Sport Securitization: Start Your Engines
Brandman, James, Global Finance
The securitization of sport has kicked off in Europe. Sports associations, faced with relegation or bandruptcy, are being forced to innovate financially, and they're breaking new ground for Europe's capital markets.
The most eye-popping example is the $1.4 billion in securitized bonds issued by Formula One, the British company that manages and promotes the international car-racing championship. Formula One tapped the capital markets in May this year with a deal initially led and managed by Morgan Stanley Dean Witter and later involving Westdeutsche Landesbank as joint lead manager.
The deal is secured by all assets of Formula One's business, including its television and promotional contract and is the first to be based on the securitization of television rights in Europe."The deal enhances the entire sphere of operating-company securitizations, because for the first time it is not backed by a hard asset such as real estate or aircraft," says Steve Din, executive director of securitization at Morgan Stanley in London."Formula One has proved that intangible assets and intellectual property rights can be the basis for securitization."
Formula One cannot raise further debt, buy companies, or pay dividends to shareholders until its initial public offering, the proceeds from which will partly redeem the securitization.The issue precedes Formula One's market listing, which is expected within five years. "We approached Formula One and suggested it would be better to delay the IPO until the growth in earnings from digital TV fed through, " says Din. "And we pointed out that the company had very robust contracts that lent themselves well to a bond."
While the deal is acclaimed by the bankers involved for its originality, it has been beleaguered with problems and delays and has flopped in the market. The bond issue came about when car-racing supremo Bernie Ecclestone's plan to raise money through an IPO to fund a trust for his wife and children came unstuck.
When the original bond was announced, it was for $2 billion. But by the launch, eight months later, it had been cut to $1.4 billion and completely restructured: The life of the bond was shortened and a stepped coupon structure introduced. The proceeds went into Ecclestone's family trust. By then the European Union's competition authorities had begun picking through the deal, discouraging many would-be investors.
A deal was eventually cobbled together late last year with Westdeutsche Landesbank. The market's reception was lukewarm, and according to bankers close to the deal,Westdeutsche still holds a portion of the debt on its books, although this has not been confirmed. Westdeutsche is believed to have taken on as much as two-thirds of the $1.4 billion eurobond.
Both banks involved have said there was enormous demand from investors for the bonds. They also point to the high interest that Formula One has agreed to pay and the ratings that the agencies have given the bondsnamely,A2 by Moody's andA from Standard & Poor's, Duff & Phelps, and Fitch IBCA.The rate of interest on the bonds is 1.3% above LIBOR until May 2002 and before rising three percentage points over the following two years.
Still, questions over TV rights, worth about $240 million a year, remain. In July the European Commission provisionally judged that TV rights contracts, through which Ecclestone had built a personal fortune, might be illegal. It is now planning an antitrust case over broadcasting rights against the sport's organizing body, FIA, and its promoters, Formula One.
Grand Prix car-racing has not been the only sport to get involved in securitization in Europe. …