Understanding Asset Liquidity in the NHL
Cap flexibility as a team building resource
A major puzzle that all NHL front offices face is navigating roster construction in a hard salary-capped league. Think of the problem as if each roster were an investment portfolio; every team is limited to investing $82.5 million this season. The challenge lies in finding the right asset allocation mix that maximizes each dollar and creates a winning team.
Finding the right mix is incredibly difficult, especially when the other 31 teams are competing to do the same thing. This means for a lot of teams, their asset allocation mix needs ‘repositioning’.
But in order to do so, teams need to create cap flexibility in order to close some ‘positions’ and open new ones. This is why viewing assets in the NHL in terms of their liquidity is a fascinating angle to approach roster-building strategy.
Liquidity: The ease with which an asset can be converted into cap space without affecting its market price (trade value).
Cap Space
The most liquid asset is cap space. Cap space is the equivalent of cold hard cash in the NHL and can be used however the team sees fit, whether that’s adding a valuable player or taking on liabilities to receive draft picks and prospects for the future.
Draft Picks
After cap space, the next most liquid assets are draft picks. They can easily be added in a trade as the receiving team’s salary cap isn’t impacted. And their market price is for the most part, consistent. A first-round pick is a first-round pick, teams know what they are acquiring. (I say for the most part because the first-round pick from a Stanley Cup contender is a lot different than a first-round pick from a bottom-three team.)
As we’ve seen this past off-season, draft picks can be used as a tool to carve out cap space when paired with inefficient contracts. The Calgary Flames paid a first-round pick in order to move Sean Monahan and his $6,375,000 cap hit to the Montreal Canadiens.
Prospects
Prospects are similar in liquidity to draft picks as they may not be signed to a contract, or if they are, can be sent to the minors without impacting the salary cap. The only added caveat is the 50 standard player contract limit which is why they are slightly less flexible than a draft pick.
Dylan Coghlan is an example of a prospect that was used to create cap flexibility for the Vegas Golden Knights when he was packaged with Max Pacioretty to the Carolina Hurricanes.
Value Contracts and Expiring Contracts
Getting into contracts that actually take up cap space, value contracts with term and expiring contracts are the easiest to turn into pure cap space.
A recent example of a value contract would be the Brandon Hagel trade. Hagel was in high demand due to his team control and low salary cap which the Blackhawks cashed in on. They received multiple futures and did not have to take on any long-term salary commitments.
Expiring contracts are nice because if the team can be patient, by season end the contract comes off the books, and cap space is freed up. But teams that can’t wait until then or want to prevent losing the player for nothing still get value from expiring deals. Whether they are moved at the trade deadline or another time of the year, the contract holds most of its trade value and if the surrendering team needs to take money back to make the trade work, it’s usually for another short-term contract.
Long-term Contracts and Clauses
Superstar contracts that command $10 million for example are worth every penny but very few teams have the cap space to take on a deal of that kind without moving money out. Lumping in contracts with no-trade and no-movement clauses adds a layer of difficulty to turning that asset into cap space.
Distressed assets
The last are distressed assets. Contracts of players that cost more than the on-ice value that they provide. Remember that in a salary cap world, how each dollar is invested matters, and the Stanley Cup contenders don’t just have their players playing to the value of their contract; they exceed it. This is why distressed assets, are the most illiquid asset in the NHL. These are the contracts whose trade values are negatively impacted and sweeteners need to be added for teams to even consider taking on.
I value interdisciplinary thinking when it comes to tackling complex problems; if the only tool I have is a hammer, suddenly, all my problems begin to look like nails. Viewing NHL assets by their liquidity is one way I would approach roster construction from an outside perspective.
With liquidity in mind, teams can look at rivals and identify those with too many illiquid assets and conclude that they are going to have some difficulties altering their roster. Talented players may become cap casualties which are where teams with cap flexibility can swoop in and reap the benefits. Colorado shrewdly picking up Devon Toews is one of many examples.
Conversely, teams that realize they have limited cap flexibility due to an abundance of illiquid assets may need to adjust their priorities to the long term if their current asset allocation mix is not equating to on-ice success. This is where the team should look long and hard at a rebuild.