There has been plenty of talk about the NHL's revenues lately, largely tied to the addition of a primary helmet partner, and divisional corporate sponsors:

https://twitter.com/MapleLeafs/status/1346156176778682368

We know that high profile teams like the Leafs expect to generate more than $1m from these ads, but the average is much lower than that as some teams are using them to offset the lost exposure of no fans in the stands. Speaking of fans in the stands actually, there is some potential on that front:

https://twitter.com/markjburns88/status/1347568901173997569

With that being said there is no timetable for fans to return to the stands in the Canadian division. The point is that the NHL is doing their best to open up additional revenue streams, because they expect significant revenue losses in another pandemic season. While the owners were squabbling with players over "not" re-negotiating the terms of the Memorandum of Understanding (MOU), some figures came out on just how little Hockey Related Revenue they were projecting to generate:

https://twitter.com/EarlSchwartz27/status/1334222509143711745

Already I have boiled over into details and number ranges that the average reader simply may not care about. I'll try to highlight the significance of this before everyone stops reading, and simplify the numbers a bit.

First off, the NHL's salary cap (currently $81.5m) is traditionally set by pooling all Hockey Related Revenue (HRR) from the previous season, dividing by two (50% player share), subtracting player benefits, then dividing by the amount of NHL teams (soon to be 32). As such, the growth of the salary cap was directly tied to HRR until this season. More on that later.

In 2018-19 the NHL brought in just over $5 billion in HRR. Last season they were on track to surpass that and the projected 20-21 Salary Cap was speculated to be as high as $84m before the pandemic hit. The league went on pause in March 2020 and all cap projections went out the window. They rallied to get the playoffs done, but when all was settled they had a $1.1 billion HRR shortfall.

Players are paid their salary every 2 weeks in 13 installments, and the players made the decision not to accept their final paycheque last season in order to help stop the bleeding. That amounted to $140 million not added to the players' Escrow Balance. To sum it up, $1.1b in lost revenues, $550m or 50% belongs to the players. Giving up that final cheque means the players now owe the owners around $410m.

I say they "owe the owners", but it is more complicated than that. They are not at fault for lost revenues, the problem is that the players were paid the other 12 cheques (and signing bonuses) under the assumption the league would clear $5b in HRR. Even the way the final payment was forfeited made things inequitable for some players, Mikko Rantanen or Anze Kopitar gave up more than the 7 highest cap hits combined because of their huge actual salary.

Anyways, the players need to make up that ~$410 million before the cap can begin to rise regularly once again.
<h1>Under the new Memorandum of Understanding</h1>
Once the dust settled and the MOU was signed to extend the Collective Bargaining Agreement (CBA) until 2026, we got a clearer picture of the NHL's financial strategy moving forward. The players opined for years about the evils of escrow, and the owners finally agreed to an escrow cap. It started at 20% of a player's salary for 20-21, had an adjustable scale for 21-22, then wound down to just 6% by the end of the agreement.

In case anyone doesn't know, escrow is the mechanism by which a 50/50 split of HRR is maintained between owners and players. Since players are typically paid out more than 50% of HRR in a given season, a percentage of their salary is retained in escrow to equalize compensation at the end of the season.

So the players lose 20% of their 20-21 salaries off the top to repay the balance, and have also agreed to defer 10% of the remaining 80% of their salary. That means the players only get 72% of their actual salary this season, before taxes and agent fees. Since this agreement was made after the majority of signing bonuses were paid out, some players actually had too little salary to defer 10%:

https://twitter.com/PuckPedia/status/1328790811232718850

Now that we know <em>how</em> the players are going to repay the owners, the bigger question is <em>when</em>. It was clear that the owners expected to make back a large amount of the player's balance in the first 2 seasons of the MOU, and they set out instructions to increase the cap accordingly.

<img class="alignnone wp-image-68591 size-full" src="https://theleafsnation.com/wp-content/uploads/sites/4/2021/01/Upperlimit-outline.png" alt="" width="1009" height="810" />

Four of these bullet points are dedicated to a scenario where revenues somewhat recover in 20-21, and the majority of the Escrow Balance is paid off by the end of 2022. The final bullet point seemed to be a life preserver in the event league revenues tanked, but there is no other framework for a scenario where HRR remained below $3.3b.

Going off Bettman's comments about getting 2/3rds of players salaries back, though, we can infer the league is preparing for a season where HRR is as little as $1.8-2 billion. That's where the final bullet point comes into play, we may see the league push for negotiations to lower the salary cap for the first time ever this offseason.

Regardless of what the cap is for next year, HRR cratering in the 20-21 season poses some additional problems. This is the season with the highest escrow cap and therefore the most potential to lessen the existing Escrow Balance, but even with 20% escrow the balance will actually grow unless HRR reaches $4b. If the NHL only generates $2b in HRR in 20-21, an additional ~$1b would be added to the players Escrow Balance.

I want to highlight the magnitude of that. With everything that went wrong in 2020 the players wound up overpaid by $410 million, the 20-21 season could be more than 2x as bad for them. In this scenario the Escrow Balance would grow to nearly $1.5 billion, and the path to repaying the owners under this MOU becomes nearly impossibly narrow.

I mentioned earlier that this CBA extension runs through 2026, but there is an option to extend it for one year until 2027. You don't have to read it, I'll summarize below.

<img class="alignnone wp-image-68592 size-full" src="https://theleafsnation.com/wp-content/uploads/sites/4/2021/01/MOU-extrayear.png" alt="" width="724" height="640" />

If the players have any hope of repaying the balance under this MOU, they're going to need the extra year. In order to activate the extra year they need the Escrow Balance under $250m by the end of the 24-25 season. Assuming the Escrow Balance is at $1.5b to start 21-22, the players need to make up about $300m per season.

The league does have a massive opportunity to grow HRR with their US TV deal expiring in 2021, the existing one was worth roughly $200m annually. I have no idea how TV markets have shifted during the pandemic, but I've seen predictions for the new deal around $500m/year plus or minus $100m.

While Seattle's $650m expansion fee does not count as HRR, the Kraken are expected to be in the top 16 at producing HRR. Based on a $5b pre-COVID HRR, they would be expected to produce over $160m annually. Essentially their contribution to the NHL's overall revenue needs to be at least double what their player salaries are.

All of these factors could contribute to a lively rebound from $1.8b in HRR to $5.15b in 21-22. Looking back it's clear that the owners underestimated the possibility of a pandemic inflicted season in 20-21, on the same premise there is a good chance I'm overestimating the potential for an uninhibited 21-22 season. Even if the majority of people are vaccinated by the time the season starts, and that's a big if, there is no guarantees attendance returns at the same rates.

Still, HRR absolutely must clear $5b in 21-22, then grow at least 4% annually if they want to extend the MOU.

<img class="alignnone wp-image-68694 size-large" src="https://theleafsnation.com/wp-content/uploads/sites/4/2021/01/NHL-HRR-1024x154.png" alt="" width="1024" height="154" />

&nbsp;

This might be confusing to look at, but the important part is the Escrow Balance is reduced by the difference between (0.5*HRR)+Escrow Collected, and total salary paid. Initially the majority of the money comes from escrow collection, but as the escrow cap is lowered to 6% the owners get more than 50% of HRR as it outgrows the salary cap.

This optimistic projection gets them right in the window to extend the MOU another year, but keep in mind that year is 26-27. What jumps out to me is that the players not only pay back the balance in the final year, but blow past it for a massive surplus. This highlights that the MOU was clearly not designed for the Escrow Balance exceeding $1b.

There is supposed to be a 'Lag Formula' that allows the cap to increase by more than $1m per year, but it cannot be activated until the Escrow Balance is fully paid off. Still, bullet 4 in the first picture allows the NHL and NHLPA to negotiate an increase in excess of $1m in order to facilitate a smoother transition into the lag formula. The point being, that was supposed to kick in as soon as 24-25, and the Escrow Balance will be larger at the start of that season than it is now.

Once the lag formula is introduced, the cap has to rise a minimum of 2.5% and a maximum of 5% year over year. That's far more than the current $1m annual increase, if the Escrow Balance were paid off by 2024 a full 5% increase would result in a $87.5m cap for 24-25. Instead they will likely wait until 25-26 to negotiate a much larger jump, something like $90m to allow the lag formula a proper setup. This is one of the better case scenarios, and there isn't a meaningful cap jump for 5 years.
<h1>What Could Go Wrong</h1>
My two biggest uncertainties in calculating all of this was just how low HRR would dip in 2020-21, and how fast it will rebound back to normal (~$5b) levels. $1.8b is a pessimistic projection for this season, but less than 70% of the games in a normal regular season are being played, and about half the revenue from those games typically comes from gate revenues. That amounts to roughly 35% of normal HRR, and we land right back in that $2b range. The NHL is really going to need to be creative if they want to avoid such a dip, but I decided to give them the benefit of the doubt and say they could muster $3b (60% of 'normal' HRR) for this scenario.

On the other hand I was probably optimistic in assuming HRR would rebound right back to 'normal' after a global pandemic. It might take some convincing to get people back in the buildings, and it's hard to ignore the massive financial crisis brought on by the pandemic. The average person now has far less financial certainty, and therefore ability to spend on a non-necessity like sporting events. In this scenario I showed the effects of a slower bounce back.

<img class="alignnone wp-image-68911 size-large" src="https://theleafsnation.com/wp-content/uploads/sites/4/2021/01/Escrow-Balance-slow-growth-1024x153.png" alt="" width="1024" height="153" />

You can see just how quickly things get out of hand if HRR does not rebound immediately, the players carry nearly $1b in Escrow Balance for the first three years. The balance being roughly $350m at the end of 24-25 would trigger the termination of the MOU in 2026, but the players would still pay off the Escrow Balance by 2026. This would leave the NHL and NHLPA to negotiate a new CBA with $6b HRR and players on equal footing. That would leave the salary cap in the $90-95 million range for 26-27, but I'm getting too far ahead of myself.

In some form or another the players will be earning ~45% of HRR by the end of this MOU, and they need a way to adjust the salary cap so they can earn 50% again once the Escrow Balance is repaid.

What's most important is the immediate effects of a stalled salary cap, and we saw a samples of that in the 2020 offseason. Players like Anthony Duclair, Dominik Kahun, Andreas Athanasiou, and Lucas Wallmark didn't receive RFA qualify offers because the risk of an arbitrator awarding them more than $3m was too high for some teams, and they signed for far less in UFA. Teams had already committed to bigger extensions on players in the $5m range, so the $3m-$3.5m class of depth players got squeezed.

<img class="alignnone wp-image-68912 size-large" src="https://theleafsnation.com/wp-content/uploads/sites/4/2021/01/19-21-NHL-pay-distribution-1024x805.png" alt="" width="1024" height="805" />

This chart just shows the number of players in each 'bin' of cap hits. For 20-21 there are more players in the $9.5m, $8m, and $6.5m ranges, which closely matches the disappearance in the $5-6m range. In a mirrored fashion there are players shifting from $3.5m to $3m. The takeaway is that when teams face a cap crunch, expensive depth is the first to go.

Since the majority of contracts over three years are top of the lineup players, the disparity in pay between top players and depth players will continue to grow as $3m-$6m contracts expire. I'm going to be writing more about these trends, so I'll save the details for another article.
<h1>How does it Affect the Leafs?</h1>
It's the first question any hockey fan wants answered when change occurs, I'm certain. The Leafs have already committed lots of money to their big 4 forwards, as I'm sure you know. They have also thinned out their luxury depth, like Andreas Johnsson and Kasperi Kapanen. The Leafs 'middle class' is now made up of Frederik Andersen at $5m, Alex Kerfoot at $3.5m, and Justin Holl at $2m.

The expansion draft will put one of the Leafs top 4 D in jeopardy this offseason, if they don't elect to protect 8 skaters and 1G. Justin Holl's play as of late might make it a difficult decision between him and TJ Brodie, whose NMC converts to an NTC before the expansion draft. Either way it should open up enough cap space for the Leafs to keep Zach Hyman, but the flat cap will make it tough to keep Andersen.

Looking ahead to the 2022 offseason, in my best estimation the cap should be $82.5m. That along with Phil Kessel's $1.2m retained salary expiring gives the Leafs a fighting chance to keep Morgan Rielly. It's hard to say with certainty what will happen with any team beyond 2 years, but if the Leafs manage to retain Rielly they won't have much flexibility until 2024 when the contracts of Matthews, Nylander, Muzzin, and Brodie expire.
<table class="pp-table table table-striped summarytable">
<thead>
<tr>
<th class="l" colspan="5"><img class="team-md" src="https://puckpedia.com/sites/default/files/logos/toronto-maple-leafs.svg" alt="" /> Cap Summary Projection<span class="pull-right-lg clone_hide"><a class="btn btn-info m-r-sm no-mobile" data-toggle="modal" data-target=".embedmodal"><i class="fa fa-share"></i> </a></span></th>
</tr>
<tr>
<th></th>
<th class="text-nowrap">2020-2021</th>
<th class="text-nowrap">2021-2022</th>
<th class="text-nowrap">2022-2023</th>
<th class="text-nowrap">2023-2024</th>
</tr>
</thead>
<tbody>
<tr>
<td class="l nobold"><i class="fa fa-chevron-circle-up"></i> <strong>Roster Size</strong></td>
<td>21</td>
<td>14</td>
<td>9</td>
<td>6</td>
</tr>
<tr>
<td class="l nobold"><i class="fa fa-chevron-circle-up"></i> <strong>Standard Player Contracts</strong></td>
<td>47</td>
<td>26</td>
<td>14</td>
<td>6</td>
</tr>
<tr>
<td class="l nobold"><i class="fa fa-chevron-circle-up"></i> <strong>Upper Limit</strong></td>
<td>$81,500,000</td>
<td>$81,500,000</td>
<td>$81,500,000</td>
<td>$81,500,000</td>
</tr>
<tr>
<td class="l nobold"><i class="fa fa-chevron-circle-up"></i> <strong>Projected Cap Hit</strong></td>
<td>$82,828,175</td>
<td>$68,922,283</td>
<td>$57,452,283</td>
<td>$51,130,616</td>
</tr>
<tr>
<td class="l nobold"><i class="fa fa-chevron-circle-up"></i> <strong>Projected Cap Space</strong></td>
<td>$-1,328,175</td>
<td>$12,577,717</td>
<td>$24,047,717</td>
<td>$30,369,384</td>
</tr>
<tr>
<td class="l nobold"><i class="fa fa-chevron-circle-up"></i> <strong>Current Cap Space</strong></td>
<td>$-1,328,175</td>
<td>$12,577,717</td>
<td>$24,047,717</td>
<td>$30,369,384</td>
</tr>
<tr>
<td class="l nobold"><i class="fa fa-chevron-circle-up"></i> <strong>Maximum LTIR Pool</strong></td>
<td>$1,496,394</td>
<td>$0</td>
<td>$0</td>
<td>$0</td>
</tr>
<tr>
<td class="l nobold"><i class="fa fa-chevron-circle-up"></i> <strong>Current Roster Annual Cap Hit</strong></td>
<td>$82,996,408</td>
<td>$68,922,283</td>
<td>$57,452,283</td>
<td>$51,130,616</td>
</tr>
<tr>
<td class="l nobold"><i class="fa fa-chevron-circle-up"></i> <strong>Carryover Bonus Overages</strong></td>
<td>$0</td>
<td>$0</td>
<td>$0</td>
<td>$0</td>
</tr>
<tr>
<td class="l nobold"><i class="fa fa-chevron-circle-up"></i> <strong>Potential Bonuses</strong></td>
<td>$0</td>
<td>$0</td>
<td>$0</td>
<td>$0</td>
</tr>
<tr>
<td class="l nobold"><i class="fa fa-chevron-circle-up"></i> <strong>Retained Salary Remaining</strong></td>
<td>2</td>
<td>2</td>
<td>3</td>
<td>3</td>
</tr>
</tbody>
</table>
(You can find these cap tables &amp; more at <a href="https://puckpedia.com/team/toronto-maple-leafs">PuckPedia</a>)

That's when the Leafs desperately need the cap to rise, and there doesn't seem to be a realistic avenue to the cap exceeding $84.5m for 24-25. It's  going to be a very tight offseason for the Leafs, Matthews and Nylander will both want raises and the money will have to come from the blue line. The following season when Marner and Tavares' contracts expire has the slim possibility of a cap around $88m, but the Leafs could be going through a lot of change at that point.

The Leafs have Nick Robertson, Rasmus Sandin, and Timothy Liljegren on deck to contribute on ELCs, they're all expansion exempt as well. When players like Pierre Engvall and Ilya Mikheyev expire on inexpensive extensions, the Leafs are going to have to continue to find cheaper options rather than give them raises. Thankfully they have drafted well for the past couple years and quickly collected some promising prospects. Just who is going to step up is also an article for another day.

This one is already too long for my liking, but I have some folks to give thanks to before I wrap up. I track a lot of different things in my spreadsheets, but the data all comes from somewhere. <a href="https://puckpedia.com/">PuckPedia</a> is a tremendous resource for such a task, and I appreciate them for their hard work to build such a helpful website. Some of these spreadsheets have been maintained for years though, and inevitably CapFriendly has supplied plenty of information as well, so thanks to them! Both websites quietly go to great lengths to verify contract details that might not seem important to the average fan, and I think they're underappreciated for that.

Thank you to anyone who has read this far, and please feel free to contact/follow me on Twitter (<a href="https://twitter.com/EarlSchwartz27">@EarlSchwartz27</a>) if you want to learn more about the CBA!

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