Thursday, January 28, 2010

Kovalchuk, The Canadian Dollar And The Cap

As much as I think that a lot of the names surrounding potential offerings to the Atlanta Thrashers as part of a trade for Ilya Kovalchuk are nothing but speculation, I think there has been some really insightful commentary on the circumstances surrounding the negotiations. But I also think a point has been left out about where the cap could be headed.

I think two of the best this week came from Puck Daddy, who pointed out that Kovalchuk's asking price could come down if the Thrashers wait until the summer, and Craig Custance, who wrote that if the Thrashers lose Kovalchuk they will need to spend nearly $20 million just to get the salary cap floor. Both of those are extremely relevant to what the Atlanta Spirit ownership group must involve in their thinking as it negotiates.

Let's take a look at those quickly for a minute before I get to some other news items that I saw earlier in the week that the Thrashers and every other NHL team who would consider meeting Kovalchuk's demands definitely should take into account. First is the option of letting Kovalchuk hit the open market on July 1. It sounds risky -- and it is -- but Thrashers general manager Don Waddell has done it before twice with Slava Kozlov and re-signed him both times. With so many capped out and uncertain about whether the cap will go up or down, teams could get sticker shock as they contemplate making Kovalchuk the league's highest-paid player for a term possibly as long as 12 years at that much-mentioned maximum salary figure of $11.36 million per season. As a result, Kovalchuk's demands could decrease if no one wants to give him that max deal. Of course, the risks in following that path are that someone could meet that figure -- it only takes one, as they say -- or that a more attractive team with a better history of winning could knock on Kovalchuk's door and he may choose to bolt.

But it's no secret that Kovalchuk likes living and playing in Atlanta. Otherwise, he would do what Marian Hossa did and not accept any offer to force a trade. I'm not sure that anyone doubts that Kovalchuk would remain in Atlanta if ownership meets his price. After all, how many other general managers would build a team around him and take in his input in player moves, as Atlanta did in signing Nik Antropov last summer? And it's not like coach John Anderson uses the strong-arm tactics of his predecessor Bob Hartley in managing Kovalchuk. Could anyone envision Kovalchuk playing for Jacques Lemaire-type and chafing as Marian Gaborik did for all of those years? All are calculated risks on both sides of the negotiation.

But now let's look at what could happen with the cap. Larry Brooks of The New York Post reported this tidy little item on Monday that "the league is experiencing an overall two-percent decline in hockey-related revenue prior to currency conversion, after a three-percent decline in HRR last quarter." The NHL salary cap went up 0.18 percent from 2008-09 to 2009-10, only $100,000.

Bridget Wentworth of the Star-Ledger reported last May that NHL Deputy Commissioner Bill Daly projected that the cap would decrease by about 5 percent, or $2 to $2.5 million, unless the NHLPA "wants a 5 percent inflator" -- its right as part of the collective bargaining agreement to which the league must agree, as it ultimately did. That use of the inflator, or escalator clause, kept the cap from such a decline. Last year hockey-related revenues rose 1 percent from $2.62 billion to $2.64 billion, according to Sports Business Journal.

If, at present, revenues overall are down 2 percent -- before currency conversion -- the future of the cap the next few seasons might not exactly be looking skyward, to put it modestly. Let's see what happens when currency conversion comes in. Bloomberg reported on Tuesday that options traders are the most bearish on the Canadian dollar that they have been in 13 months. Canadian teams represent 20 percent of league's franchises but in terms of revenue they contribute a disproportionate share. This story that I wrote for The Sporting News two years ago shows that the Canadian teams were contributing about 28 percent of the revenue and the Canadian dollar wasn't at $0.96 then. The New York Times in December showed how the Canadian dollar went from $0.62 in 2002 to $o.96 in seven years -- a 50 percent increase -- helping the bottom line of Canadian teams and the league as a whole.

But what happens if the cycle reverses itself, as the Bloomberg story suggests? It's not like we'll go back to a situation tomorrow where the Canadian dollar goes back to $0.75, but if it did that 28 percent of revenues that Canadian teams contribute would be cut to 21 percent and that could have a major impact on the salary cap.

So what does all of this have to do with Kovalchuk's impending free agency? In the Star-Ledger story, Maple Leafs general manager Brian Burke was quoted as saying the cap, in effect, has a 12-month lag time between when they compute the numbers and what the current economic reality is. So if, over the next few years, the Canadian dollar settles back into its more historic relationship with the U.S. dollar it could strangle the growth of the NHL's upper team payroll limit, currently set at $56.8 million. Even a modest decrease in the Canadian dollar over the next six months before the league computes the cap for its July 1 free agency date could make a relative impact. (Perhaps that's why Kovalchuk is pushing hard for that big number now while it's still available.) NHL Commissioner Gary Bettman has long cautioned as a general theme about teams' entering into player contracts of extreme length -- those given to Philadelphia's Mike Richards, the Islanders' Rick DiPietro, the Red Wings' Henrik Zetterberg and Chicago's Marian Hossa, to name a few.

The Thrashers definitely have to have this long-term thinking reflected in their negotiations with Kovalchuk -- and so should other potential suitors.


  1. Good analysis and a great point about how currency values affect the salary cap. No other league has to factor that in.

    My prediction is that the asking price for a trade will be too much for other teams and Kovalchuk will stay with Atlanta through the playoffs this year. Then he'll test the free agency waters.

    There will be very few teams willing and/or able to meet his initial salary demands, and when he settles on a slightly lower number, he'll weigh staying in Atlanta against going to another NHL city for the same money, or going to the KHL for a lot more money.

    I think the factors you've cited above will eventually keep him in Atlanta, but don't expect him to sign a contract until late Summer. Kovy's deadline isn't March 3 and it isn't July 1. His deadline is the first game of the 2010/11 season.

  2. Very well put, sir! Something I honestly hadn't considered, but then I'm not the one getting paid to consider those things...

  3. I wish you would blog more often.

  4. Anonymous, I think I will start blogging more often. As you can see, I took about a six-month hiatus but I'm going to try to make it closer to a daily thing.