Possible Compliance Buy-Out Loophole

Earlier today, TSN announced that the NHL and NHLPA agreed to accelerated compliance buy-outs. The important excerpts are the following:

"Teams are now eligible to exercise an "accelerated compliance buyout" on one player with a salary cap hit of $3 million or more before the regular season begins on Saturday."

"In order for a player to be bought out this week, he still must clear waivers first."

"Team will take the full cap hit on such players this season, less the $900,000 for not burying the player in the minors, but suffer no cap hit next season or beyond."

"Teams would pay out 100 per cent of a player's actual salary this year and two-thirds or one-third (as applicable) over twice the remaining term of the contract and the player is free to sign elsewhere."

"However, there's no actual benefit to the teams to take this plan of action other than as a favour to the player to perhaps allow them to sign with another team right away." (or is there?)

I originally intended to write about this subject once the full new CBA was available online, but this new development forced me to write about it today before it becomes irrelevant (or materializes).

Here is the paragraph concerning compliance buy-outs from the summary of terms of the NHL/NHLPA proposed CBA that is available online.

"During the Ordinary Course “Buy-Out” periods following the 2012/13 season and 2013/14 season, in addition to any other Ordinary Course “Buy-Outs” a Club may elect to effectuate pursuant to Paragraph 13 of the SPC, Clubs may elect to terminate and “buy-out” the already existing SPCs of up to two (2) additional Players (in the aggregate over the two (2) years) on a Compliance basis (a “Compliance Buy-Out”). Such Compliance Buy-Out(s) would be effectuated on the same terms as are set forth in Paragraph 13 of the SPC, except that the amounts paid under such “buy-out(s)” will not be charged against the Club’s Cap in any of the years in which the payments are made to the Player. Amounts paid under such Compliance Buy-Out(s) will, however, be counted against the Players’ Share during any League Year in which the “buy-out” payments are made. A Player that has been bought out under these Compliance Buy-Out provisions shall be prohibited from re-joining the Club that bought him out (via re-signing, Assignment, Waiver claim or otherwise) for the duration of the 2013/14 League Year (if the Player was bought out in 2013) and the 2014/15 League Year (if the Player was bought out in 2014)."

The intent to prohibit a team from re-acquiring the player it has bought out via the compliance buy-out is clear. However, there is a way around this, because the criteria used is "the Club that bought him out" instead of say "the Club that had the player on its payroll for the 2011-2012 season". All you need to go around this is two teams with two similar "bad contracts" that they want to buy out with the accelerated compliance buy-out. By trading two similar bad contracts, placing them on unconditional waivers and than using the accelerated compliance buy-out, the original team would be able to re-sign its own player to more favorable terms and possibly enjoying very good value on the new contract for the 2013-2014 season if it has at least a two-year term. Since these "bad contracts" have very bad value in a cap system, they are very unlikely to be reclaimed on waivers by any team (teams in big markets that could be tempted by such contracts do not have the cap space necessary this season to keep them while teams in small markets do not have the internal budget to afford them). 

Using an accelerated compliance buy-out now is also a better option than using a simple compliance buy out this summer if you want the player with the bad contract to play for your team this season, because if that player suffers from a long-term injury during the season, the team will not be able to buy him out during the summer buy-out period (which could have catastrophic consequences for the 2013-2014 season when the cap goes down to 64.3M). One thing that could however mitigate this risk to abuse the LTIR reserve next season like the Flyers are currently doing with Chris Pronger.

Let's take as an example the two contracts that are currently regarded as the worst: Scott Gomez's and Wade Redden's. The terms of both are extremely similar: both have two seasons and 10M$ left to pay (without taking into consideration the current prorated season). A Scott Gomez-Wade Redden trade would imply that the Montreal Canadiens use one of their 2 compliance buy-outs on Wade Redden's contract thus giving the New York Rangers (and the 28 other teams) the chance to re-sign him to more favorable terms and imply the New Rangers use one of their 2 compliance buy-outs on Scott Gomez's contract thus giving the Montreal Canadiens (and the 28 other teams) the chance to re-sign him.

Accelerated compliance buy-out payments (first year prorated for a 48-game season, payments are outside the cap, but not outside the players' share)

Scott Gomez: Y1:3.220M, Y2:1.500M, Y3:1.500M, TOT: 6.220M

Wade Redden: Y1:2.927M, Y2:1.667M, Y3:1.667M TOT: 6.260M

A total amount difference of around 41K (which is further reduced by the time value of money) that the Montreal Canadiens would have to pay in extra for buying out Wade Redden instead of Scott Gomez (which is peanuts for a big market team).

By being bought out at the start of the season with an accelerated compliance buy-out, Scott Gomez loses 1.5M on the last year of his contract (plus one year of interest on the year-3 1.500M). If Scott Gomez subsequently signs a contracts that pays him 1.500M over, let's say, the next two years, the total amount of money received (excluding the one-year interest lost) by Gomez would be the same as if he fulfilled his original contract and with the same opportunity cost (ie he will be able to re-sign elsewhere only after the 2013-2014 season). Because the 2012-2013 season has only 48 games, such a "complimentary total-money-received-neutral contract" would have a 1.016M caphit over two years (with only 1.500M actually paid). If the Montreal Canadiens hand out such a contract to Scott Gomez, the total impact on the cap for the 2012-2013 season is a loss of 0.116M in cap space and a gain of 6.342M in cap space for the 2013-2014 season (when cap space will be a most) versus the scenario of not buying him out.

Simarly for Wade Redden, by being bought out at the start of the season with an accelerated compliance buy-out, Redden loses 1.667M on the last year of his contract (plus one year of interest on the year-3 1.667M). If Wade Redden subsequently signs a contracts that pays him 1.667M over the next two years, the total amount of money received (excluding the one-year interest lost) by him would be the same as if he fulfilled his original contract and with the same opportunity cost (ie he will be able to re-sign elsewhere only after the 2013-2014 season). Because the 2012-2013 season has only 48 games, such a "complimentary total-money-received-neutral contract" would have a 1.128M caphit over two years (with only 1.667M actually paid). If the New York Rangers hand out such a contract to Wade Redden, the total impact on the cap for the 2012-2013 season is a loss of 0.228M in cap space and a gain of 5.372M (when cap space will be a most) versus the scenario of not buying him out.

The underlying assumption is that the bought-out players may be psychologically inclined to sign break-even contracts (see the recent Colby Armstrong contract). It is interesting to note that if Gomez (Redden) signs one two-year or two one-year contracts with actual pay higher than 1.500M (1.667M), they will make more money that way (with higher risk) than if they simply fulfilled their original contract.

The inherent risk to this strategy is that 28 other teams can also offer a new contract to the bought out players (since they are becoming UFA after being bought out) and they are potentially in a better position to do so, because they are not carrying the original cap hit of the player with the bad contract (minus 900K) this season on their cap. By making the original trade (Gomez for Redden), the Rangers and Habs are also tipping off the 28 other GMs in the league that they have the intention to re-sign their own player thus making it harder to re-sign them to friendly terms.

However, the fact that NHLPA and the NHL still seem able to add/change the rules of the new CBA (see new accelerated buy-outs) probably means that the wording of this clause could still change and fix this loophole.

Update (Jan-16): Both Scott Gomez and Wade Redden have been placed on unconditional waivers today by their respective teams and no trade has taken place. They are thus not in the future plans of their respective team and there is no possible way that the potential loophole discussed above will be used.