Fifa plays it safe

In the wake of September 11, insurance companies have been forced to increase their premiums on global events such as the World Cup. Nick Parsons reports on a novel alternative being used by Fifa

When Fifa, world football’s governing body, held its World Cup in West Germany in 1974, it felt obliged for the first time to insure the tournament against the risk of cancellation. The catalyst was the terrorist attacks on Israeli athletes at the Munich Olympics two years previously.

The World Cup finals have been insured ever since, however the 2006 finals in Germany (again) will buck that trend. Insurance since September 11 has become too expensive, forcing Fifa to look elsewhere. It has decided on the bond markets and in the process has opened up a niche and novel asset. Not so much catastrophe bonds as man-made disaster bonds.

Fifa tapped institutional investors in late September with a $260 million bond issue that protects it against the cancellation of the 2006 finals and transfers the risk of having to cough up a fortune to its marketing partners to the capital markets. The transaction is the first to involve the transfer of event risk and the first to transfer the risk of man-made catastrophe as well as natural catastrophe.

Mechanics

Unlike catastrophe bonds, investors are specifically shouldering the risk that the tournament, which makes up the bulk of Fifa’s revenues, will be cancelled – most likely by terrorism but also by World War, mass boycott or a host of other reasons. If the tournament is cancelled, bondholders lose their investments with the money used to repay Fifa’s marketing partners.

Credit Suisse First Boston (CSFB) led the bond issue, which comprised four floating-rate/fixed-rate tranches. All were for three years and rated A3 by Moody’s. The bulk of the issue ($210 million) paid a coupon of 150bp over three-month Libor.

The nearest benchmark to price the deal against was natural catastrophe bonds, says Andrew Pearse, a member of CSFB’s asset finance group in London. The few natural catastrophe bonds that have attained a single-A rating pay between 100bp and 125bp, so a premium of at least 25bp for a brand new asset class was deemed appropriate.

To promote the deal, CSFB spent two weeks roadshowing the offering and three weeks building the book. Fifteen institutional investors, primarily European unsurprisingly, joined. But what surprised CSFB’s Pearse was that they were not so much natural catastrophe buyers as major European banks. Many others would have liked to buy but faced portfolio restrictions.

The idea for the deal goes back to October 2001 when insurers Axa, running scared after events the months before, cancelled its insurance policy for the 2002 World Cup. Fifa is contesting this decision in the courts. As a result Fifa was forced to seek alternative protection, turning instead to a vastly more expensive policy extended by National Indemnity, a subsidiary of the Berkshire Hathaway group that did not even include the risk of terrorism. After the 2002 tournament passed off successfully, Fifa wanted to ensure its unsatisfactory insurance arrangements were not repeated four years hence.

“It became clear that any sports event in future would become very difficult to insure against,” says Urs Linsi, Fifa general secretary. “After the World Cup, Fifa assessed its options in the insurance market; we saw they were still very bad – the traditional insurance market is not any longer willing to adequately cover such a risk at a reasonable premium – so we started looking at other ideas.”

In the spring, Fifa decided to look at the capital markets. Time was of the essence. The governing body was contractually bound to insure its advertisers and World Cup hype begins years in advance. That influenced the decision to ask CSFB to lead the transaction. The investment bank knew the organisation well, having administered a private placement secured on asset-backed marketing revenues two years ago.

Instant payout

One benefit of the bond for Fifa is that it would get any payout straight away rather than after years of possible legal wrangle. “Unlike insurance coverage, bonds or notes cannot be ‘withdrawn’ until such time as they mature, which provides a durable coverage over several years,” says Linsi. Insurers currently offer only 12-month contracts, not the three years Fifa needs, ensuring that renegotiating each year becomes a more expensive exercise as you get closer to the event.

Linsi adds: “Another benefit is that this issue allows us to see what kind of response we get from the financial market, what kind of stature Fifa is enjoying with major international investors. Also the money is generally paid upfront and therefore available to satisfy claims immediately upon a potential cancellation.”

Bankers hope that other event organisers watch the performance of the Fifa notes carefully. The International Olympic Committee is an obvious potential beneficiary. But there are significant differences between the football and Olympics organisers, notably that the IOC doesn’t get paid until after its quadrennial extravaganza. However bankers might be looking at other areas to involve the capital markets.

“Natural catastrophe bonds have been out there a long time but no one looked at the broader risk transferred to the capital markets,” says CSFB’s Pearse. “This transaction has opened up people’s eyes to what can be done.”