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The Signing Bonus: Rise Of The Buyout-Proof Contract

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The life of an NHL agent is tough. As the league continues to tweak (or totally overhaul) their CBA each few seasons, changing contract regulations and offering teams different ways of structuring deals, agents are always trying to find ways to circumvent them and get the best offers for their clients.

With teams becoming more and more willing to use buyouts to rid themselves of the horrible contracts that they sign on July 1st – famously a day of simultaneous excitement and regret – agents around the league needed to find a way to protect their clients from losing out on a third (or sometimes two-thirds) of the salary the sides agreed on.

The most recent buyout window, which lasted from June 15th to 30th, saw a dozen NHL players bought out, including household names like Thomas Vanek and Dennis Seidenberg. While some fans may see this as an opportunity for a player to earn two contracts at the same time – Vanek was signed on by Detroit for $2.6MM on July 1st, more than the $1.5MM he surrendered in his buyout – most take it as a personal slight, an indictment of their play or character. Regardless, agents continue to try and secure guarantees for their clients, instead of leaving the power in the hands of the league’s general managers.

Enter the signing bonus, this summer’s contract-du-jour. All across the league, big name free agents have inked deals that will see them paid almost entirely in signing bonuses, with very little actual salary being given out each season.  Take Loui Eriksson for instance:

2016-17 – Salary: $1MM, Bonus: $7MM
2017-18 – Salary: $1MM, Bonus: $7MM
2018-19 – Salary: $1MM, Bonus: $6MM
2019-20 – Salary: $1MM, Bonus: $4MM
2020-21 – Salary: $1MM, Bonus: $3MM
2021-22 – Salary: $3MM, Bonus: $1MM

While Eriksson’s cap-hit sits at $6MM per year, he’ll make more than that in bonuses alone each of the next three seasons. There are a couple of reasons why this would benefit the player.

For one, everyone loves getting a big check rather than a weekly salary – who would turn down a piece of paper with six zeros?  As any economist will tell you, money in hand is worth more than money promised to come, and just as teams in other sports are deferring payments for this reason long into the future, having money up front is actually more valuable for the player in question.

It’s in the buyout rules that the contract really holds value though, as – hinted at by the title – these contracts are basically buyout-proof.  Under the current CBA, buyouts are calculated by taking two-thirds of the remaining salary owed, not including signing bonuses, and spreading it out over twice the remaining contract length. The new cap hit is determined by subtracting the savings from the average annual value of the deal which includes signing bonuses.

This means that if the Canucks were to want to buy out Eriksson after say, the third year of his new deal, they’ll only be saving $333K of cap hit in 2020-21, an insignificant portion of the $6MM number. That last season of $3MM is a bit better for the Canucks (they would save $2MM of his cap hit), but structuring it this way almost guarantees that Eriksson will collect at least $35MM of his deal – more than 97%. It’s just not worth it to buy him out any sooner than his final year.

Andrew Ladd, Milan Lucic, Kyle Okposo all signed deals heavily impacted by signing bonuses, protecting them against a buyout through all but the very end of their agreements.  Even Matt Martin, a career fourth liner secured a $10MM deal that is 65% bonus.  He’ll only be collecting $750K in salary in years three and four of the deal.

While this doesn’t necessarily mean trouble for clubs around the league, you can bet the owners and NHLPA will take a look at it when negotiations begin on the new CBA.  The current agreement expires in 2022, though the two sides have the option to end it a year earlier.

Just as the league has used cap recapture and contract limits to close loopholes in the past, be sure that if they want to continue to have the option to buyout bad contracts they’ll remove this option from the equation.  Creating a rule that would make signing bonuses only be able to hit a certain percentage of each season’s salary would be the easy fix, but expect push-back from the NHLPA.

Even if they do end up closing it, agents will work on another way to get their clients the best possible guarantee; they always seem to be one step ahead of the league.

Cap Space For Each Team Heading Into Free Agency

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With the free agent market ready to open up, here is a closer look at what each team has to spend and how many roster spots they have filled (the maximum roster size is 23).  All numbers are courtesy of Cap Friendly.

Anaheim: $14.8MM in cap space, 16 players signed
Arizona: $26.3MM in cap space, 14 players signed
Boston: $17.6MM in cap space, 16 players signed
Buffalo: $18.0MM in cap space, 19 players signed
Calgary: $21.0MM in cap space, 18 players signed
Carolina: $26.0MM in cap space, 18 players signed
Chicago: $5.2MM in cap space, 19 players signed
Colorado: $20.9MM in cap space, 15 players signed
Columbus: $4.4MM in cap space, 19 players signed
Dallas: $14.2MM in cap space, 17 players signed
Detroit: $13.3MM in cap space, 19 players signed
Edmonton: $14.4MM in cap space, 23 players signed
Florida: $18.0MM in cap space, 20 players signed
Los Angeles: $7.9MM in cap space, 19 players signed
Minnesota: $11.6MM in cap space, 16 players signed
Montreal: $9.2MM in cap space, 21 players signed
Nashville: $9.3MM in cap space, 19 players signed
New Jersey: $24.9MM in cap space, 16 players signed
NY Islanders: $14.6MM in cap space, 18 players signed
NY Rangers: $15.3MM in cap space, 15 players signed
Ottawa: $18.4MM in cap space, 18 players signed
Philadelphia: $12.0MM in cap space, 17 players signed
Pittsburgh: $1.5MM over the cap, 23 players signed
San Jose: $9.1MM in cap space, 17 players signed
St. Louis: $14.2MM in cap space, 19 players signed
Tampa Bay: $13.0MM in cap space, 18 players signed
Toronto: $3.8MM in cap space, 21 players signed
Vancouver: $10.1MM in cap space, 21 players signed
Washington: $8.9MM in cap space, 19 players signed
Winnipeg: $20.1MM in cap space, 19 players signed

Note that these amounts don’t factor in any potential LTIR savings for players that are signed but are not expected to play next season.

The Steven Stamkos Contract And Its Long Term Effects

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Had it happened at any point over the last year, Tampa Bay captain Steven Stamkos re-signing with the Lightning would have been the top story of the day and dominated the conversation. However, on a day where big names were being traded left, right, and center, the Markham-native forgoing unrestricted free agency seemed like a side note.

Sportsnet’s Elliotte Friedman reports the structure of Stamkos’ new contract being heavily bonus-laden: Stamkos will make a $1MM salary with the rest in bonuses. Friedman has the salary at five years of $9.5MM, followed by $7.5MM and two years of $6.5MM. That’s a total of $68MM over 8 years, for a cap hit of $8.5MM, which is only $1MM higher than his expiring contract.

It’s a similar structure to the contracts of David Clarkson and Ryan O’Reilly, with great benefits to the player in the event of a lockout or buyout: Stamkos will still get the signing bonus money if the NHL goes through another lockout in 2023 at the expiration of the current CBA. As well, should the Lightning ever want to buy him out (don’t laugh, they bough out Vincent Lecavalier), it would cost the team $2.83MM per season. That’s 283% of his actually salary. (Buyout calculation done on General Fanager).

The feel-good aspect of the signing is this: Stamkos took less money to stay than he could have gotten on the open market (not factoring taxes). He wants to retire a member of the Lightning. In the Lightning’s press release, Stamkos was quoted as saying “it’s not often that a player gets the chance to spend his career in one organization and I am hopeful that this agreement sets me on that path”.

However, the part that is going to make Lightning fans nervous is how it will affect the team around Stamkos. The team has $9.3MM in space for next season. However, leading scorer Nikita Kucherov still needs a new contract after being qualified earlier this week, as does two-way winger Alex Killorn. Those two contracts are doable; it’s next summer where it could get ugly. Top defenceman Victor Hedman, both starting goalie Ben Bishop and goalie-of-the-future Andrei Vasilevskiy, and forwards Jonathan Drouin, Tyler Johnson and Ondrej Palat will all see their contracts expire.

One of the goalies will likely be traded before then, but the rest of the group will cost serious money to keep together. Defenceman Matt Carle has two years left at $5.5MM and figures to be traded or bought out to save space for the upcoming group of free agents. This is also where gritty winger Ryan Callahan’s contract is going to hurt. Callahan will make $5.8MM annually until 2020, but scored just 28 points in 73 games last season and is on the wrong side of 30.

Wily GM Steve Yzerman will have his hands full again this season, after masterfully handling the Drouin and Stamkos sagas last season. It’s going to be a very interesting year for the Lightning and their fans.

Capology: Restricted Free Agents (Part I)

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Restricted Free Agents can sign with any team once their SPC expires, but the player’s prior club can either match the new contract—called an offer sheet—or receive compensatory draft picks from the RFA’s new team. It allows a young player the opportunity to experience free agency while giving teams a exclusive chance to match any offer their player may receive.

Who is Eligible to be an RFA?

A player generally becomes an RFA after his first contract expires. Essentially, RFA status is tied to a player’s age* when he signed his first SPC:

18-21 when signing ELC: RFA after 3 years of pro experience
22-23 when signing ELC: RFA after 2 years of pro experience
24+ when signing ELC: RFA after 1 year of pro experience

Age is defined as the players age on September 15th of the year he signed his first SPC. Professional experience however, depends on a player’s age. For players 18 and 19, professional experience is 10+ games in the NHL. For players 20+, professional experience is merely 10+ games in any professional league.

Just because a player is eligible to be an RFA, however, does not automatically bestow RFA status. As explained below, a team must either make the player a Qualifying Offer (QO) or elect to take the player to salary arbitration. If a team does neither, the player becomes a UFA.

Flowchart Illustraing NHL RFA Timeline

 

What is a Qualifying Offer?

A qualifying offer (QO) is an offer of a one year SPC by a player’s team. The CBA requires that the SPC meet certain terms and conditions:

Salary

An SPC’s minimum salary is determined by a player’s previous year’s NHL Salary

  • If a player’s previous year’s NHL salary was $660,000 or less, the SPC must offer a minimum of 110% of the player’s previous year’s salary;
  • If a player’s previous year’s NHL salary was greater than $660,000 but less than $1,000,000, the SPC salary must be at least 105% of the player’s previous salary but cannot exceed $1,000,000; or
  • If a player’s previous year’s NHL salary was equal to or greater than $1,000,000, then the SPC salary must be 100% of the player’s previous salary.

One-way and Two-way

Most QOs are two-way (meaning that the player receives a minor league salary if he is sent down). A QO must be one-way, however, if the player meets the following conditions:

  1. played at least 180 NHL games in the previous three NHL seasons;
  2. played at least 60 NHL games in the previous season; and
  3. did not clear waivers during the regular season waiver period.

Qualifying offers sheets are predominantly a formality. Teams are required to make an offer so they can retain a player’s RFA rights. Players can reject a team’s QO—something they usually do. Once the QO expires, both the team and the player will negotiate a more lucrative deal.

When Does a Team Make a Qualifying Offer?

A team seeking to retain its rights in RFA players (and not electing arbitration) must tender the QO by the later of June 25th or the first Monday after the NHL Entry Draft. That means that a player must receive the offer by that date. A late QO is insufficient, and the player immediately becomes a UFA.*

When Can a Player Accept a Qualifying Offer?

Even though a QO must be offered in June, a player cannot accept a QO until July 1st. The QO is open for two weeks until it expires on July 15th.

What if a Team does not Make a Qualifying Offer?

If a team does not make a Qualifying Offer by the CBA-imposed deadline, the RFA-eligible player immediately becomes an unrestricted free agent.

So an RFA either receives a QO, or becomes a free agent. If they receive a QO, they can still sign with another team, but their original team has right of first refusal. This process is called the offer sheet process. See our forthcoming post on offer sheet soon.

* in 2010, the Chicago Blackhawks tendered their QOs late, and their RFA-eligible players became UFAs

 

Capology: NTCs and NMCs

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As the free agency period approaches, Pro Hockey Rumors takes a look at No-Movement Clauses and No-Trade Clauses.

A no-trade clause (NTC) prevents a team from trading a player, but does not apply to loans or waivers. Players can negotiate limited NTCs that give the player the option to veto trades to certain teams. Players usually provide their current team with a list of teams for they would accept a trade. NTCs can be waived by players at any time, both temporarily or permanently. A no-movement clause (NMC), on the other hand, prevents a team from trading or waiving/loaning a player. Neither clause, however, prevents a team from buying out a player. If a team wants to buy out a player with an NMC, they must first give that player the option of being placed on waivers.

Other Notes

  • Only Group 3 UFAs are eligible for these clauses;
  • RFAs can negotiate for these clauses only if they become effective once the player would be group 3 UFA eligible; and
  • Teams that trade for players with NTCs or NMCs are bound by these clauses unless the clause has not yet come into effect.

As we explained in our post on the NHL expansion draft, NMCs will potentially handcuff GMs in the upcoming expansion draft. All players with NMCs effective past 2017-18 are automatically protected and count against the number of players a team can protect.

 

Capology 101: Player Contracts

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The NHL Collective Bargaining Agreement (CBA) restricts player contracts—called Standard Player Contracts or SPCs—in three ways: length, amount, and salary variability. Pro Hockey Rumors will give you a crash course in how the CBA defines legal SPCs, and uses fictional player phenom Francois Yakov to illustrate certain points.

Length

The CBA limits SPCs to a maximum term of seven years. Teams may sign its own players, however, to an eight-year SPC if the player was on its roster as of and since the trade deadline. This added option expires if a player reaches unrestricted free agency

Yakov played for the Toronto Maple Leafs this season, and is four days away from becoming a UFA. Teams can offer Yakov contracts up to seven years in length. Toronto, Yakov’s team, can offer a contract up to eight years in length, but only up until July 1st. Once Yakov becomes a free agent Toronto loses the additional year advantage.

Amount

No contract can pay less than the minimum salary defined in the CBA, or more than 20% of the CBA’s upper limit (read: cap ceiling) in effect when the contract is signed.

Salary Variability

The CBA’s variability restrictions are a result of the NHL’s effort to curb front-loaded long-term contracts. The rules limit how much a player’s salary changes from year to year, and different restrictions apply if the SPC is front-loaded.

A contract is considered front-loaded if the majority of a player’s salary is paid in the first half of the SPC. The easiest way to determine that is to:

  • Divide the contract term in two, and
  • Add up all the salary paid in the first half. If the contract is for an odd amount of years, use half the salary in the middle year.

If the added salary in the first term is greater than the SPC’s cap hit, the SPC is front-loaded.

If a contract is front-loaded, two variability restrictions apply:

  1. Any change in salary/bonuses from year to year must not be more than 35% of the contract’s first year; and
  2. Any year’s salary must not be less than 50% of the SPC’s highest year’s salary.

So, if our Yakov makes 5MM his first year, salary change in any year cannot be more than by 1.75MM (35% of 5MM). Moreover, Yakov’s lowest salary year cannot be less than 50% of his highest salary year.

If a contract is not front-loaded, the CBA imposes two other variability restrictions:

  1. The difference in salary and bonuses from the first year to the second year must not be greater than the salary/bonus amount in the lower of those first two years; and
  2. In any subsequent year the salary/bonus amount cannot increase by more than the amount of the lower of the first two years, and cannot decrease by more than 50% of the amount of the lower of the first two years.

If our Yakov makes 5MM his first year, the second year cannot be lower than 2.5MM (2.5MM difference) or higher than 10MM (5MM difference. If he makes 5MM his first year, and 4MM his second year, any year-to-year salary increase cannot be by more than 4MM, and any salary decrease cannot be by more than 2MM.

The NHL CBA governs almost every aspect of the relationship between the players and the league. Defining a contract’s term, amount, and variability goes to the heart of the relationship, and was the product of intense bargaining during the lockout.

 

Buyout Candidates: Bickell, Bolland, Cowen

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With the buyout window opening Wednesday evening, there is speculation as to which players will most likely see their contracts bought out. Luke Fox from Sportnet put together a list of players  who might find themselves a victim of buyer’s remorse. Here are a few:

  • Bryan Bickell: After having the playoff performance of a lifetime during the Chicago Blackhawks 2013 Stanley Cup run, Bickell’s contract has been a thorn in the side of the Hawks constant cap worries. Signed to a 4-year, $16MM deal in 2013, the return on investment has been null for the Blackhawks. Some will point to bench boss Joel Quenneville as one of the reasons Bickell never found sustained success after his magical year. Scott Powers wrote in the Chicago Sun Times back in January that Bickell was resigned to his fate, and that it was ultimately up to the Chicago brass as to how they solved the problem. Bickell was shuttled back and forth to AHL affiliate Rockford, and barely saw ice time even when he was up in Chicago. As Fox points out, with only a year left and $4MM owed, if Bickell isn’t traded, he’s most likely to be bought out.
  • Dave Bolland: Another former Blackhawk, Bolland has been injury plagued and unable to produce like he did when he was in Chicago. Back in December, the Hockey News  speculated that Bolland would be an excellent candidate to be removed from the books with 3 years still left on his deal. However, the average hit on the Cap should Florida choose to do this would be $1.833MM per year through the 2021-2022 season. While the Panthers have historically taken on large contracts to remain above the salary cap floor (Brian Campbell comes to mind immediately), this would be a steep price for six seasons of a nearly $2MM hit. One other caveat: Fox reports that Bolland failed a recent physical, which would disqualify his contract from being bought out per CBA rules.
  •  Jared Cowen: The Maple Leafs are in the midst of an epic purge, and already dealt most of the bad contracts from the previous regime. Cowen’s was acquired in the Dion Phaneuf trade, and as Fox notes, general manager Lou Lamoriello already indicated that Cowen would be bought out. TSN (as well as mentioned in Fox’s article) also writes that the Leafs would get a credit for buying the contract out. Mark this one down as a guarantee.

Capology 101: Buyouts

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The annual NHL buyout period is almost upon us, and here at Pro Hockey Rumors we are going to give you a quick crash course in NHL contract buyouts so that you can make sense of the incoming news.

What is a buyout? Buyouts allow teams to prematurely terminate a player’s contract. The team is still responsible for paying a portion of the player’s salary, but over a longer term and lesser cap hit. If a player is bought out before he turns 26, the team owes him 1/3rd of his salary over twice the remaining contract length. If the player is 26 and older, he is entitled to 2/3rds of his salary over twice the remaining contract length. The player immediately becomes an unrestricted free agent and can sign with any other team.

Why would a team buy out a player? Players are bought out mainly because their performance does not correlate to their salary. In other words, they are paid too much and provide too little. Sometimes it’s an aging vet with a inflated contract, and other times its a well-paid goalie usurped by an up-and-coming rookie. In every event, a team buys out a player to save salary cap space.

What are the salary cap implications? Even though a player’s contract is bought out, the team still carries a cap hit. The cap hit is calculated in two phases: original contract years phase and extra buyout years phase.

In phase one, the cap hit for the year is equal to the difference between the salary initially owed and the salary paid by the buyout, and subtracted from the original SPC’s AAV:

Cap Hit = SPC AAV – (Original Salary Owed – Salary Paid in Buyout)

This equation is used to determine the cap hit in each year of the contract had it not been terminated.

In phase two, the cap hit is equal to the buyout amount the player is paid that year:

Cap Hit = Buyout Salary

Finally, if a player has a no-movement clause (NMC), the team has to first give the player an option to be placed on unconditional waivers.

When can teams buy out players? The official buyout period begins on the later of (a) June 15th, or (b) 48 hours after the end of the Stanley Cup Finals, and ends on June 30th at 5:00pm EST. Teams can buy out as many players as it likes during this time. This year it begins on June 15th.

Teams may also buy out a player outside the buyout period if they meet the following requirements:

  1. the team has more than one salary arbitration hearing in a given year;
  2. the player was on the team’s reserve list at the trade deadline; and
  3. the player’s average salary is $2,750,000* or higher.

If a team meets these three requirements they can buy out up to three contracts outside the regular buyout period.

* in 2013 dollars. This number increases at the same percentage rate of annual increase as the average league salary  

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