In a league of their own

Football securitisation

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If there was any doubt that it is the fans rather than investors that really own football clubs, then the spate of securitisations based on future ticket sales has perhaps dispelled it. Gaining entry into the lucrative Uefa Champions League and avoiding relegation both bring crucial financial benefits to Premiership clubs, but a loyal fan base is proving to be the soundest prop in obtaining long-term funding from lenders.

Since Newcastle United launched the first UK football club deal secured on future ticket receipts in December 1999, Southampton, Leicester City, Ipswich Town, Leeds United, Everton, Manchester City and most recently Tottenham Hotspur have followed. Even the Football Association (FA) itself is now planning to cash in on future revenues to stave off a short-term cashflow crisis and the ignominy of having to move from its cushy berth in Soho Square.

Other deals are in the pipeline: Liverpool is now looking at securitisation possibilities to fund the building of a new £80 million stadium in Stanley Park. Sunderland, having already sacked two managers this season, is talking to banks about a deal that will cushion the financial fallout of likely relegation. Further ahead, the small coterie of securitisation bankers that have handled these deals are looking forward to the largest deal yet – the £350 million financing of Arsenal’s new ground at Ashburton Grove.

Football in the UK has never been more popular. Attendances at Premiership matches are at decades-old highs, and TV revenues continue to pour in for the elite clubs, sheltered from the fiasco that engulfed many lower-league clubs when they were left financially crippled by the demise of Carlton and Granada’s ITV Digital venture.

But with share prices stuck at rock bottom, equity investors – who financed football clubs and stadiums in the 1990s – have abandoned the sector in droves. Banks too are becoming reluctant to extend loans to a sector that is loath to cut back on costs – particularly players’ wages – and anyway for the borrower, bank loans are often an expensive and inflexible source of funds.

Just as well then that private placement bondholders have stepped into the funding gap.

A typical deal, which is similar to a whole business securitisation, is based on season ticket and corporate hospitality revenues, and is secured on the club’s stadium. The idea is that you can rely on punters flocking through the turnstiles without worrying about corporate risk.

“Securitisation takes the football club out of the loop,” says Bill Gerard, a specialist in sports finance at Leeds University Business School. “The main source of risk in a football club is the club itself and with securitisation the club can’t get its mitts on the money.”

He adds: “It mitigates the risk in what is a high risk business. If the company stays in business it needs a stadium; if it goes belly up, the real estate is there.”

Leicester City for example went into administration last year, following a double disaster of relegation and the collapse of ITV Digital. This left the sole US investor, Teachers Insurance & Annuity Association College Retirement Equities Fund, holding £28 million of bonds. However the fund is effectively the owner of a brand new stadium, which it is leasing back to the club in what appears to be a no-lose situation.

For a football club, revenue-backed bonds provide long-term fixed rate funding of long-term assets.

“Historically the only loans available to football clubs were short-term bank loans which went from season to season, which was not the way to finance long-term assets, especially bricks and mortar stadiums,” says Stephen Schechter, founder of Schechter & Co. So in order to pay for long-term investments, like stadiums, clubs should borrow long-term debt.

Schechter set up the Mayfair-based boutique last year specifically to arrange private placements and leasing for football clubs, having previously worked on several similar deals while at Schroders and Lazard. The world of football securitisation is small and largely secret. A few arrangers – principally Schechter, Lazard and Bear Stearns – tailor private deals for an investor base that comprises less than 10 major funds on both sides of the Atlantic. Most deals involve only one or two bondholders, and none has required more than three.

“If you look at a football club, it has long-term assets – the brand name, the team and its fans – so securitisation provides long-term financing,” says Nitin Bhandari, managing director, principal and asset financing at Bear Stearns in London. “The stadium is going to be there for 50 years so you don’t want short-term loans.”

He adds: “The strongest cashflows a club has are its gate receipts, and in order to maintain them, you need a stadium. That is why the stadium is a key part of the securitisation structure; it is not so much the stadium’s value as its ability to generate ticket sales. And of course you need a football team to play there.”

Last November a £75 million securitisation deal for Tottenham Hotspur via Lazard blurred the boundaries between the bank and private placement markets and provided evidence of the market’s growing sophistication. The North London club set up a debt programme that allowed it to draw the money down in line with its capital investment plans – it is building a youth academy and hopes to expand its White Hart Lane stadium.

“Banks and institutional investors have traditionally approached lending or investment decisions in different ways, particularly with respect to flexibility of structure and covenant package,” says David Reitman, head of European debt advisory at Lazard in London. “For Tottenham we were able to negotiate with two UK investors a bank-type drawdown. With this deal, the investor was tested further. Tottenham had a very particular set of circumstances and requirements which make the deal work.”

Lazard has worked on four of the deals done so far, but Reitman is not optimistic about the future size of the UK market. “Going forward it will be a limited market, which is a function of two things,” he says. “Firstly, on the demand side, there is a limited amount of appetite from a limited number of institutions, probably between six and 10. Secondly, there is a limited number of clubs left with the brand name and sufficiently reasonable credit and revenue characteristics to get a meaningful transaction away.”

Bear Stearns’ Bhandari thinks there are only eight to 10 clubs in the Premiership that could do deals. Schechter agrees that securitisation is “only right for clubs with a consistent fan support”.

He thinks the best example is Newcastle United, for whom he worked on the £55 million private placement in 1999. At the time the club was in twentieth place in the Premiership but still attracting 36,000 capacity crowds. The intention was to increase capacity to 51,000 and with demand for season tickets outstripping supply to the tune of 17,000, it was clear to the lending group that ticket revenues were safely assured. Even more so now that Newcastle are flying high in the Premiership and playing Champions League football.

A similar success story has been the financing of Southampton’s St Mary’s stadium, which has increased capacity from the 16,250 crammed into The Dell to 32,000 today.

“If a football club is borrowing to invest long, it is financially prudent,” says Gerrard at Leeds University. “There is nothing wrong with borrowing against your fan base to invest in a stadium.”

In contrast with Southampton, Leeds United have scored a spectacular own goal. “Leeds needed to build a new stadium or invest in the existing one, and they admitted it,” says Gerrard, a Leeds fan and vocal critic of the Leeds board. “They needed long-term funds but paid it all out on debt repayment, operating losses and players.”

Since then Leeds have been forced to sell off several of their top players, have lost any hope of Champions League football and may even face a relegation struggle. “One of the lessons learnt from the Leeds deal is that the business plan was based on continued participation in the Champions League,” says Stuart Brinkworth, finance lawyer at Ashurst Morris Crisp in London. “Investors prefer to see asset development, on a stadium or youth academy, and short-term assets funded elsewhere.”

He adds: “Investors have learnt a lot about football recently, especially the dangers of relegation, and are reluctant to deal with yo-yo teams.”

Despite the attempts at ring-fencing, football clubs are very much triple-B credits and risky even among other so-called ‘esoteric’ asset classes. This is because so much depends on unforeseeable factors, which is reflected in the pricing, says Brinkworth. Revenue-backed bonds for football clubs pay more than twice the interest of normal corporate bonds and fees are high. Bond investors – unlike equity investors – are determined to get their money’s worth.

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