking to play friendlies. Think like Jerry Jones.

Manchester United v Bayern Munich Photo by Phil Cole/Getty Images

Champaign is ideally situated between St. Louis and Chicago. What about Blues - Blackhawks meeting in the Winter Classic in Chambana?

2017 Bridgestone NHL Winter Classic - Chicago Blackhawks v St Louis Blues Photo by Dilip Vishwanat/Getty Images

Time Your Leverage

Timing leverage is crucial to any efforts for the Illini to refinance their debt. This requires a self-awareness on the part of Illini Athletics that only comes from objective feedback on how the program is perceived. The self-awareness comes from constantly poking your head into the lending markets to look for favorable rates, like Michigan.

Still, poking in and assessing the market will not suffice — the Illini must know when the iron will be hot for them to refinance the debt. If they go too early to renegotiate, they might leave significant discounts on the table. If they go in too late, they could miss on significant discounts.

How would Illinois know when the timing is right? We are glad you asked. The Champaign Room has devised the following formula for knowing the precise moment the Illini should strike at the negotiation table:

**The above formula is actually a joke. We do not know the exact moment the Illini should go in to refinance. The Illini should hire experts to help them assess their leverage at the refinancing table.**

But all in all, Josh Whitman — a former lawyer — is one of the smartest athletic directors around. His moves all bold and all in an effort to make a statement (#WeWillWin), so the goal is that the debt won’t be an issue at the end of this line, but for now, this is the world we’re in. Projects cost money, and Illinois needs some success in the revenue sports.