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Photo Credit: © Dan Hamilton-USA TODAY Sports

Analyzing the State of NHL Contracts in 2021

At this point the words ‘last season’, ‘this season’, and ‘next season’ have become so conflated that it’s hard to say what season is being talked about. Conveniently, the entirety of ‘next season’ may take place in the 2021 calendar year. I hope we can just say “the 2021 season” rather than the “Twenty-Twenty, Twenty-Twenty-One Season”.

Any way you say it, the 2021 season is going to be different. We already know that the NHL is committed to playing 82 games even if the season starts in January. This compressed schedule may eliminate the bye-week or even the All-Star game, and force the NHL to allow expanded rosters due to injury concerns.

This is a collection of my thoughts about what the NHL might look like when ‘next season’ starts.

Expanded Rosters

There have been rumours that the NHL will allow teams to carry extra players in 2021, in order to reduce the amount of injuries caused by a compressed schedule.

As Phase 2 of the NHL’s return to play plan begins to unfold, we’re catching a glimpse of how expanded rosters could work. Teams will be allowed to carry 30 skaters and unlimited goaltenders for the playoffs. The key difference here, is that this expansion is only for the playoffs (and play-ins), where the salary cap does not apply.

I don’t think that the same rules would apply for next regular season, they certainly have to take goaltenders into account for cap purposes. 30 skaters on the roster would mean that as many as 12 could be scratched on a given night. In my eyes it makes sense to start out with a replacement player for each position, 3F, 2D, and 1 Goalie. That makes 26 man rosters, which seems more reasonable.

The trouble is that teams are already falling away from the 23 man roster limit in order to save cap space. Multiple teams have gone as slim as the minimum 20 players due to cap difficulties, difficulties that are going to be magnified by a stagnant salary cap. It doesn’t make sense for the NHL to only allow the teams that have cap space to have additional scratches to prevent injury, when the other teams had no choice in a shortened season.

The easy solution would be to say that the 20 players who participate in a game are the ones who count towards the cap, but the salary cap is calculated on a daily basis, even on days when there are no games. However it is handled, we will likely see a new way of calculating daily cap hits due to expanded rosters.

Middle Class Squeeze

This unfortunately will not be a fruitful off-season for unrestricted free agents. I say that simply because there is less money and less open spots for free agents to land, let alone the pandemic stalling salary cap growth.

It starts with how many contracts were signed for last season. 31 teams with 50 SPC slots makes 1550 openings, with 1511 being filled. A couple notes on that, it’s changed as some contracts have been terminated, and some signed contracts are returned to junior, where they don’t count towards the SPC cap. There is bound to be exceptions amongst a sample that large, but the overarching trend is what matters.

Both the total number of SPCs signed, and the percentage of the maximum SPCs has risen gradually over the past 3 years. The distinction is important, as Vegas entering the league in 2017 added 50 more SPC spaces. With more contracts signed, you would expect more contracts to be expiring. That isn’t necessarily the case, 672 expiring deals being roughly in line with the past 5 off-seasons. Additionally, for the first time in that period there are more expiring RFAs than UFAs. Since RFAs are more likely to re-sign, that leaves even less room for players when free agency hits. There was 353 pending RFA contracts and 319 pending UFA, although 72 of those players have already signed extensions.

That means when considering the 1018 contracts signed for next season, there are 600 expiring contracts to potentially re-enter the equation. Over the past 5 seasons on average ~100 RFAs were not given Qualifying Offers and therefore became free agents, assuming the same for this off-season that would mean 218 of the existing RFA expiry contracts would re-sign.

That leaves 314 total spots for 381 expiring contracts, plus any European free agent or draft pick signings. Keep in mind that most teams prefer to keep a couple SPC slots open to allow for trades and waiver claims, so the number of open spaces when Free Agency hits could more realistically be 250. For the top free agents this may not mean much, but there are some talented depth players that will fall victim to the SPC cap and wind up in Europe.

It’s difficult to map out which teams will have cap space for which free agents and definitively say which free agent pay-group will be most tightly squeezed, but it is plain to see which groups are already under contract. In the chart below, each line represents the number of contracts in a given AAV range, in different years.

You can see that above $6m, there are just as many contracts signed for 20-21 as 19-20. The blue line shows that in the past as well as in the current season, there have been many more players signed in the $2m-$4m range than are signed for 20-21. Zooming out to the full picture demonstrates where the real disparity is, the contracts that can be buried.

This chart is an approximation of how much money is dedicated to each pay-grade in different seasons. For next season, there is far fewer contracts signed under $2m at this point in time. I believe that players that may have commanded $6m+ in a typical offseason may be forced into the $4m-$5m range on a shorter term deal, and even more role players will be vacuumed into the $1.5m range on 1 year deals.

Part of what contributed to this is that top players are now taking a larger slice of the pie. Looking back at the top 100 cap hits in each of the past ten seasons, T100 players average salary has grown from under $6m to over $7.75m. You can also see the percentage of the cap the top 100 has occupied was relatively steady before a spike in 19-20.

With proportionally more money dedicated to top 100 players, just as many contracts over $6m signed, and less money than previously thought available, many players will be forced to take less than they are worth, or their comparables signed for, due to market restrictions.

Depth Players

When it comes to NHL depth on expiring contracts, both RFAs and UFAs could be more likely to head for Europe. There are varying reasons why, but the list is unmistakable. Roman Polak, Lawrence Pilut, Nikolay Goldobin, Reid Boucher, Oliwer Kaski, Joel Persson, Lukas Radil, Vili Saarijarvi, and Anton Wedin are amongst the list of players already signed overseas for next season, while Peter Cehlarik, Cory Conacher, Pontus Aberg, Brian Gibbons, Markus Granlund, and Mark Barberio are rumoured to have signed in Europe.

Some of these players unquestionably could have found another NHL contract, but chose to sign in their home country before even reaching the open market. What could the motivation for that be? More specifically, what is different about this season that would encourage players to sign overseas while there are still potentially NHL games to play?

Obviously the schedule being disturbed, but escrow is going to play a big role in players decisions on where to sign. Since the players were paid all but one paycheque throughout the season, they earned 92.3% of the face value of their contract, with escrow taken off the top between 10-15%. Players will not be getting any of that escrow money back since there will be a massive shortfall in revenues.

I’ll likely write about the amount of escrow next season when we know more about the numbers, but the players can expect a massive portion of their salary to be retained in escrow next year. If the NHL can resume playoffs, even in a best case scenario they will have a shortfall of at least $500m in HRR. In rough numbers the NHL brought in $5b in HRR last season, if that was the target for this year they’ve fallen 10% short of their goal.

What that means for players, is that they already owe 10% of next year’s salary to the NHL, at minimum. On top of that they will likely see higher escrow for the uncertainty of meeting 2021’s HRR goals, and all of a sudden players face the potential of losing 1/3rd of their contract to escrow. This is before taxes and agent fees come in and eat away even more of their earnings, but that varies from player to player.

So if you were a depth player, RFA or UFA this offseason, here’s an analogy. You went to the vending machine and paid for one bag of chips, but two fell out. You gladly take both bags of chips, but the next day you come back and see that the first row of your favourite chips is empty, because the bag that originated there has already fallen out. Do you pay the machine just to bring the next bag to the front, or use a different vending machine and wait for it to be restocked?

It’s not a perfect analogy, it’s more like seeing the bag at the front of one machine has 30% less chips, but the vending machines here are the NHL and European Leagues. I’m not an expert on Russian tax law but there’s a good chance signing for the equivalent of $700k in Russia next year lands players far more take-home than a league minimum deal in the NHL. In my opinion this is a big reason why so many players have already agreed to play in Europe next season.

Speaking of escrow, there is a key date coming up. On July 1 many signing bonuses are paid out, like the $40.59m the Leafs are set to pay Tavares, Matthews, and Marner. If escrow is going to be as high as 30% next season, the NHL will need to withhold a large portion of their signing bonuses. John Tavares’ entire salary accounts for just 4.4% of his compensation for next season, the other ~25% would need to be taken out of his signing bonus.

Minor League Trouble

While there is much uncertainty for the NHL’s return to play, we can be certain that the AHL and ECHL seasons are over. The question mark is when and if they can return for next season, and minor leagues face different problems than the NHL. Minor Leagues do not have large broadcast deals and therefore cannot generate revenue to pay their players without fans in the stands.

The ECHL seems unlikely to play if there are not fans, however many ECHL teams reside in states with, let’s say ‘more relaxed’ coronavirus policy. On the Leafs ECHL affiliate, the Newfoundland Growlers, four of their top players have already signed in Europe. Michael Kapla and Brady Ferguson both signed in Sweden, while Zach O’Brien and Marcus Power, both born in Newfoundland, signed in Germany.

The AHL on the other hand, has external forces influencing their decision. Since many AHL players are paid via their NHL contracts, AHL teams can operate potentially with minimal player compensation costs. New AHL President Scott Howson has said that the AHL is modelling plans for partial arena capacity, so there is some flexibility.

There are 17 AHL teams owned by their NHL clubs, and Howson indicated on The Athletic’s “Front and Nationwide” podcast that some of those teams would play if possible regardless of if there are fans. In the context of the Marlies it could mean they play a loop of local AHL teams, if the entire league cannot operate with limited fans.

The small market teams are where this is the most concerning, for example the Florida Panthers AHL affiliate. It was the Springfield Thunderbirds for 2019-20, but the St. Louis Blues have agreed to affiliate with Springfield for 2020-21. A series of affiliation changes leaves Carolina’s former affiliate, the Charlotte Checkers open, but the Panthers do not appear to have an affiliation in place currently.

There is still time for Florida to establish an affiliation, but there has already been some worrying moves. First was the rumour that top prospect and 1st round draft pick Henrik Borgstrom is returning to Finland to play for Jokerit, after just 3 years under contract with Florida. Next there is the departure of Daniel Audette, who just turned 24 and was on an AHL deal. He was the top producing u24 player not under NHL contract in the AHL, with 38 points in 58 games, and signed in Finland for next season. Pending RFA Emil Djuse has signed in the KHL for next season.

In the 2019 draft the Panthers used their last two picks on CHL players that had already been through 2 NHL drafts. Greg Miereles and Matthew Wedman both saw a drop in production this season, but the Panthers could have held their rights for another season simply by giving them a bona fide offer, a normal practice with unsigned draft choices. The Panthers instead gave up exclusive rights to both players less than a year after drafting them, perhaps because they do not have a place for them to play next season?

Florida is just one example, so I looked at all the AHL deals signed for next season. From what I can tell there are 78 AHL contracts for next season, but 10 teams that have yet to sign a single player. That means the remaining 21 AHL teams have an average of 3.9 players signed, while teams like Florida, Ottawa, New Jersey, Anaheim, Arizona, and Carolina have none. Four of the AHL teams with no players signed are also independently owned, which may factor into their ability to return for next season.

I’m not going to make any predictions at this point, but I have some concern that the ECHL will play at all next season, or that the AHL will be able to come back in full capacity.

Conclusions

Given the stagnated salary cap, loss of revenue for the current season, increase in existing contracts, and the upper class taking more of the pie, it will be a difficult offseason for free agents to get paid. Some talented players will end up in Europe for a year, and some will take 1 year deals when they would otherwise be cashing in. For teams, this means there will be a market inefficiency to take advantage of.

The teams that have SPC slots, cap space, and roster space stand to add the most value this free agency cycle. For a long time the best contracts signed in free agency have been short term deals in the $1-3m range, and there will be plenty of players forced into that category. The key difference is that players like Tyler Ennis may not be willing to take league minimum, because they could take home more money in European leagues.

If players like Josh Leivo and Jesper Fast hit the open market, teams may get a good deal on a middle 6 winger that could become part of their core moving forwards. Also worth noting, if teams can get a discount on a 1 year deal due to the stagnant cap, the player they add will be UFA for the expansion draft. They can leave them unsigned and attempt to negotiate an extension after the expansion draft if they are not taken. From this point on all major moves will be made with expansion in mind, including the handing out of NMCs when free agency hits.

A good example of the type of player that might be a great pickup this offseason is Derrick Brassard. He went unsigned into August last summer, before signing a 1 year, $1.2m deal. He recorded 32 points on that contract, for a cost of under $40k per point. Similar story for Patrick Maroon. Since there will be too many players and too few contract spaces, waiting until the initial rush of free agency has passed might be the smart move for teams that are tight to the cap.

There have been a few ECHL deals signed over the past week that leads me to believe they are planning on returning, at the same time the league is in a delicate place. It can often be an afterthought in NHL circles, but the ECHL is just beginning to get used as the 2nd development tier, and there are some tremendous athletes trying to make a living playing in it. I hope the league is able to make a full return for next season and continue growing.

From any perspective, there is much we do not know about how the 2019-20 season will conclude. From a contract perspective, I hope this article was thought provoking, provided you some insight about the current state of the NHL, and how it will impact decisions in the offseason and down the road.