Decreasing discount for second contracts for young but proven restricted free agents

This week we saw young Calgary Flames franchise centerman Sean Monahan sign a long-term deal for $6.4 million per year after having a solid 3-year run for his entry-level deal. The number was expected based on comparables that included other young top 6 forwards like Aleksander Barkov and Nathan MacKinnon who are also signed long-term for more than $6 million per year.

Mostly gone are the days when teams received an extended discount for homegrown players. There is still a significant discount over the 3-year term of a player’s entry-level contract, but for players who emerge as stars quickly, there is minimal discount for second contracts when the player is still a restricted free agent without arbitration rights. $6.4 million per year might be a modest discount from what a similar player would earn as an unrestricted free agent, but it is also a huge step up from the entry-level deal. And the discount is much less than it was some years ago when players worked their way up step-wise from a rookie deal to a modest raise to a bigger deal before getting fully paid when they hit the unrestricted years.

Increasing price and term for even aging unrestricted free agents

This summer was another barn burner for any and all veteran unrestricted free agents with a reasonably solid NHL resume. All of David Backes, Milan Lucic, Andrew Ladd, Loui Eriksson and others received a pretty comparable 5-6 years at $6Mish per year even if some of those years were well past a 30th birthday.

Because of the scarcity of top-tier free agent options that hit the open market, the scale is tilted in the direction of the players. Teams must either pony up a long-term, full-price deal or sit and watch while someone else does. Many of these deals will turn out to be bad in the second half, but NHL GMs just cannot stand to do nothing if they have salary cap to spare, so the bidding wars continue.

Player pricing tiers

Up to 3 years on entry-level contract can be incredibly inexpensive for players who mature quickly.

Restricted free agent contracts following entry-level deal are discounted but not nearly as much as years past.

Top-tier unrestricted free agents are both expensive and risky.

So how do the Hurricanes best capitalize on these financial realities?

Entry-level players: I think the incentive that has always been there to push entry-level players back to juniors until they are ‘overripe’ has increased significantly. Elias Lindholm is the best recent illustration from a Hurricanes standpoint. In his first 3 years (all of his entry-level contract), Lindholm has grown from a struggling rookie at least being a serviceable top 9 forward. But when you look at what he did even in year 3 and ask if he could be replaced by a reasonably inexpensive depth veteran free agent signing, I think the answer is yes. So the Hurricanes burned 3 inexpensive years at less than $1 million per year and got roughly what they paid for or only modestly more for their $. Had the Hurricanes let Lindholm play 2 more years in Sweden while maturing, Lindholm would only be playing his second of 3 inexpensive seasons on his entry-level deal. Instead, he will be making $2.75 million average over the next 2 years on his second contract already.

Looking forward, this impacts players like Julien Gauthier, Jake Bean and Nicolas Roy. The first 2 can play up to 2 more years in Canadian juniors and roll there 3-year entry-level deals forward by 2 years in the process. Roy has 1 more year in Canadian juniors.

=> Unless 18-19 year old players are ready to make the Canes SIGNIFICANTLY better at the NHL level, there is a great incentive to save their inexpensive entry-level contract years until they are older.

Restricted free agents: For restricted free agents who are expected to continue improving, there is an incentive to sign them for longer before they peak. The result is that they can be signed for an intermediate price that is more costly than a short-term bridge deal but has the potential to save $ by being a discount to signing them after they peak. Victor Rask is the case and point for the Hurricanes. Francis chose to lock him up for $4 million per season for 6 seasons. That $4 million price is fair but not necessarily a discount relative to his 48 points in 2015-16 and third-line role. But if Rask can climb another rung on the ladder scoring-wise and do so in a first line role (which he will likely get the chance to do this season), he starts to look similar to Sean Monahan. At that point, his $4 million is a bargain compared to the list of players above who are making $6 million per year.

The challenge here is projecting which players are still rising and which are just peaking early. I do not care who the player is. There is risk in any 5-6-year deal because of the term. Though I would rather take risk on rising young players than potentially sinking old players, there is still an element of paying for projected improvement that will not always pan out.

=> It is a tricky game, but there are discounts to be gained by selectively signing younger players long-term before they have the huge year that boosts them into the next tier price-wise. Ron Francis made exactly this type of bet in locking up Victor Rask for 6 years at $4 million per year.

Unrestricted free agents: The pricing of unrestricted free agents as driven by the salary cap challenges in recent years is fascinating. At the same time that we are seeing the price of the top-tier of players continue to rise in both cost and term, the price of pretty good, more than fourth line depth players has absolutely plummeted. Krist Versteeg is in Switzerland. Radim Vrbata signed for $1 million. And Jiri Hudler who had 76 points in 78 games 2 years ago remains unsigned and also figures to be a bargain at this point.

A GM could easily build a pretty good third line for a fourth round price by being patient and opportunistic in today’s free agent market despite the near impossibility of winning bidding wars for the top players who might be/once were first-liners.

=> Based on what we have seen in consecutive summers now, I really like the idea of entering July with some good young internal options to fill out a fourth line with players who could still go back to the AHL. This presents free agent shopping flexibility. If good players are available for cheap in late July and early August (like this summer), then they can be added. If not, the team defaults to the inexpensive youth. Why build a fourth line that cannot score  in early July when recent history has offered the chance to build a third line that can for the same price?

Go Canes!