The UK’s football clubs are taking advantage of large TV revenue streams to borrow from European direct lenders.
Stone Mountain Capital, an independent alternative investment adviser, works with general partners of direct lenders to raise capital for their funds.
As well as corporate mid-market and speciality finance strategies, they also lend to football clubs. While the market is small, Stone Mountain managing partner and chief executive Oliver Fochler said that there is a big opportunity in lending to elite teams.
“The market is very thin, spread really between the top six clubs in the UK and in each of the major European leagues, and you have a couple of firms which source these deals,” Fochler told GlobalCapital. “There are around three firms in the UK that work on originating this type of bridge football finance deal."
England's Premier League is European football’s biggest money maker, with Manchester United topping the table of European teams on revenue, reporting a turnover of £515.3m ($670.25m) in 2016, according to figures from Deloitte.
Much of the Premier League’s wealth is backed by the substantial television revenues, with companies such as Sky and BT competing for the rights to screen games domestically, while broadcasters from abroad, such as NBC in the US, ink sizeable multi-year contracts with the league.
When combined with the ballooning transfer fees received by clubs for players, football teams have plenty of receivables to tap for asset-backed funding.
“There are two applications for this sort of financing. One is for a player transfer and the other one is the TV rights. You have future receivables through TV rights and you can finance using those,” said Fochler. “It’s a unique lending strategy where the underlying assets are very exotic — player transfers and TV broadcasting rights — so that is interesting to investors.”
While clubs earn large revenues, they still need to engage in short term financing.
“As the TV deals are swelling, we are starting to see more clubs use loan financing against these,” said Rob Wilson, an expert in football finance at Sheffield Hallam University. “I think these sort of deals help clubs with general day to day cash flow as we see these transfer fees swell.”
Wilson added that given transfer market inflation, such financing gives clubs more flexibility to acquire either more expensive players or a greater number of players during transfer windows without negatively affecting cash flow to the club.
Securitization on the cards?
With football clubs already making use of asset backed loans, it brings up the possibility of securitization.
Last year XXIII Capital, a specialist capital solutions provider, priced a $73m securitization backed by player transfer fees and media rights receivables owed to a group of European football clubs.
The deal was meant to enable the clubs, which were spread across the top leagues in England, Italy, Spain, the Netherlands, Portugal and France, to unlock the value of the receivables owed to them in order to reinvest in the transfer market or to develop new infrastructure.
Clubs themselves have been active in the securitization market in the past. In 2006, Arsenal issued a deal backed by future ticket receipts at the new Emirates Stadium. Manchester United was also rumoured to be looking at a securitization in 2007 as part of the Glazer’s plan to refinance club debt.
Football securitizations in the past have gone pear shaped however, most notably in the case of Leeds United when a deal backed by ticket receivables was credited with the ultimate financial misfortune of the club.
A similar situation occurred with Italian club Fiorentina when its underperformed after fans stopped turning up to matches.
But now deals are being propped up by guaranteed receivables revenue over a set period.
This is either through TV rights or commercial sponsorship deals, such as those paid by Adidas and Nike to Manchester United and Chelsea respectively, which could make deals more attractive to clubs and investors.
“I don't think there is anything to stop clubs securitizing receivables, even if you go outside the top six,” added Wilson. “It could really change the mid-table, the clubs from say 14 to eight. If they started to go straight to capital markets to raise funds, their opportunities to sign bigger players and pay more out in wages against a relatively secure revenue profile could really mix things up and make the league even more competitive, which would then drive up TV rights further.
“Inside the top six, you would expect clubs like Manchester United, Manchester City and even Arsenal who are pretty savvy to be exploring that.”
Favourable direct lending conditions
Banks used to be involved in the football finance market, but this participation has fallen away since risk-weighted capital rules made it difficult to lend to smaller companies.
But for direct lenders, the loans, which can yield 6%-8% annually and up to double digit returns in some cases, are very attractive.
Fochler notes that the loan is effectively asset backed and investment grade because of the nature of the clubs which are borrowing.
He said that this allows lenders to “achieve unlevered returns which are better than high yield” similar to direct lending like returns, adding “it is all investment grade equivalent and uncorrelated to other assets and debt markets”.
However, investors have long memories, and not all are convinced of the value given the risk.
“We’ve seen what happens with football lending in the past and with the securitization of clubs like Fiorentina,” said one. “The results weren’t good.”