Inside the football debt niche
The 2019 summer football transfer window has already opened in various European countries and like always, largest football teams are expected to splash the cash on star players. Transfers’ money is now sourced from a broader investor spectrum than it used to be given revenue flows from ticketing, stadium financing, sponsoring or broadcast rights, rise steadily and attract new investors. Tobias Schlauch, managing director and co-founder of German football investment-focused firm Quattrex-Sports, observes “more and more financing partners without industry knowledge are entering the market as it is growing quite fast”. He also points new entrants’ absence of track record and network.
Specialist lenders and structures remain ahead in the area of football financing. Contrary to the US, structured finance has been less utilised in Europe to fund sports teams – British football leagues aside - as football clubs traditionally turn to banks with whom they have had a long-time built relationship to get general financing.
“Since a few years, we have stressed rising interest from US investment banks in particular in the area of stadium financing in Europe. Players like Goldman Sachs and JP Morgan have moved pawns to the UK and used structured finance technics for the building of stadiums, asset securitisation and general financing of teams. Such technics were known before as we saw acquisition finance technics being applied at Manchester United for instance but they have become more common”, explains a professional who asked not to be named.
European football, a €28.4bn market
According to the latest Deloitte’s review of football finance, the European football market size in revenue terms reached €28.4bn at the end of the 2017/2018 season, 55 percent of which (i.e. €15.6bn) were generated by the big five European football league clubs (Premier League, Liga, Bundesliga, Serie A, Ligue 1). Deloitte forecasts revenue generated by the big five European league clubs will total €17bn over the 2018/2019 season and €17.95bn for 2019/2020.
The Premier League will remain Europe’s richest league in the medium term, Deloitte analyses, predicting a €5.73bn revenue for the upcoming season. Spain’s Liga, whose expected revenue for 2019/2020 is €3.79bn, has recorded a first in 2018 with the funding of a local club by investment funds. Reuters revealed FC Barcelona had received a €140m financing package from Pricoa Capital and Barings. Another manager, TwentyFour AM, was proposed an asset-backed securities deal with Barca’s ticket sales as underlying, Douglas Charleston, ABS portfolio manager, told Asset News at an investor presentation in Paris last November. "Securitisation develops within sports teams financing but we do not invest in this kind of deals as these securities remain unrated”, he said.
J.Stern & Co’s Star Football Finance fund provides debt financing for football clubs with similar approach to factoring. Jean-Yves Chereau, partner and manager of the fund, says it pools high-net-worth families and other long-term investors, many of which are the London-based firm’s clients. The fund is not suitable for retail clients. “It provides funding by purchasing the club’s receivables deriving from transfers of players, TV rights or other media revenue, or sponsoring contracts. These are predictable future cashflows. We do not invest in mortgage-type infrastructure stadium debt or team acquisition through equity finance.”
“Football clubs do not differ much from SMEs. They generate revenues from media rights, sponsorship and tickets sales, and have to pay for team salaries, acquisitions of players and other reasons. They have to manage their working capital with significant timing differences of cash inflows and outflows, including the club’s performance during the year and likelihood of advancement or relegations in leagues, timing of player acquisitions or sales during transfer windows and league practices around receipt and disbursement of media revenues”, he explains.
Says Chereau, clubs can benefit from learning more about alternative debt financing and shall see it as complementary funding solutions to their banks offering. “With today’s low rates, banks have stepped back into financing football clubs. However, if a Lehman Brothers-type financial crisis occurs, banks are unlikely to provide liquidity to football clubs. In Portugal, teams sponsored by Espirito Santo and Portugal Telecom were all faced with issues when Espirito Santo collapsed as recently as 2014. Football debt financing is a reliable, recurring source of alternative funding. We will answer the call to fund clubs.”
Another football finance professional says specialist lenders, hedge funds and debt funds show interest in the space. Referring to top-tier clubs funding, he highlights the “huge amount of prestige” for these players to get their name on the mandate, hinting quite intense competition between them. The professional reveals his firm is approached quite regularly by hedge and debt funds as well as insurance players looking to understand dynamics and risks inherited in football financing.
Risks are plenty
J.Stern & Co’s partner Chereau expounds various criteria apply to the football debt financing. First, the different levels of interest rates across countries. In Germany, rates are very low as the government-owned regional and local banks (Landesbanken and Sparkassen) compete with each other to finance football clubs. French football league body LFP has made an agreement with Crédit Agricole enabling French football teams to refinance themselves every three months. Other European leagues need other types of financing, he says.
“Security is all-important in football debt financing. There are two drivers there: the local legal framework and local football league rules. In certain leagues, football creditors are granted privileges. We are moving towards a system that protects football creditors more from certain risks such as club bankruptcy and club relegation”, the manager of the Star Football Finance fund pursues.
A player of the football financing space notes small prints in contracts will surely contain protections from the downside of relegation for lenders, citing the Premier League where teams receive a parachute payment when they relegate in Championship.
Reputation is at risk for both clubs and investors, stresses Quattrex-Sports’ managing partner Schlauch, who lists a number of arguments to flag investment opportunities in German football clubs towards clients : “double-digit growing market with improved finacial stability and relatively stable cash flows/income streams (6-7%), no correlation with any other asset class”.
Deloitte expects German league Bundesliga to generate €3.72bn revenue over next season. “With a new four-year broadcast rights cycle having just begun, the focus of revenue growth over the coming seasons will firmly be on commercial revenues for Bundesliga clubs”, the consultant’s report states.
Chereau says all types of football clubs in all European countries are interested in having their debt financed by investors like J.Stern & Co. He tells large clubs backed by wealthy owners have been more reluctant to use this type of funding.
“UEFA has sought to level the playing field with its financial fair play rules, which limit funding by the owners of clubs. Today, club managements are looking at how to use their capital structures more efficiently and find alternative sources of finance.”
Chereau observes billionaires’ football investments tend to dry up and split them in four waves : the US wave (Liverpool, Manchester United), the Russian wave (Chelsea, Monaco), the Asian wave (Leicester, Inter Milan) and the financial consortium wave (Inter Milan, Lille, Bordeaux).
“These consortiums are looking at a return on their investments and are more careful about cash injections in those clubs. They are more likely to look at funding on a holistic basis and use alternative funders”, he says.
Quattrex-Sports’ Schlauch adds securitisation could partly be a solution used by teams not funded by neither billionaires nor consortiums to reach a certain degree of competitiveness. “It depends on the rules within a country”, he says, mentioning the 50+1 rule in Germany. In short, a Bundesliga’s licensed club must hold a majority of its voting rights.
For both, the impact of an eventual Champions League reform on football financing remains unknown.
Socios no more
Also Schlauch sees no future for financing through supporters such as socios at FC Barcelona because amounts are getting too high in football finance.
J.Stern & Co’s Chereau distinguishes different ownership structures of clubs depending on their history, leagues and other reasons.
“You can have a club that belongs to the fans as a not-for-profit or for-profit entity. Not-for-profit entities can have for-profit subsidiaries for commercial and financing reasons. Fans supporting their clubs financially often do it for sentimental reasons and do not follow specific financial logic. They often also do not have the financial fire power to provide their clubs with the necessary funding.
“Crowd financing of football clubs through debt or equity is an important topic. Football clubs need significant funding beyond what is currently raised through crowd funding. It is important for fans, clubs, leagues and regulators that crowd funding to provide full disclosure of the financial risks and returns involved in the investments.”
The manager of the Star Football Finance fund reckons football debt financing remains a niche market with a few specialised and reliable providers. “We know many of the providers and sometimes share transactions. Barriers to entry are quite high because knowledge and experience are key.”