Saturday, August 06, 2005

Long-Term Risks

An interesting trend in this year's free agency season is the number of 4 and 5-year deals being handed out. Among others, Gonchar, Modano and Pronger all signed for five years; Niedermayer, Aucoin, Hatcher and Rathje for four years. Prior to the lockout, such deals to lock up key players would have been applauded by fans and media. But in the new, capped NHL, these deals can hold high degrees of risk.

Unlike in the NFL, which also has a hard cap, contracts are guaranteed in the NHL. This means that once a team signs a player, they are bound to 100% of the deal. And except for a small window to buyout existing contracts last week, future such buyouts will count against that team's cap. For example, if in two years, the Flyers want to change directions and buy out injury-prone, 33 year-old Derian Hatcher ($3.5 million/year for 4 years), it will cost them $7 million to do so. Further, that $7 million will count against the Flyers' cap.

What makes it even riskier is that the NHL's cap is a moving one, the cap amount based on the previous year's league revenues. This year's salary cap is $39 million based on $1.7 billion in post-lockout year revenues. Assuming however that league revenues are lower than $1.7 billion this year, then next year's cap amount will also be lowered proportionally - teams, of course, will then have to adjust their salaries as well. There are rumors that next year's cap can be as low as $36 million.

Long-term deals will make it harder for teams to adjust to a lower cap. Most likely, these teams will have to trade big contracts for cap space (ie. draft picks or cheap players). However, if the cap is lower, then most teams will likely not be willing to take on bigger salaries themselves. Let's say for example that the Blackhawks decide to trade Khabibulin ($6.75 million/yr) next season to get under the cap. If the cap is lowered to $36 million, what would entice teams to take on his salary when they have already essentially lost $3 million in cap space?

Admittedly, there are merits to teams locking up key players to long-term deals and keeping their core together. However, with a salary cap limiting their flexibility, teams must be sure that they are giving these long-term deals to the right players.
posted by J.J. Guerrero, 10:17 PM


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