- within Law Department Performance, Insolvency/Bankruptcy/Re-Structuring and Consumer Protection topic(s)
- with readers working within the Retail & Leisure industries
With private capital providers now viewing sport as a distinct asset class, we explore the range of financing options available to support investment in sports-related businesses (including acquisitions) and to fund operations once those investments have been made.
Investors (including financial sponsors) seeking debt financing for investments in sports assets can access a range of funding solutions, including from traditional financiers such as investment banks, but also institutional investors and private credit funds. The sources and amount of capital available is growing rapidly, as evidenced by the increase in the number of funds that have been raised to deploy specifically in the sector1 across the capital stack.
We need third-party financing to fund our investment in sport—what are our potential options?
Broadly speaking, you can raise debt through public debt securities, the syndicated term loan market, private debt or by issuing a hybrid instrument such as preferred equity.
If we issue publicly traded debt, what are some of the issues we need to consider?
Other than the obvious points around having to engage investment banks to market the debt, and whether public traded debt will produce the best outcome from a pricing and documentary terms perspective, the main considerations when issuing publicly listed debt securities (e.g., listed bonds) to fund an investment in sport will relate to demand, disclosure, ongoing rating requirements and costs. None of these issues are new, but there will be increased levels of scrutiny when the underlying asset is sport-related given the publicity involved2.
If the proceeds are to fund an acquisition, the vehicle or entity used by the acquirer to issue the debt will need to publish an offering memorandum or prospectus to potential bondholders, setting out in in granular detail the nature of the investment, historic financial data, forward-looking projections (including how the debt will be serviced), the risk factors which may affect the nature of the investment and/or ability to service the debt (including potential litigation) and the terms of the securities.
The expectation must be that the document will be seen by a wide audience, with fans and commentators pouring over the content. If the intention is for the business to be highly levered and the assets of the target to be secured, consideration must be given to how this will be received by stakeholders, including fans.
Another point to consider with publicly traded debt is that once issued, the board of the target and/or borrower will need to be mindful of insider trading obligations, what information can be disclosed to whom and ongoing reporting requirements (such as regular investor calls). This can be an issue in the fast-moving world of sport where information leaks are common given media interest. As a result, the board may need to release a statement to comply with listing obligations relating to material non-public information (MNPI).
When issuing public debt, it is likely that the instrument will need to be rated by a rating agency. The rating will need to be maintained throughout the life of the debt, and it will need to be listed on a public exchange. Here, the issues an investor will need to consider include:
- the cost of obtaining the rating (they are not cheap and can affect the economics of the deal)
- execution risk (e.g., if rating agencies give the asset a low rating, it may deter debt investors and/or increase pricing)
- reputational risk in respect of an ongoing rating (e.g., if the debt is downgraded, it will be viewed as a public assessment of the financial health of the asset itself, and could be used by supporters as evidence of poor management)
- the trading price of the debt instrument (this is publicly available and represents another metric via which to judge the investor's performance)
- the ongoing costs for maintaining the listing of the relevant debt securities.
What are the main differences between the public debt market and the syndicated term loan market?
Firstly, there are a number of similarities between the public debt market and the syndicated term loan market.
When looking to market syndicated term debt, the acquirer seeking the financing (in conjunction with arranging investment banks) will need to prepare an information memorandum or lender presentation. While this is not as extensive as an offering memorandum or prospectus, it will contain some similar information, including a business plan. To make the syndicated term debt as attractive as possible to a wide range of investors, a rating will most likely be required. However, syndicated term loans do not need to be listed on a public exchange.
The primary differences between the syndicated term loan market and the public debt market are that the terms and trading price of syndicated term loan debt are meant to be private, and the ongoing maintenance cost of syndicated term debt is cheaper than publicly listed debt given that there are no recurring listing fees. However, investors/sponsors should be aware that (a) sites such as 9Fin, Cov Review and others will publish high level summaries of the terms of the debt which will be widely accessible; and (b) the latest trading price will also be available.
For the above reasons and an overall desire to maintain confidentiality, investors in sporting assets may therefore consider private debt in the first instance.
Would this be different if the source of debt was private credit?
As mentioned above, there has been an increase in both fundraising by private capital providers whereby the funds are to be deployed into sports as a distinct asset class and also private credit providers who are willing to lend into sport whether in respect of investments/acquisitions or for ongoing capital requirements.
Some of the main benefits of obtaining debt through private credit fund(s) include that:
- the terms (including pricing) of the debt are more likely to remain confidential
- there is no syndication/marketing risk (as the issuer may be dealing with either a sole financier or a small club of lenders)
- private credit lenders can be flexible to specific requests such as delayed draw capex, acquisition lines or certain documentary terms. For example, if the investor wants to spend heavily on the team or a capex project such as a stadium, a private credit fund may be more amenable than a bank and flexible as to corporate structuring.
Private credit funds are increasingly able to provide sufficient capital so that investors do not need to seek other financiers3, although in a situation where further debt is required, a “club” of private credit lenders can be assembled.
In the private credit space, given that there are fewer parties involved (as there is no syndication of debt to bondholders or loan investors), leaks are less common and the terms of the debt are more likely to remain confidential. Private credit lenders will tend to have institutional knowledge of the asset class and will view themselves as partners rather than simply “lenders”.
However, debt from private credit funds can be more expensive than public debt or syndicated term loans to reflect the “blended” cost of capital (i.e., there is no senior and junior debt in the capital structure, so the “unitranche” debt can attract higher pricing).
This will depend on market conditions, as public and/or syndicated debt can contain “flex” provisions where the investment banks leading the marketing can increase pricing if there is insufficient initial interest.
What we have seen recently at A&O Shearman is that private credit funds are willing to provide financing solutions to fund the development of assets secured against ongoing revenue streams such as stadiums (see below).
For both public and private debt, are there any specific concerns that investors will need to think about?
One of the main concerns will be debt service and how the underlying asset will generate sufficient returns and cash flows to pay interest costs. For some investments there may be restrictions around the payment of dividends or distributions, or that paying interest costs will reduce cash on balance sheet which is available for further investment in the underlying asset.
For example, investments in a league's broadcasting revenues may only generate cash flows which are available to be distributed to a sponsor at the end of each season or may only begin to be received after a certain period of time. Where the target asset does not produce the returns required (at least initially) to service the debt, investors may need payment-in-kind (PIK) features, where interest payments can be rolled up and added to the overall principal.
In respect of an acquisition of a team or club, the payment of interest reduces the amount available to invest in either capex projects or the team and may attract negative publicity. However, this obviously needs to be weighed against the initial sum received.
Another concern may be in respect of the security granted in favour of the creditors. We have seen recent examples, (e.g., in relation to Italian football giants AC Milan4 and Inter Milan5), where lenders have enforced their security, assume control of the asset from the initial investors.
Some recent sports investments have been funded through preferred-equity type instruments. What is preferred equity and why is it an attractive option for investors?
Preferred equity instruments typically sit between debt and common equity in the capital stack. They are offered by the initial investor or sponsor to other investors (e.g., private equity firms, private credit funds or specialised investment vehicles), who are attracted by the fact they offer debt-like features (e.g., fixed returns) but deliver higher yields than traditional debt securities, due to the fact that they are unsecured6.
An initial investor may offer a preferred equity option to a secondary investor to access additional capital or liquidity while not impacting the debt servicing burden. Often the preferred return that attaches to preferred equity instruments may only be payable if the underlying asset or business hits certain performance markers (or only becomes effective upon an exit).
Recent examples include Ares' investment in Chelsea FC7 and Strategic Sports Group's investment in the PGA Tour8.
OK, so we have acquired the business, what are some of the financing options available to manage cashflow?
The two most common methods for financing sports assets are through general secured lending and receivable financing (often known as factoring).
Secured lending to sporting organisations is similar to standard corporate loans, although the assets over which security is granted and the relevant jurisdictions involved are important especially if the finance is being used to develop tangible assets such as stadium or training facility.
If the collateral is in the form of tangible assets such as a stadium or training ground, lenders may view this as a single-use asset and attribute a lower value for internal risk purposes. For example, in the case of a stadium, a lender would be reluctant to enforce security and repurpose the asset, not least because of the negative publicity. In this situation, we have seen recent examples of lenders requiring the sporting institution to carve out revenue streams attributable to those assets to form part of the collateral package9. This is becoming increasingly popular as teams look to enhance their stadium (and hospitality offerings) and lenders are increasingly comfortable offering financing solutions for this purpose.
Security in common law jurisdictions (e.g., England and Wales and the U.S.) can include “all-asset” security and can also be granted over future assets such as receivables (see below). The location of the sports team, club or league will be important here because in certain jurisdictions, lending is a regulated activity which requires a banking licence. Where the financier is not a regulated entity (such as certain private credit funds), the secured debt securities may need to be issued in the form of notes10.
As far as receivable financings are concerned, some private credit funds take the view that where there is a revenue stream there is often a receivable, and where there is a receivable there is a financing opportunity.
Sporting clubs and teams often enter into receivable financing transactions involving the assignment of a receivable, be it from a commercial contract, ticketing revenues or an amount owed by a regulatory or governing body. For example, FIA (as the sport's governing body) will owe F1 teams a proportion of the revenues it receives under the Concordat Agreement; likewise the English Premier League will owe “Central Funds” (as defined in the Premier League Handbook) to each participating club.
A club or team can sell its right to receive a future payment under a contract or agreement to a third party, and the third party will become the beneficial (and often also the legal) owner of the right to receive a payment from a contracting party by taking an assignment of that receivable.
It would be remiss not to mention transfer-related receivables financing, which has become a standalone financing product for debt funds and financial institutions and operates like any other receivable financing. Let's take a scenario in which a football club receives a transfer fee of EUR50 million for one of its star players. The fee will be structured such that the buying club pays a certain amount upfront, with the balance due in instalments. If the upfront fee is EUR20m and the remaining EUR30m is paid in EUR10m annual tranches, a finance provider will acquire the receivable (i.e., the EUR30m outstanding) from the selling club at a discount and take an assignment over the remaining amount owed, assuming credit risk on the buying club making each instalment.
The transfer-related receivable financing does not require the “lender” to be a “financial institution” under Premier League rules (nor is it considered “lending” in most other jurisdictions), meaning the financier does not require a banking licence. This is one of the reasons why there are so many “players” in this industry!
The final point to consider on general lending transactions to clubs and sporting organisations is in the context of security. If security is granted as credit support in respect of the debt, in certain jurisdictions (including in England) it may need to be registered. This can present issues, as typically security registers are public, and, notwithstanding that the debt may assist ongoing business operations and cashflow, sharp-eyed fans and journalists may notice that security has been granted over assets of the club or team given that the security document is publicly available.
Can publicly traded or syndicated debt be used to finance ongoing operations?
Yes, but this is typically related to asset financing such as stadium development where revenue streams are isolated to provide credit support to the debt. It is rare that a sports team/asset would issue this type of debt for ongoing financing needs due to the cost and public nature of the debt.
Lastly, are there any specific asset-backed financings we should think about?
Sports investors may want (or need) to improve infrastructure, such as training grounds or stadiums.
Stadium or arena financing has become a standalone construction and infrastructure financing product in which we have deep industry knowledge. We will cover this in a separate article.
Footnotes
1. Ares Launches Sports and Media Fund for Wealthy Investors - Bloomberg; Apollo Announces Launch of Apollo Sports CapitalApollo Global Management; Fasanara and Tifosy team up for $250m sports receivables fund; Sports Investor Apex Launches Fund Targeting European Sports Assets - Bloomberg
2. LaLiga and CVC Fund VIII sign agreement to set Project Boost LaLiga in motion | CVC
4. AC Milan officially taken over by Elliott Advisors (UK) Limited - ESPN
5. A&O Shearman advises Oaktree on assuming ownership of Inter Milan
6. Investors see opportunities in preferred equity - A&O Shearman
7. Chelsea FC raises $500mn from Ares
8. Shearman & Sterling Advises Strategic Sports Group in Partnership with PGA TOUR - A&O Shearman
9. Sporting Lisbon's Biggest-Ever Bond Sale Raises €225 Million - Bloomberg
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
[View Source]