UK: Football Finance Moves Into A New League

Last Updated: 24 July 2008
Article by Deborah Kirtley

New Ways Of Financing Football Clubs Have Meant Exciting Times In The Boardroom As Well As On The Pitch. Deborah Kirtley Explains.

Football clubs, like any other business, need finance. Not just to acquire the best players but also to make regular investment in things like stadium expansion, or relocation, or the development of academy facilities.

Dickinson Dees' Banking Team has been working closely with Barclays Bank PLC for some time in relation to its financing of a number of Premier League football clubs, and in particular Newcastle United, Middlesbrough FC and Sunderland AFC.

And over the years, we've seen how the financing of football clubs has changed.

Traditionally clubs have borrowed from banks that, in turn, required a relatively high rate of return on their loans as the price of lending in a high risk market. Banks also tended to want to restrict the length of loans, take security over the club's assets and include a range of financial covenants in their loan agreements. All this effectively placed restrictions on a club's management.

This led clubs to start exploring securitisation as an alternative method of financing. Securitisation offered the possibility of a lower cost of borrowing; longer-term loans and greater investment diversity. Even more attractive was the greater flexibility it seemed to offer the club's management.

Both of these quite different methods of financing were used in this region in the 1990's. In 1998, Barclays (with Dickinson Dees acting) funded the expansion of St James' Park for £40 million, by providing a traditional term loan.

Then in 1999, with Dickinson Dees again acting for Barclays as account bank, Newcastle United became the first UK football club to raise finance by the securitisation of its gate and hospitality receipts. This operation raised £55million to refinance development.

Eight further securitisations were carried out by other British clubs between 1999 and 2003.

So how does securitisation work?

A securitised club no longer needs to finance capital investment by short term borrowing. Instead it can match long term debt obligations with long term revenue streams from gate receipts. Additional working capital facilities (in the form of traditional bank loans and/or letter of credit facilities) can be used to finance short term investments, typically the purchase of new players.

Football clubs tend to use the so called 'secured loan securitisation' model for utilising anticipated future cash flows to make investment bankruptcy remote for investors.

Under securitisation, the parent company owning the club creates a subsidiary company (Stadco) which holds the legal title to the stadium. The Club then leases the stadium from Stadco and agrees to play its home games there. Stadco then borrows the securitised sum from a SPV specially set up by the parent company.

Revenue generating assets are ring fenced from general creditors and the structure can be rated by the credit rating agencies and bonds and notes issued to the capital markets. Credit rating agencies such as the Standard & Poor Corporation, Moody's Investor Service and Fitch provide investors with a graded assessment of the risk of the securities. In order to get an investment grade rating, the credit risk for the SPV bonds in a football securitisation structure must be very low.

Credit enhancement measures, such as a bank letter of credit or a credit insurance wrapper to back the bond issue, are usually put in place at the time of the deal to boost ratings.

Despite the advantages offered by securitisation, it fell out of fashion as a method of financing as rising insolvency rates amongst clubs dampened investor confidence post 2003.

However, with the £260 million Arsenal securitisation completed in July 2006 (by far the biggest to date) it appears that the biggest clubs might once again be considering securitisation as a long term financing mechanism.

Arsenal's aim was to refinance the bank debt it had incurred in constructing the Emirate's Stadium. So the money raised by the issue of fixed and floating rate bonds was used to pay off its existing debts, saving around £1.2million a year on interest payments. The Arsenal securitisation is structured on a secured loan basis in respect of anticipated ticket revenues over the next 25 years.

The structure also incorporates aspects of a whole business securitisation. For example, fixed and floating charges are placed over other revenue streams (such as broadcasting rights and the proceeds of player sales) to support the loan repayments if gate receipts fall because of failure to qualify for European competition or relegation from the Premier League, etc.

In this instance too, Barclays Capital separately provided liquidity facilities to the SPV to cover seasonal variations in the ticket income stream, which is front loaded due to season ticket sales. This ensures Bond holders' regular payments can be maintained.

The transaction was also separately credit wrapped by Ambac Assurance, an AAA rated insurer. This enabled Arsenal to obtain investment grade status for the company, Arsenal Securities plc, to issue the notes publicly – the first time that this has been done. Previous football securitisations have been privately placed with a small number of institutional investors.

And whilst the Arsenal deal has encouraged clubs, financiers and investors to consider the option of further securitisations, particularly of high value deals, other factors are now coming into play that could prompt an increase in future securitisations. These include improving Premier League Club finances (as a result of the new Sky/Setanta deal) and a favourable economic climate for bond investments.

Ultimately, however, transactions depend on a club's performance on the field and success over an extended period of time is essential if the requisite revenues to finance the repayment terms are to be generated. Arsenal has played top flight football for over 80 years and was therefore seen as a 'safe bet.'

Where clubs are unable to win consistently on the pitch, securitisations have not been successful. Things went badly wrong at clubs like Leicester City, Ipswich Town and Leeds when too much money was spent on players in a bid to either retain Premier League status and/or take part in the lucrative European competitions.

Another potential pitfall of securitisation is that bondholders will always be wary of a business sector which lacks a real profit motive - success on the pitch rather than the maximising of shareholders returns is always the primary goal of football clubs.

Predicting whether we are about to enter a boom time for securitisation is about as risky as predicting a final score before the end of a match. What is likely though is that future football bondholders will follow the Arsenal model of credit enhancements, high returns and strict conditions on investment. And this may put off all but the biggest and financially best run clubs from completing securitisations in the first place. And even these highly structured securitisation transactions can never completely insulate bondholders from performance on the pitch.

It's worth remembering too that some of the biggest stars in the game today are not on the pitch. The super rich investors from abroad are transforming the way clubs operate and with their seemingly limitless bank accounts it's likely that some lucky clubs won't have any need to explore the world of loans or securitisation.

In a game where nothing is certain, there are sure to be exciting times ahead.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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