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NHL teams can expect salary cap woes if Canadian dollar keeps falling

The Canadian dollar's plunge could mean salary cap headaches for several NHL teams in coming seasons.

On a day when one of the game’s all-time greats formally announced his retirement, the plummeting exchange rate for the Canadian dollar probably isn’t the sexiest topic to tackle.

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But just like Martin Brodeur, who is staying on in a management role with the Blues, this situation isn’t going away.

The loonie is in freefall, losing a penny of value since the close of markets on Wednesday. There are a number of factors involved, but the big one is the tumbling price of oil. That’s great for folks who are filling up their tanks. But it’s going to hurt hockey.

The impact on Canadian teams is immediate. They take in Canadian dollars but pay out their biggest expenses—salary and travel—in American currency. They have protected themselves to some degree by stockpiling U.S. funds purchased at more favorable rates, but those reserves can only last so long. The next time they load up on American dollars, they’ll feel it.

The significance extends south of the border as well. Canadian teams make up less than 25% of the league, but they account for approximately 35% of all hockey-related revenue (HRR). If that pile shrinks, so does the pile that is made available to players under the salary cap.

In the short term, Canada’s dwindling dollar isn’t apocalyptic. Most of the money that will go into calculating HRR—TV deals, marketing partnerships and season ticket purchases—is already in the pile, which is why Commissioner Gary Bettman could safely say last weekend that the salary cap for 2015–16 will not “fall off a cliff.”

But he also said that the league took the falling Canadian dollar into account when cap projections were presented at last Saturday morning’s Board of Governors meeting in Columbus. In other words, the $73 million cap that was discussed in December already is off the table. The only question now is how low it will go.

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Bettman did offer a rough idea. For example, if the Canadian dollar is at $0.82 against the U.S. dollar, the cap ceiling would be $72.2 million. If the loonie hovers around $0.80, roughly where it started on Thursday morning, we could see a ceiling around $71.6 million.

Both of those numbers would be well above this season’s cap of $69 million, but they are subject to further revision.

The league’s estimates include an assumption that the NHLPA will again exercise its right to a 5% cap escalator, the CBA device that allows the players to inflate the cap above the prescribed level and thereby create room for teams to pay out more in salaries.

In theory, anyway.

All contracts are subject to escrow clawbacks, which are used to ensure that players don’t end up getting more than their 50% share of the HRR pie. Triggering the escalator all but ensures higher escrow rates—a growing source of frustration among the players, who have seen escrow payments (16% for next season) whittle away at their deals. And depending on the final calculation of HRR, they may never get that money back.

So rather than create an artificially higher cap ceiling next year, they may pass on the escalator and take their chances at retaining a larger portion of their contracts ... even if it means putting a damper on this summer’s free-agent market.

But the players’ hopes for the loonie might be a little too rosy.

As bad as things are now, they could get worse. Many experts are many predicting a dip to $0.75 against the American dollar in the next three to six months. Goldman-Sachs believes that the Canadian dollar could drop as low as $0.71 USD.

Such drops would be murder on 2016–17. If a fluctuation of two cents means $600,000 in cap space (extrapolating from Bettman’s figures), then a dip to $0.75 USD could peg the ’16–17 cap around $70.1 million. And if Goldman-Sachs is right, the salary cap could sink below this year’s $69 million.

So maybe the commissioner is right. The cap won’t fall off the cliff. But for it to stay flat at a time when the league has maximized broadcast and gate revenues is no small concern.

A team like the Bruins can’t afford to take a chance on re-signing pending UFA center Carl Soderberg. Mike Green will become a tougher fit for the Capitals. The Rangers, who already have more than $36 million committed to defense and goaltending, will have tough calls to make on Mats Zuccarello and Martin St. Louis.

It might not be as sexy as fancy stats, but this is one sort of numerical analysis that teams won’t be able to overlook.