The opening of the new Tottenham Hotspur Stadium is notable not just for its cutting-edge design and engineering but also for the £637m debt incurred in building it. The club were fortunate to have three supportive banks in Goldman Sachs, HSBC and Bank of America Merrill Lynch who provided the development finance package enabling the stadium to be completed. However, other sports organisations (whilst unlikely to need that level of support) are not always so fortunate and cannot command the requisite bargaining power when it comes to obtaining debt facilities to invest in infrastructure or other projects.
In this article, we explore the various methods and sources of finance available to sports organisations and consider the merits and drawbacks of each.
Corporate Loans: lenders lend an amount for specific or general purposes for a period of time taking into account the sports organisation’s assets and revenues. Lenders are likely to require security over all assets of the organisation and may also require personal recourse to the owner in the form of a guarantee.
Development Finance: the sports organisation borrows money, as Tottenham have done, to finance the purchase and/or development of a site (eg: a stadium, training ground or other facility). Funds are typically drip fed in as and when costs are incurred with the lender monitoring closely via its own appointed project monitor.
Forward Funding future revenue streams: the sports organisation uses future revenue streams, such as transfer fees, naming rights, sponsorship and merchandise income or broadcast revenue – basically any revenue stream where a lender can be certain that it will be received by the sports organisation from a creditworthy source in the future – as collateral for an upfront loan. Many football clubs do this on a regular basis as we have explored previously, and a recent example is Leicester City who, last year, utilised future transfer fees and broadcasting revenue in order to help fund the development of their new training ground.
Traditional finance has several advantages in that it is relatively quick to put in place, loan agreements can be tailored to the situation allowing a degree of flexibility (both at the outset and subsequently if circumstances change and need renegotiating) and the terms are confidential, other than those which are the subject of security filings at Companies House and the Land Registry.
However, the amount or availability of a traditional finance facility is often limited by the fact that many sports organisations are loss-making and future revenues will be materially affected by sporting events such as relegation which tends to, understandably, give a lender’s credit committee cause for concern. Where a lender would ordinarily look to the value of tangible assets (eg: a stadium) as security for the loan, they are often reluctant to do this when lending to sports organisations mainly due to commercial concerns around the value and saleability of the asset and reputational concerns when enforcing (which may involve ejecting a beloved local club from its home).
Obtaining funding via a traditional finance option may not necessarily work for all sports organisations therefore they may wish to consider raising finance through the bond market. This is an option which until fairly recently would have been reserved for the very biggest organisations, but innovative approaches and regulatory changes relating to bond issues have now made this a possibility for many sports organisations. Types include:
Corporate Bonds: loans made to the issuer of the bond for a fixed period by investors who receive regular payments of interest and the principal sum back at maturity. They are listed and so can be bought and sold on the international debt capital markets making it attractive for investors looking purely for a financial investment (eg: Manchester United (2010) - £500m, Inter Milan (2017) - €300m and Juventus (2019) - €175m).
Retail Bonds: a special type of corporate bond, available since the London Stock Exchange launched a retail bond market in 2010. The minimum investment is much lower than with a traditional corporate bond and so is accessible to a much broader range of investors. A recent example is Wasps who raised £35m in 2015.
Mini-bonds: similar to retail bonds but unregulated, unlisted and not tradeable. These are cheaper to set up, more flexible for the issuer but less attractive to financial investors. However they can tap into supporters’ loyalty as they often offer more than just financial returns such as reward schemes or club credit to be spent on tickets, hospitality or food. The very first in British sport to issue a mini-bond was The Jockey Club, raising £25m in 2013 and paying 4.75% interest plus an added incentive of 3% in Racing4Rewards points. More recently, Norwich City FC raised £3.4m in 2018 paying 5% interest plus 3% in club credit and a one-off 25% bonus if (and now when) the club is promoted to the Premier League during the mini-bond’s lifetime.
Private Placements: bonds or loans that are sold privately to a very small group of selected, sophisticated (typically institutional) investors, such as insurance companies and pension funds. As this is an entirely private arrangement, there is much greater confidentiality than with the other options. Manchester United raised US$425m this way in 2015 and press reports suggest Tottenham may explore this as a way of refinancing some or all of its stadium development debt.
Debentures: typically unsecured debt instruments issued by some sports organisations which pay little or no interest. As well as providing a predictable and constant source of funds, debentures are a good way for holders to be guaranteed a ticket at popular sporting events whether it is test cricket (MCC), a tennis grand slam (Wimbledon) or rugby internationals (RFU).
The broader investor base for bonds typically means the risk associated with a bond is spread out leading to lower interest rates and the quantum and maturity of the debt can be more varied (and greater) than in most commercial loans. However, bond markets are generally only accessible to corporates with a good credit rating and reputation which can potentially preclude lesser known issuers from entering the bond market. There is far more publicity, regulation and disclosure, especially if listing the bond, and potentially greater uncertainty of take-up when offering to the public. Although the terms of a bond typically offer greater operational leeway from the outset, if they need to be renegotiated this can be a very lengthy and costly process.
The disadvantages of traditional finance and bond issuances may outweigh the advantages, and so we now consider a couple of alternative options:
Utilising present or future value of surrounding land: if a sports organisation, when developing its ground or training facility, owns surrounding land which can be used as residential, retail or office space, the present or future sale or rental value of this land can be used to attract the capital required to help fund the main development. Brentford is a good current example where the project to create the new Brentford Community Stadium includes the development of over 900 apartments surrounding the stadium together with the conversion of Griffin Park to family housing.
Local Authority Investment: approaching a local authority for funding or other support is also a viable alternative, provided there is a sufficient ‘community element’, whether that is regenerating an area, providing public space/facilities/affordable housing or encouraging investment into an area for the benefit of the community. The local authority will also need to generate a fair return, which can then be reinvested into other local projects. Some recent examples include:
a) Saracens secured £23m from Barnet Council in 2018 to renovate the West Stand at Allianz Park, which is not only Saracen’s home but also a thriving community sports and education facility whose improved facilities will be accessible to a wide range of local residents.
b) Legal & General partnered with Leeds City Council in 2017 to fund the redevelopment of Headingley which was enabled by the council taking the long lease of the relevant stands (sub-letting to Yorkshire CCC and Leeds Rhinos) allowing L&G to take council rather than club risk and provide the requisite funding.
Local authorities are not driven by the same motivating factors or processes as private funders or investors which can be both good and bad. Where there is agreement between the local authority and sports organisation as to how the community will benefit, the local authority may well provide more favourable loan terms. However, the decision-making process for a local authority is less predictable and may be significantly slower than a private funder. Although there is a push for local authorities to be more forward-thinking and innovative when investing in community projects, funding or support is not a given. The importance of public opinion or political factors are often stumbling blocks as to whether a local authority will provide support or even to whether the sports organisation decides to accept any offer made. These factors should not be underestimated as Everton recently discovered after Liverpool City Council offered them a loan from funds accessed via the Public Works Loans Board.
For those sports organisations considering raising finance, it is essential that they are aware of the options available, that they understand which factors are most important to them when deciding which option is most suitable and that there is a clear dialogue between the sports organisation and funder from the outset. Building and fostering a positive relationship with the funder, be it a bank, institutional investor, local authority, supporters or otherwise, is a vital part of the process to ensure that aims and expectations are aligned on both sides and is instrumental in increasing a sports organisation’s prospects of a timely and successful delivery of its project.
Martin Blake is a partner in the banking team at Farrer & Co. He advises lenders as well as clubs, governing bodies and other organisations within the sports sector on structuring and documenting a range of financing arrangements.
If you require further information about anything covered in this briefing note, please contact Martin Blake, or your usual contact at the firm on +44 (0)20 3375 7000.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, May 2019