Sunday, August 17, 2008

Giving Away the Store

OK, we finally had a weekend with good weather both days, good crowds at the track, great racing, especially on Saturday, and the usual Sunday giveaway mob scene. But a closer look at the numbers suggests that perhaps those giveaways -- by now a Saratoga tradition -- really don't contribute much of anything to NYRA and its horsemen.

It's safe to assume that NYRA doesn't actually make any money on the giveaway items themselves. Even if made by near-slave labor in China, those long-sleeved t-shirts (today's giveaway item) probably cost NYRA a couple of dollars each. Add in the need to pay a few people to hand the shirts out to the oncoming hordes, and add in the over-ordering that's a necessary part of running the giveaway program, and it seems unreasonable that NYRA could realize a profit on the $3 general admission charge. I don't know how much of the giveaway items' cost is picked up by corporate sponsors (today's shirt was credited to the Adirondack Trust Co.), but it's hard to imagine that someone else is paying the whole cost of those items.

But, you (or NYRA) say, all those people coming in for the t-shirts will bet, right? And NYRA will get the takeout from all that additional handle. Not so fast.

Yesterday -- admittedly a great racing day, with the Alabama and the Sword Dancer -- attendance was 32,344, and on-track handle was $5,517,000. That's an average of about $170 per person, and, remember, the crowd on a day like yesterday includes a number of casual $2 bettors, not to mention lots of (presumably) non-betting children.

Today's crowd was announced as 65,598. Obviously it was nothing like that, since the announced crowd counts each "spin" of the turnstile by someone who goes through again and again for more t-shirt vouchers.Today's on-track handle was $4,486,660. If you use the announced attendance as the divisor, that's betting of only $68 per person. So, obviously, there were nowhere near that many people on the grounds.

Let's apply yesterday's per-person average to today's handle and see how many real live people there might have been at the track. Dividing the four and a half million dollar handle by per-person assumed betting of $170, and assuming roughly the same mix of racing fans, casual bettors and kids, we get an assumed actual attendance today of 26,392. Nice, and certainly enough to produce the feeling the the track was bustling, but nothing to really write home about.

Would many of those 26,392 have stayed home if there were no giveaway? Probably a few, but mostly they'd be the people you see LEAVING the track, carrying dozens of t-shirts, as you're walking in 20 minutes before the first race. In other words, they're almost complete non-bettors, and those are the folks that NYRA is losing money on with every t-shirt they take home.

So, if anyone at NYRA is listening, how about just trying the no-giveaway approach. Offer good racing, pray for sunshine, and see what happens.

First Stakes Race at Saratoga!

This is a diversion from the usual fare, which deals with racing economics and the big players in the game.

But we (Castle Village Farm) will be running our first-ever stakes race at Saratoga tomorrow, and I couldn't not mention it.

Our four-year-old filly Just Zip It will run in Monday's $80,000-added Union Avenue Stakes, for NY-bred fillies and mares on the dirt at six furlongs. Just Zip It sailed through her NY-bred conditions earlier this year: lifetime she's 3-3-2 from eight races, and has never been worse than second at six furlongs. Her Beyer numbers aren't as flashy as some of the other entrants', but she has a great competitive spirit.

Dick Dutrow has what will certainly be an odds-on favorite in By the Light, but we're hoping to be able to run with the rest of the field. Actually, we're happy just to be here, with a filly that legitimately deserves a shot at this level.

Our horses have won stakes before (Maryland Million Distaff at Laurel and the Hollie Hughes at Aqueduct), and we've won in Saratoga for the past five years running, but it is a special thrill to be in a stakes race up here. Wish us luck!

Saturday, August 16, 2008

Magna Gets a (Short) Breather

Magna Entertainment scrambled and managed to negotiate a one-month extension of the loans that were due this month, according to a report in the Daily Racing Form.

In addition to intra-company loans within Frank Stronach's Magna empire, MECA also got an extension from the Bank of Montreal, which was due to have some of its $40 million paid back by yesterday. The bank's estimate of Magna's creditworthiness is illustrated by the 16.2% interest rate that it's charging on the loan. Not exactly prime-rate territory.

I'm not sure what good this doies in the long run, since it's unlikely that Magna can raise significant revenue by the new due date, September 15th, but perhaps it gives Frank Stronach time to decide if he wants to put his own, personal money into the company, rather than continuing with plans to use funds from other Magna companies that have those pesky minority shareholders.

Monday, August 11, 2008

Adieu Magna?

One of the fringe benefits of being a recovering (i.e., retired) lawyer is that you know how to read financial statements, but you only have to read the ones that interest you, and not, as in the old days when one was still working at a law firm, the incredibly boring ones of your clients or their takeover targets. So, when Frank Stronach's Magna Entertainment Corp. filed its quarterly financial report with the Securities and Exchange Commission last Friday, I decided it was time to put some of those old skills to use. For what can be more entertaining than deconstructing what was certain to be bad news? And if the report provided some ammunition for criticizing Stronach, so much the better; after all, his "vision" single-handedly destroyed the perfect winter race track that was the old Gulfstream.

And bad news it surely is. At least for Frank Stronach and for those who, quite frankly, are unlucky enough to still own Magna stock. (Full disclosure: I bought a little bit of Magna Entertainment Stock shortly after its initial public offering, and got out soon after with a modest profit.)

As has already been reported, Magna lost $67.7 million for the first half of 2008, including a $21.3 million loss in the second quarter, which ended June 30th. That brings the company's accumulated losses since 2005 to a total of $578 million. Just think, for that money Frank could have stayed out of the race track business and bought himself a few more nice horses. He might even have given Demi O'Byrne of Coolmore and John Ferguson of Darley/Godolphin/Shadwell a run for their money at the top of the yearling and two-year-old markets. Perhaps The Green Monkey would have run faster in Frank's snazzy black silks.

But on to the ever so revealing details

This is the only financial report I've seen that starts out with a paragraph saying that the company's ability to continue as a going concern is in serious doubt. In English, that means that they can't pay their bills on time, and if the creditors don't give them some leeway, the next stop is bankruptcy court.

Specifically, Magna owes its lenders $230 million that's due to be paid by June 30, 2009. And a lot of that is due very soon indeed. An unspecified portion of a $40 million revolving credit facility is due to be paid to the Bank of Montreal this Friday, August 15th; the loan was just extended from its original due date of July 31st. Up to $110 million is due to another Stronach company, Magna International, at the end of August; as is another $100 million related to the Gulfstream construction project, also due to a Magna-related company. Even if Stronach can con his long-suffering minority shareholders one more time and get those Magna-related loans extended, there's still the bank loan that's due on Friday. Will the bank really believe it should extend Frank's credit one more time? And there are signs that the shareholders in those companies that Magna Entertainment owes money to are getting restless as well.

Further embarrassing Stronach and Magna is the fact that the company had to do a reverse stock split -- one new share for every 20 old shares -- just to keep the stock price above the $1 a share level that's required for continued listing on the NASDAQ exchange. (Today's stock price was $7.71 for a new share -- or roughly 39 cents for an old share -- down about 85% over the past year.)

And, lest we forget, there are some fairly absurd assumptions hidden in the fine print of the Magna quarterly report. Just as an example, the company is carrying "racing licenses" on its books as assets worth some $109 million. But racing licenses are simply the permits that the state gives to tracks that are actually conducting racing, so those so-called assets would simply disappear if the company ceased racing (which it might or might not have to do if the company were in bankruptcy). Mre importantly, racing licenses would be worth zero to anyone buying a track for its real estate potential, and that's the most likely source of buyers. More smoke and mirrors, I'm sure, await a more detailed examination of Magna's SEC filing, but this gives you some idea of the mess that the company is in.

The last time we heard a plan from Stronach for keeping Magna Entertainment alive and in the racing business, was last September, when he announced that he intended to sell a bunch of properties in order to make the company completely debt-free by the end of 2008. The latest quarterly report admits the obvious: that ain't gonna happen. Of the various Magna properties that he expected to sell, only the defunct Great Lakes Downs in Michigan, sold to the Little River Band of Ottawa Indians for a fire-sale $4.5 million, has actually been disposed of. Still on the block, with no takers in sight, are Magna's land in Dixon, CA, once intended as the site of a new race track; and additional landholdings in upstate New York, Ocala, at Gulfstream and near Laurel in Maryland, as well as the Magna Racino in Frank's homeland of Austria. Also for sale are three race tracks: Portland Meadows in Oregon, Thistledown in Ohio and Remington Park in Oklahoma. And the newest quarterly filing adds to the for-sale list: Stronach is willing to sell interests in the hotel-retail-condo development and parking lot rising up in what used to be Gulfstream's beautiful paddock and back yard; and, most surprisingly, a majority interest in Santa Anita seems to be on the block. Assuming that anyone would be willing to partner with Stronach, that would leave Magna with control of only Gulfstream and the Maryland tracks, Laurel and Pimlico. A far cry from the empire contemplated just a few years ago.

Of course, getting all these asset sales done before Magna runs out of cash is pretty unlikely in the current real estate market. A much more likely scenario, given the increasing opposition to Stronach's restructuring plans among the minority shareholders in various Stronach companies, is that one or more creditors will push the company into bankruptcy.

And when that happens, the fate of the race tracks will be out of the hands of racing people. Sure, there will be racing industry bidders for the prime properties-- Churchill comes, inevitably, to mind -- but the duty of the bankruptcy court is to get as much as it can for the creditors, and most of the race tracks are probably worth more as real estate development locations than they are as functioning tracks. So, while we may be glad to see Stronach go, and not above just a little schadenfreude (dictionary: a malicious satisfaction derived from the misfortunes of others), Magna's over-reaching and subsequent downfall could take a good chunk of America's race tracks down with it.

In a conference call discussing the quarterly results, Stronach said "I think I'm reasonably intelligent." Well, reasonable people may differ. As another reasonably intelligent person said, "you gotta know when to hold 'em and when to fold 'em." Frank, it's time to fold, while we perhaps have time to rescue some of those tracks before they become tracts. Make a deal with someone who still cares about racing, and who has the financial resources to protect the race tracks as they are, or, even better, as they were before you took over.

Steroids Update

In my last post, I mentioned a few things the industry itself could do to put the steroids issue behind us and eliminate at least this one piece of the all-racing-is-drugged-and-crooked perception. It looks like I'm either fairly prescient or, mirabile dictu, some folks with power in the game actually read these blogs. On Friday, the American Graded Stakes Committee, an offshoot of the Thoroughbred Owners and Breeders Association (TOBA), adopted a rule, to take effect January 1, 2009, that would strip graded-stakes status from any race where the state regulatory authorities or, if those bodies haven't acted, the race tracks themselves, have not adopted the Association of Racing Commissioners International (RCI) Model Rule on anabolic androgenic steroids.

Under the model rule, the four naturally occurring substances, boldenone, nandrolone, stanozolol, and testosterone are only allowed at trace levels, and all other anabolic steroids are banned completely. The effect of the rule will be to prohibit administration of steroids for at least 30 days prior to racing, and, to be safe, most trainers will probably opt to be clean for at least 60 days.

According to the Thoroughbred Times, Arizona, Arkansas, California, Colorado, Delaware, Illinois, Indiana, Oregon, Pennsylvania, Washington, and Virginia have adopted the model rule, and approximately 15 other states, including New York and Kentucky, have started the process of adopting the rule.

The graded stakes committee also adopted a similar provision requiring states or racetracks to adopt the RCI model rule restricting toe grabs in order to retain graded-stakes status. On August 2, the RCI board of directors voted to ban toe grabs more than two millimeters long, which follows a guideline issued by the Jockey Club’s Thoroughbred Safety Committee.

Looks like the dreaded spectre of federal regulation is working its magic.

On a more parochial note, my stable has a filly that we''re thinking of shipping to Delaware for a race in September. Delaware has already adopted a steroid ban, so we took her off Winstrol as of July 1st. Now that it's clear the ban is going to take effect nationwide, thanks to the latest action by the Graded Stakes Committee, I'm telling my trainers to just say no from now on. In any event, we'd have to stop the steroids as of November 1st, so why not just do it now?

Tuesday, August 5, 2008

Saratoga Week Two Numbers

With a few days of quasi-sunshine, business at Saratoga improved somewhat in week two, according to the latest press release from NYRA, but overall totals for the first two weeks were still down from last year.

According to the NYRA release,
attendance was off 16.6 percent for the first two weeks, which ended yesterday; on-track handle was down 8.8 percent, and total all-sources handle declined 8.9 percent compared to 2007. I suppose that represents progress, considering that the dreadful Week One totals showed decreases of 24.8 percent in attendance, 11.8 percent in on-track handle, and 12.6 percent in all-sources handle.

Daily average attendance is now up to 22,326. Of course, that includes multiple-entry spinners for the cap and t-shirt giveaway days. Anecdotally, it has felt comfortably full the past few days, compared to completely empty most of week one.

All-sources handle is averaging $14.5 million a day, compared to $16 million for the same period last year. The declines are more or less the same for on- and off-track betting. Because of all the rain, and despite the endless 10- and 11-race cards, there were only 990 betting interests running so far this year, compared to 1,035 last year, when seven fewer races were run. That translates to an average field size of 8.1 this year versus 9.0 for the first two weeks last year. Enough to make a difference for some serious gamblers.

And despite the $100,000 N1X allowance and all the hoopla about increased purses, total purse money for the first two weeks was up only 2% over last year. In fact, because more, and cheaper, races were run, average purse size per race declined from $82,363 in the first two weeks last year to $79,213 this year.

Not sure what it all means yet. Maybe I'll have an epiphany by morning.

Steroids on the Way Out

Last week's Thoroughbred Times (dated August 2nd) had a number of articles on steroids and their effect on race horses. All good reading, as far as they went, but, alas, it appears that we don't have a lot of scientific evidence on exactly how steroids affect race horses, whether and to what extent they are "performance enhancing," or what their long-term effects on horses' health and well-being might be. But even as we wait for more "scientific" findings, I think we can all generally be pleased that the industry is moving with some speed toward eliminating steroids on race day.

[Just to be clear, what we're mostly talking about when we discuss steroids in racing are the anabolic-androgenic steroids: testosterone, stanozolol (Winstrol), boldenone (Equipoise) and nandrolone). Most of these are synthetic versions of the testosterone that naturally occurs in male horses. "Anabolic refers to their body-building effects -- think Mark McGwire -- and androgenic simply means related to male sex hormones.]

Steroids have been around in race horses for 50 years or so, although, as vet-to-the-super-trainers Steve Allday noted in the Thoroughbred Times article, their use increased dramatically in the late 1980s, especially among claiming trainers who were trying to run their horses back early and often. And the trainers who didn't get on the bandwagon mostly ended up out of the business, or with greatly reduced numbers of horses. Gasper Moschera, once king of the New York claiming trainers, is today in premature retirement in Florida, forced out, he says, by his inability to compete with trainers who were using the "juice."

According to the one large scale study that we do have,
in a 2004 sample of more than 600 horses from Pennsylvania, some 60% of race horses tested positive for at least one steroid, and 17.4% tested positive for two or more steroids. From what I see on my own vet bills, those seem to be pretty representative numbers. Horses are routinely receiving steroids as part of their general vet care at the race track, and all the while, we have no idea whether, or even how, they improve performance, nor what their long-term effects may be. But it's hard to tell a trainer not to do what everyone else is doing.

Although long-term studies are lacking, there's certainly lots of anecdotal evidence about the effect of steroids on race horses. Anyone who's bought at the two-year-old-in-training sales is familiar with the big, muscular sales horse who comes back to the farm and suddenly looks like a 97-pound weakling, presumably because the horse is no longer getting its steroid regimen. And there's lots of evidence that steroids administered at the race track, besides providing the advertised benefits of increased appetite, more muscle mass and a tougher, more competitive disposition, can also lead to such unwanted traits as severe aggression and a willingness to run through pain -- something that may result in breakdowns. A horse we used to own, a George-Steinbrenner-bred gelding named Adverse, provided me with some painful, personal anecdotal evidence -- he very nearly bit my thumb off in what was not a playful attack. While some vets make an argument for administering steroids to geldings, who no longer are producing natural testosterone, it seems pretty clear that such great geldings as Kelso, Forego and John Henry managed to do pretty well without that chemical boost.

Dr. Mary Scollay, who has studied race horse injuries for many years, thinks that the added muscle mass attributable to steroids may be a factor in breakdowns, because the extra weight places more pressure on a horse's already fragile bone structure, increasing the risk of microfractures that, under race-day pressure, turn into catastrophic breakdowns.

Not to mention that some of the available steroids can't even be guaranteed to be free of contaminants. Winstrol, for example, the steroid given to Big Brown by Rick Dutrow, is really the trade name for a brand of the steroid stanozolol. But brand-name Winstrol was discontinued by drug maker Pfizer in 2002, and what trainers have been calling Winstrol ever since is whatever "compounded" medication they obtain from a veterinary pharmacy, with very little regulatory oversight or quality control. Think cheap Chinese ingredients, and you might wonder why Big Brown's owners would let anyone inject their horse with that stuff. Of course, now I'm wondering why I let my trainers and vets use it on my own horses.

Lots of vets say there is a legitimate use for steroids -- in helping a horse recover from an injury, especially helping the horse add weight and muscle tone after surgery. But even if those therapeutic uses are valid, shouldn't the administration of steroids then be limited to horses that are off the track, recovering?

One can see just how ineffective steroids have been in improving the breed by looking at how fragile horses have become over the years. At the start of the steroid era, in 1960, the average race horse ran more than 11 times a year. By 2006, the average horse ran barely six times a year. And career starts have declined at a similar pace, to fewer than 20 per horse. Maybe we're breeding frailer horses, but steroids sure haven't helped. One interesting study would be to look at the number of starts per year for trainers that we all can agree are "clean" and who are willing to say that they don't use steroids. If those trainers have higher starts per horse per year than the average, we could conclude that steroids are actually a negative factor.

The steroid era does seem to be winding down, however. The sale companies are moving to eliminate steroid use in the horses they offer at auction, by amending their conditions of sale to allow a buyer to return any horse that fails a drug test. In the past year, every horse that was tested coming out of such sales was, in fact, steroid-free, so that's one major step. As of right now, though, steroids are still allowable at all the two-year-old sales except those run by the Ocala Breeders Sales Co. (OBS). It's pretty certain, though, that Fasig-Tipton and Keeneland, the other major auction companies, are moving to eliminate steroids in the horses they sell as well.

Such industry groups as the Breeders Cup and the American Graded Stakes Committee are also moving toward putting in place rules that will bar steroids in the highest-level races. Those rules could be implemented by racing itself, without needing to go through any time-consuming state regulatory processes.

And racing commissions are also moving toward a ban on steroids -- or at least the setting of minimal threshold levels that should ensure that a horse in the starting gate hasn't been juiced fin the past 30-60 days. Congress is too. With Congressional attention focused on the industry, there seems to be a lot of momentum toward having new rules about steroid use in place in all major racing jurisdictions by the end of the year. If they are not, you can be pretty sure that the next Congress will force the issue. And once a bill gains some traction in Congress, it's hard to predict how it will turn out; for example, well-meaning animal-rights activists might seek to attach a ban on two-year-old racing, or to limit the Kentucky Derby to four-year-olds. With Senator Mitch McConnell (R-KY), who has frequently acted as the Senator from Horse Racing, in a tough reelection fight, it's possible that racing would not have very many influential friends in the next Congress.

The new rules don't eliminate steroids altogether; they'll still be allowable for "therapeutic" purposes, if far enough removed in time so that any traces still in the horse on race day are below threshold levels. But eliminating them from day-to-day racing may help even out the playing field a little.
In Delaware, where steroid use is already being restricted, horsemen report that a wider range of trainers are now winning races, which at least suggests that drug use may have contributed to the very high win percentages recorded by a few trainers in the past.

Those beneficial effects assume, of course, that the racing industry does adequate testing so that those using steroids too close to the race date can be caught. As of right now, for the 28 states conducting thoroughbred racing, some 18 different testing labs are being used. Some of these labs -- Cornell, the University of Florida, Penn and the University of California at Davis -- are well-equipped, well-staffed, and thoroughly professional. But many states award their testing contracts to the lowest bidder, which is not exactly a reassurance of high quality. With the adoption of new rules on steroid use, not to mention the advent of such even newer possibilities as gene-splicing to enhance performance, we need to concentrate drug testing in the labs where there is the capacity to do the tests right, and we need to finance those labs at a reasonable level.

I had meant this discussion of steroids to be just the introduction to a more general discussion of veterinary costs for race horses, but it's already sufficiently long on its own. Next time we'll look at all those other vet and drug costs.