FSM
Features
High Performa Strategies f
Jackie Bowie, Chief Executive innovative funding strategies for S
Jackie Bowie The basics
When arranging a loan, a sports club is no different to any other borrower. A club can look at either its physical asset base, its cash flows, or both in order to secure debt financing. The value of the physical asset is the
determinant for the amount of debt that can be raised; measured as a loan to value. For example a 60% loan to value ratio means the borrower can raise debt up to 60% of the value of the asset. For lending secured against cash flow, the
quantum of debt is related to a ‘multiple’ of the operating profit – say 3x this number. The normalised level of operating profit to raise debt against needs to be determined, which can be complex, taking into account different assumptions and the certainty of future income.
26 FSM Development Financing
Few clubs have the financial resources to self-fund large development projects, and therefore will look to the debt market for capital. The project cash flow is the starting point for determining how much debt is needed and for how long. Lenders understand that the initial cash flow forecast will change, as delays to the project are likely to arise, as well as possibly cost overruns. Lenders will therefore closely monitor the spending. Borrowers need to ensure that the development financing model takes into account the full financing cost; e.g. from the point at which the debt is committed by the lender, there will be an interest cost (non- utilisation or commitment fee) even if the debt is not drawn. There also needs to be a defined ‘take out’ of the loan at the end of the development
period. For example, will the same lenders continue with term loan style funding, or will the club be required to undertake a full refinancing exercise? This needs to be determined at the outset of the development project so that the lender has clear sight as to how they will be repaid.
Securing against the physical asset
For many sports clubs, the value of the asset (its stadium usually) would seem an obvious choice to secure debt against. However, lenders sometimes struggle to consider a stadium as security, as its value as a property asset is primarily tied to its use as a stadium for the sports club that calls it home. This means there is limited ‘alternative use’ value that a lender can base its credit risk analysis on. Sports clubs can however have other assets related to the stadium, for example
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