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Football SecuritisationsFootball SecuritisationsPast, present and futurePast, present and future

Ricardo Vasquez-UrraRicardo Vasquez-UrraLL.M CandidateLL.M Candidate

Sports Law (LAWS 6808) Sports Law (LAWS 6808) Sydney University, School of LawSydney University, School of Law

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Preliminary issuesPreliminary issues

Asset classesAsset classes

Pharmaceutical patent revenuesPharmaceutical patent revenues Trademarks leasesTrademarks leases Future ticket receiptsFuture ticket receipts

Keys:Keys: The asset is capable of commoditizationThe asset is capable of commoditization

Cash flow sufficiently stable and predictableCash flow sufficiently stable and predictable

Asset class relates to a service provided Asset class relates to a service provided en masseen masse to the public to the public

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HistoryHistory

1999 stock market interest in 1999 stock market interest in football shares was over:football shares was over:

SUNDERLANDSUNDERLAND 11.9%11.9%

ASTON VILLAASTON VILLA 21.8%21.8%

NEWCASTLE UNITEDNEWCASTLE UNITED 26.8%26.8%

Clubs continued to need Clubs continued to need financing…financing…

What do we do?What do we do?

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HistoryHistory

Clubs turned to Clubs turned to securitisation as securitisation as a form of long a form of long term borrowing, term borrowing, often to fund often to fund construction or construction or renovation of renovation of stadiums.stadiums.

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Clubs face problemsClubs face problemsTransactions relied on:Transactions relied on:

Whim of fansWhim of fans Fitness of playersFitness of players Team’s performance on the fieldTeam’s performance on the field

……this experience left investors much more this experience left investors much more wary of football securitisations…wary of football securitisations…

No new football securitisations between No new football securitisations between 2003 and 20062003 and 2006

July 2006 £260 million securitisation July 2006 £260 million securitisation carried out by Arsenal FCcarried out by Arsenal FC

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What is a securitisationWhat is a securitisation

The process of converting cash flows from underlying assets or The process of converting cash flows from underlying assets or debts (receivables) due to the originator (the entity which debts (receivables) due to the originator (the entity which created the receivables) into a smooth repayment stream, thus created the receivables) into a smooth repayment stream, thus enabling the originator to raise asset-backed finance through a enabling the originator to raise asset-backed finance through a loan or an issue of debt securities—generically known as asset-loan or an issue of debt securities—generically known as asset-backed securities or ABS—which is limited recourse in nature to backed securities or ABS—which is limited recourse in nature to the credit of the receivables rather than that of the originator as the credit of the receivables rather than that of the originator as a whole, and with the finance being self-liquidating in nature. a whole, and with the finance being self-liquidating in nature.

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Key issues of the structureKey issues of the structure

SPV is insolvency remote from the originatorSPV is insolvency remote from the originator Principle of separate personality of a Principle of separate personality of a

companycompanySalomon judgment [1897] AC 22Salomon judgment [1897] AC 22

Serves to lower the credit risk for investorsServes to lower the credit risk for investors Helps to improve the credit rating of the Helps to improve the credit rating of the

bonds bonds

What are they looking for?... What are they looking for?...

……that the bonds are rated as ‘investment grade’ securitiesthat the bonds are rated as ‘investment grade’ securities

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How can credit enhancement be How can credit enhancement be achieved?achieved?

Bank letter of credit to back the issueBank letter of credit to back the issue Issuing bonds in tranches (junior Issuing bonds in tranches (junior

tranche)tranche) Originator purchases the junior Originator purchases the junior

tranche to reduce the risk for the tranche to reduce the risk for the senior bondholders senior bondholders

Over-collateralisation Over-collateralisation

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Securitisation Structures in Securitisation Structures in FootballFootball

Secured loan Secured loan

Whole Business Securitisations Whole Business Securitisations (WBS) (WBS)

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True sale?True sale?

NO…NO…

……unless the general operating cash flows associated unless the general operating cash flows associated with the football stadium (the club’s main collateral) with the football stadium (the club’s main collateral) can be effectively ring-fenced from the claims of can be effectively ring-fenced from the claims of other creditors of the clubs. other creditors of the clubs.

According to Standard & Poor’s, it must be clear According to Standard & Poor’s, it must be clear that, as a matter of law: that, as a matter of law:

a)a) the security gives de issuer securitization entity “true control” the security gives de issuer securitization entity “true control” of the assets; of the assets;

b)b) is fully enforceable; and is fully enforceable; and c)c) cannot be challenged under general law or insolvency law. cannot be challenged under general law or insolvency law.

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Advantages of this Structure Advantages of this Structure

Most important:Most important:

Allows the club to retain control over its Allows the club to retain control over its businessbusiness

In addition:In addition:

Prevents over-collateralisationPrevents over-collateralisation Club retains the surplus cash generated by the asset Club retains the surplus cash generated by the asset Club retains the residual value in the asset itself at Club retains the residual value in the asset itself at

the end of the financingthe end of the financing

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Whole Business SecuritisationWhole Business Securitisation

Essential Difference:Essential Difference:

In a whole business structure it is the cash flows from the In a whole business structure it is the cash flows from the entire range of operating revenues generated by a whole entire range of operating revenues generated by a whole business, or a segregated part of a larger business, that business, or a segregated part of a larger business, that are securitised. are securitised.

However can be more costly to establish because However can be more costly to establish because of, inter alia:of, inter alia:

Additional legal costs of setting up the appropriate Additional legal costs of setting up the appropriate corporate structures to manage the cash flowscorporate structures to manage the cash flows

Additional costs of arranging the necessary credit Additional costs of arranging the necessary credit enhancements and appropriate covenants to achieve a enhancements and appropriate covenants to achieve a high credit rating from the credit rating agencies. high credit rating from the credit rating agencies.

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Key elements in this Securitisation Key elements in this Securitisation StructureStructure

Loan agreement between the operating companies Loan agreement between the operating companies and the SPVand the SPV

Covenants:Covenants:

Financial covenants:Financial covenants: e.g restricting the level of indebtedness of the e.g restricting the level of indebtedness of the group, or the level of dividends payments by the parent group, or the level of dividends payments by the parent

Operational covenants:Operational covenants: e.g restricting the business operations of e.g restricting the business operations of Stad.CoStad.Co

……However, because the focus of the secured loan securitisation However, because the focus of the secured loan securitisation is on the gate receipts, the football club has normally been is on the gate receipts, the football club has normally been given more flexibility in the operation of its general business given more flexibility in the operation of its general business than would typically be the case with bank loans. This has given than would typically be the case with bank loans. This has given the clubs an opportunity to borrow against other revenue the clubs an opportunity to borrow against other revenue streams, such as TV revenue or sponsorship deals. streams, such as TV revenue or sponsorship deals.

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What went wrong?What went wrong?

• Clubs spent too much Clubs spent too much money on:money on:

buying new players buying new players increasing wages for existing increasing wages for existing

playersplayers

• They became reliant They became reliant on gate receiptson gate receipts

• They became reliant They became reliant on media revenue on media revenue

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Reasons for the Failure:Reasons for the Failure:Economic, Managerial and StructuralEconomic, Managerial and Structural

Investor under-Investor under-estimated the estimated the peculiar risk peculiar risk associated with associated with football football securitisations, andsecuritisations, and

Over-estimated the Over-estimated the level of security they level of security they had against the had against the various risks that various risks that might arise in might arise in football football

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RenaissanceRenaissance

2006 Arsenal FC securitisation, made via Barclays 2006 Arsenal FC securitisation, made via Barclays Capital and Royal Bank of Scotland, changed the Capital and Royal Bank of Scotland, changed the panorama with a deal that effectively brought whole panorama with a deal that effectively brought whole business securitisation to the sporting arena. business securitisation to the sporting arena.

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Arsenal’s Securitisation: Main Arsenal’s Securitisation: Main featuresfeatures

Arsenal’s deal differs in some key respects to those that have struggled Arsenal’s deal differs in some key respects to those that have struggled before, with various structural features making the transaction more akin to a before, with various structural features making the transaction more akin to a whole business securitisation than a receivables-backed deal whole business securitisation than a receivables-backed deal

The Arsenal securitisation is a secured loan structure, based on anticipated The Arsenal securitisation is a secured loan structure, based on anticipated ticket revenues over the next 25 years.ticket revenues over the next 25 years.

However, it also resembles a whole business securitisation insofar as fixed However, it also resembles a whole business securitisation insofar as fixed and floating charges are placed over other sources of revenue, such as the and floating charges are placed over other sources of revenue, such as the income from broadcasting rights and sponsorship deals to support the loan income from broadcasting rights and sponsorship deals to support the loan repayments, if the gate receipts should happen to fall repayments, if the gate receipts should happen to fall

Incorporated a public limited company, Arsenal Securities PLC, to issue the Incorporated a public limited company, Arsenal Securities PLC, to issue the

notes publicly. notes publicly.

The transaction offered £210m of Ambac Assurance UK Ltd.-wrapped fixed The transaction offered £210m of Ambac Assurance UK Ltd.-wrapped fixed rate notes with a weighted average life of 13.5 years and a £50m floating rate rate notes with a weighted average life of 13.5 years and a £50m floating rate portion with an expected life of 7.1 years.portion with an expected life of 7.1 years.

Arsenal’s aim was to refinance a £260m loan taken out to fund the Arsenal’s aim was to refinance a £260m loan taken out to fund the

development of Arsenal’s new Emirates Stadium in Ashburton Grove (London)development of Arsenal’s new Emirates Stadium in Ashburton Grove (London) With the lump sum of £260 million raised by the issue of fixed rate and With the lump sum of £260 million raised by the issue of fixed rate and

floating rate notes, Arsenal paid off its existing debts and replaced them with floating rate notes, Arsenal paid off its existing debts and replaced them with lower cost securitised debt saving around £1.2 million on annual interest lower cost securitised debt saving around £1.2 million on annual interest payments. payments.

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Of particular note in the structureOf particular note in the structure

a) a) the limitation on the club taking on any the limitation on the club taking on any more debt; more debt;

b) b) the testing of working capital on a the testing of working capital on a three-season, three-season, look-forward basis, to ensure look-forward basis, to ensure that the club could that the club could pay its players; and pay its players; and

c) c) measures to prevent asset-stripping. measures to prevent asset-stripping.

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Crucial Asset Crucial Asset

The participation of Ambac The participation of Ambac Assurance UK Ltd as a monoline Assurance UK Ltd as a monoline guarantee. Without Ambac Arsenal guarantee. Without Ambac Arsenal would have been rated in the Triple would have been rated in the Triple B area. This was an important B area. This was an important difference compared to former deals. difference compared to former deals.

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Transaction StructureTransaction Structure

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Security PackageSecurity Package

Over all assets of the securitization group, including all Over all assets of the securitization group, including all accounts, property, and lease agreements.accounts, property, and lease agreements.

Noteholders have security over substantially all of AFC's Noteholders have security over substantially all of AFC's

assets in the form of fixed and floating charges.assets in the form of fixed and floating charges. The security over substantially all AFC's assets extends to The security over substantially all AFC's assets extends to

fixed charges over the club's intellectual property rights. fixed charges over the club's intellectual property rights. The main benefits, among other things, are that the The main benefits, among other things, are that the secured creditors should be able to prevent AFC from secured creditors should be able to prevent AFC from reforming as a new legal entity and playing at an reforming as a new legal entity and playing at an alternative venue under the "Arsenal" name.alternative venue under the "Arsenal" name.

The security also provides control over revenue generated The security also provides control over revenue generated

by AFC, should the club play at another stadium, and thus by AFC, should the club play at another stadium, and thus provides a further disincentive to AFC to do so. provides a further disincentive to AFC to do so.

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Flow of Funds: StructureFlow of Funds: Structure

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Flow of Funds: ExplanationFlow of Funds: Explanation

The debt is serviced by ticket revenues collected for all the matches AFC The debt is serviced by ticket revenues collected for all the matches AFC plays at the stadium. plays at the stadium.

All the ticket revenues are credited directly to ManCo's receipts account. All the ticket revenues are credited directly to ManCo's receipts account. The cash standing to the credit of the ManCo receipts account is applied The cash standing to the credit of the ManCo receipts account is applied

to: to:

a) fund AESL debt-service reserve account (DSRA) up to the required a) fund AESL debt-service reserve account (DSRA) up to the required DSRA reserve amount; DSRA reserve amount; b) fund AESL debt-service accrual account (DSAA) up to the debt service b) fund AESL debt-service accrual account (DSAA) up to the debt service required balance; and required balance; and c) fund the AESL operating account up to the higher of £1 million or a 12-c) fund the AESL operating account up to the higher of £1 million or a 12-month look-forward test for operating and capital costs. month look-forward test for operating and capital costs.

The required DSRA reserve amount is defined as a minimum of six-The required DSRA reserve amount is defined as a minimum of six-months' peak debt service. This mandatory reserve, added to the 12-month months' peak debt service. This mandatory reserve, added to the 12-month liquidity facility provided jointly by Barclays Bank PLC and The Royal Bank liquidity facility provided jointly by Barclays Bank PLC and The Royal Bank of Scotland PLC, covers a minimum of 18-months' debt service. The debt-of Scotland PLC, covers a minimum of 18-months' debt service. The debt-service required balance is defined as a minimum of 150% of debt service service required balance is defined as a minimum of 150% of debt service due next period. due next period.

The operating account is a reserve put in place to cover the ongoing The operating account is a reserve put in place to cover the ongoing operating and capital costs. operating and capital costs.

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ConclusionsConclusions

It seems that some investors are clearly prepared to It seems that some investors are clearly prepared to risk their money in football bonds again. risk their money in football bonds again.

The improvement of football finances and a favourable The improvement of football finances and a favourable economic climate for bond investments may increase economic climate for bond investments may increase the chances of further football securitisations, the chances of further football securitisations, particularly for the purpose of retiring expensive debt particularly for the purpose of retiring expensive debt and replacing it with lower-cost securitised debt.and replacing it with lower-cost securitised debt.

Yet it is far from clear that this will lead to a large scale Yet it is far from clear that this will lead to a large scale

revival of the technique. revival of the technique.

At present, investors seem to be interested only in the At present, investors seem to be interested only in the largest clubs with the most loyal supporters, perhaps largest clubs with the most loyal supporters, perhaps because they view these clubs as less of a credit risk because they view these clubs as less of a credit risk than the smaller Premiership clubs.than the smaller Premiership clubs.

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Many thanks!Many thanks!