04 January, 2009

Lowe seeking a contract

We've seen mixed approaches to signing players this offseason. The Mets were able to acquire Francisco Rodriguez at a reasonable amount for a reasonable length of time. The Yankees however bid against themselves for CC Sabathia, blew competition out of the water for Burnett, and stayed with competition for Teixeira. Many players remain on the market and are expected to take lower salaries than was originally anticipated.
Derek Lowe was originally thought to be looking for 5 years $90 million. After seeing a slowing market the Mets made an initial offer of 3/$36. Two very disparate numbers. Scott Boras and Derek Lowe countered by saying Lowe is looking to other suitors for $16 mil per.

Let's use CHONE's projections to formulate the present value of Lowe's worth to a team. We will use a present value formulated from a discount rate based on current bond models. Using a combination of Citigroup's Discount Rate Curve, Moody's Discount Rate, and a portfolio of high rated corporate bonds, a reasonable discount rate is 6.75%. Furthermore, let's assume a middle of year payment for each year of Lowe's valued worth. CHONE projects Lowe's worth at:
2009: $15.5 mil
2010: $14.8
2011: $14.2
2012: $13.4
That gives us a present value of $51.14 mil.
Now, it is important to note that these discount rates do factor in current economic conditions. While we may be tempted to adjust the discount rate going forward, it is really unreasonable to do so given the current economic turbulence.
So now any team wanting to match the value of Lowe's worth, but not wanting to give Lowe 4 years guaranteed could backload some of the dollars of both the guaranteed portion of the contract as well as a fourth year vesting option.
Based on the Mets' three year offer a fourth year vesting option seems highly likely. To make the contract more appealing to Derek Lowe you need to make the vesting condition fairly easy to attain. Something that he has an 85%+ chance of attaining. Perhaps that would be pitching something like 170+ innings in 2011.
Suppose that a team offers Derek Lowe 3/$40, with a payment schedule of 2009 - $12 mil, 2010 - $13, 2011 - $15. In order to match the present value of Lowe's worth, the 85% likely vesting option would have to be $22.18 million; a pretty hefty vesting option.
Now if instead a team makes a more reasonable offer of 3/$42 without backloading; the vesting option would only need to be $19.23 mil. This seems like the type of offer Lowe would be happy with. Either way, he's probably looking for a bit too much in $16 mil per and the Mets started off too low at 3/$36, even given the current economic situation.

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