Stadium finance in the US has set a succession of records for transaction size. The most recent financing for a new stadium in the US is the joint venture between two National Football League (NFL) teams, the New York Giants and the New York Jets. The stadium, the most expensive ever in the US, and, at constant exchange rates, perhaps globally, will be built on the existing Meadowlands site in New Jersey, and features a financial structure divided between the two teams. This deal is the latest in a market which has seen increasing private investment, new ways to raise revenues on assets, and the increased involvement of banks and monoline insurers in financings.

Stadiums in the UK and Europe have until recently mainly been financed using public funding or public borrowing. There has been an increase in the ratio of private to public investment, however, in such UK deals as the Wembley stadium in 2002, and the Arsenal Emirates stadium financing in 2004. Such deals, as well as Arsenal's 2006 refinancing, have employed increasingly sophisticated financial engineering, and have also incorporated US-inspired ways of maximising team revenue.

Greg Carey, a managing director at Goldman Sachs, which worked alongside Lehman Brothers as lead bond underwriter for the Giants' part of the financing, cites the popularity of sports with the US public, and the ability of the teams to attract tax-exempt municipal financing in the North Eastern states and major US markets, as a significant factor in the way US deals are structured.

Split tickets

The $1.6 million Meadowlands stadium featured $1.3 billion in bond debt, split equally between the two teams. Goldman and Lehman underwrote $650 million in bonds for the Giants, while Citi and RBC underwrote the same sum for the Jets. Both sets of bonds are taxable and subject to rule 144A. The Giants bonds have two maturities, 2037 and 2047, with a coupon of 5.6%. The Jets bonds mature in 2047. Both sets of bonds are primarily repaid through sales of advertising at the stadium, luxury suites, television rights, and merchandise revenues, rather than ticket sales.

As with many of the other US stadium deals, the bonds were monoline wrapped. In this case, FGIC was the main insurer for the Giants, wrapping $455 million of the bonds, with FSA wrapping the remaining $195 million. On the Jets bonds, the two insurers' commitments were exactly transposed, with FSA taking the lead role. Carey explained that the use of the two monolines was designed to diversify bondholders' exposure.

Anne Rabin, managing director at FGIC, says that the split allows each of the two insurers to take a lead role on one part of the financing, but at the same time "to be at the table with the other team", as the two are equally important to the stadium's success. She continues, "the split was not about diversification, but rather to help with structuring risk".

The financing featured no equity, but did include two $150 million loans, one to each of the teams, from the NFL's G3 programme. As Carey explains, 34% of ticket revenues from NFL games are deposited into a pool which is shared among the 32 teams. In the case of a team that has taken loans from the NFL, this portion of the ticket revenue does not go into the pool, but is rather used to pay down the loan. To date, nine NFL teams have taken advantage of the G3 programme.

Wealthy, but tax-exempt

The Meadowlands stadium also benefits from payment in lieu of taxes (PILOT) treatment, which was approved by the state authorities and allows the StadCo (the sports team's special purpose vehicle) to pay down its debt instead of paying property taxes, at an equal or lower rate to the exempted tax.

Many states have their own programmes for tax exemptions in stadiums. The financing for the new Yankees and Mets stadiums in 2006 both used PILOT. Though, for example, Madison Square Garden in New York and Fenway Park in Boston are privately owned, both benefit from breaks on property taxes.

Rabin explains that these tax exemptions are in place because the stadiums are as much public infrastructure as roads and airports; "Historically the stadiums were municipally financed, as they were seen to provide an economic benefit to communities. However, as revenues became tighter for the governments, and sports teams became increasingly profitable, public finance became less feasible."

In the past 13 months, Peter White, a partner at Nixon Peabody, has worked on the Patriots, Giants, Jets, Yankees and Mets deals, and is currently working on six more stadium deals, including the $480 million Minnesota Twins stadium. "Most of these deals are what I'd call true public-private partnerships," he notes, "it just depends on the deal as to what the division is between the public and private investment."

Rabin says that this ratio is set by reference to the importance of the team to its area, and what benefits it generates; "there are benefits to the area through revenues from municipal bonds, employment opportunities, the increase in people coming to the area, and civic pride in retaining the team in the area. But the imposition of hotel/motel taxes [on lodgings in the vicinity of stadiums] is indicative of the public not wanting to shoulder the cost of a stadium through local taxes."
In short, the stadiums of the larger teams have reached the point where they can comfortably meet their expenses and service their debts through television rights, naming rights, ticket sales, luxury suites, merchandise concessions, and franchises. The smaller, less lucrative stadiums, or sports which do not have the same capacity for generating revenues, necessitate greater public financial input.

Cash creation

The NFL is viewed by the industry as the strongest of the sports' business models. It maintains control of its talent, its teams' finances, and runs a strong surplus. But across sports in the US, owners enjoy huge flexibility in how they allocate revenues and expenses, which benefits both their tax position and their ability to earn a return even while servicing the costs of a brand new stadium. The recent advances in financial engineering for stadiums allow them to allocate as little revenue to debt service as the ratings agencies, which broadly set the cost of financing, allow.

Says White, "The NFL is very involved in the financing, and participates in its deals, and as a result the credit community is comfortable with investing. It also generates huge revenues from television rights. But Major League Baseball is also dynamic. It has robust game attendance. In the past season, 78 million fans went through the turnstiles. It has a long history of making money."

White continues, "The type of sport has an impact on the way its stadiums are financed. Soccer [football] and NHL [ice hockey] in this country have very different business models and are much more fragmented, and do not generate the same levels of revenues, whereas the European professional soccer associations have operated collectively for a long time."

Some of the risks for financing stadiums also vary by the type of sport, though there are also some generic risks. Rabin cites construction as one of the major risks, "With greenfield construction, there are no revenues from corporate deals before the stadium is erected." But, she counters, with the stadiums that are built on an existing, established site, the risk of attendance is minimised, because there is an existing fan base already situated.

Whether the team plays its scheduled games in the stadium is at the forefront of the risk factors. "There were a number of strikes in US sporting history, in [American] football in the 80s there was labour disruption, and with basketball and hockey there were lock-outs," says Carey. But, he continues, "our deals have surety bonds to cover strike risk, and the luxury suites are still paid for even if the team doesn't play. The comfort level that teams will keep playing has grown tremendously in the last five years."

Another risk is that teams will relocate, but Carey says that the lenders have this risk covered too, "The deals include a non-relocation clause. If the team left it would still have to pay off the bonds."

Room for imitation?

The risks in the European football league are slightly different. Team relocation is not a factor, but the structure of the sport's divisions, and the risk of relegation, is a factor not seen in the US. Carey cites the 2006 Juventus relegation as a specifically European phenomenon. The team was relegated despite strong performance on the pitch, in a match-rigging debacle which also incriminated three other Italian teams. However, in terms of finances, Carey uses the Juventus example to illustrate the robust fan loyalty in European football: "Despite the scandal, standard attendance was unaffected. The risks are mitigated by the strength of the fan base, especially in terms of TV. The top teams generate the lion's share of the revenues."

Market sources are in general agreement that the UK and European markets have not yet capitalised on their assets in the way the US has maximised profit-making in sports. In terms of project financing, it is the rare infrastructure asset class where US deals have blazed a trail and provided models for the European market, rather than the reverse. Rabin, for instance, believes that the increased comfort level of monolines and ratings agencies with the US team's business model has been a factor in relaxing covenants.

Says White, "The US is out in front in terms of revenue and building models in sports, but European football leagues will follow suit. So, it is a more attractive investment, as it has untapped revenues, and the premiership has an attractive fan base. We always perceived the Yankees as the world's most popular sports franchise, but Manchester United is its equal. There is a tremendous potential for generating revenues if the US model is applied. Historically UK sports financings had a significant public sector involvement, but in the future we will see more costs borne by franchises and leverage-enhanced collateral packages".

Carey also notes the difference in the financing models historically; "In the UK, ticket securitisation had been the standard model, but in the US the stadiums have been project financed. The covenant package of revenues is derived from the facility, and there has been a transition from commercial bank debt to the capital markets, which has increased the length of the deals. The Patriots extended the market to 36 years, and the Giants and Jets extended it to 40 years."

Nevertheless, the London deals in the last five years, the new Wembley stadium, and Arsenal Emirates stadium in particular, are both recognised as a move in the European market towards the US style.

The 2002 Wembley stadium financing may have paved the way to a project finance model in the UK, but not without significant teething problems: "The cost of the project was substantially more than any other comparable deal," says a lawyer close to the deal. He continues, "but international comparisons are also misleading, as this was a national stadium financing, so the same rules do not apply to the smaller stadia."

Wembley has a claim to be the most expensive stadium deal to date, costing $750.4 million ($1.5 billion at today's unforgiving exchange rates), of which $426.4 million was bank debt initially arranged by WestLB, Société Générale, and Lehman Brothers, with mezzanine debt provided by CSFB. A significant part of the cost was for the purchase of the land. "When Paris built a stadium, the land was donated," says the source, "and in other cases it is subsidised by the government, so it is another false comparison". The questions of public ownership, and location, were also expensive debates. The stadium is wholly owned by a Football Association (FA) subsidiary.

Though the Wembley deal included a great deal of public funding, (a £120 million National Lottery grant from Sport England. £20 million comes from the department of culture, media and sport and a £21 million grant from the London Development Agency), it also commercialised previously untapped assets. The pre-sales of premium suites and hospitality, advertising and TV rights all followed the US precedent.

The impact of Euro 2004

The 2004 European Championships were hosted in Portugal, and the country displayed a remarkable aptitude for stadium construction, erecting ten in just five years. Of these, six were municipally financed, but on the other four, the clubs arranged their own financing. The clubs were the four largest in Portugal – Benfica, Sporting, Porto and Boavista.

The Eu150 million ($215 million) Sporting deal was a private financing, although it did benefit from government subsidies. The 25-year concession is held by a privately-owned special purpose StadCo, NEJA, which repays its debt with various revenues. These include ticket sales, corporate boxes, television rights (transferred from Sporting to NEJA to increase its credit profile), and income from other development; including shops, restaurants, a gym, and merchandise concessions. The team also provides 30% of the revenues to the StadCo in rent, funded in turn by club members' monthly dues.

The Eu128 million Benfica Estádio da Luz deal was also a non-recourse financing. The 40% debt was fully underwritten by Banco Espirito Santo, Banco Comercial Português and Caixa del Depósitos, and Benfica provided 60% in equity subsidised by the government for Euro 2004. The margin started at 250bp over Euribor, similar to the UK pricings, but will decrease to 150bp over the 15-year life of the debt. The debt on the Benfica deal will also be serviced in part from commercial developments, luxury suites and hospitality, and rent from neighbouring properties.

The Euro 2004 deals do provide an example of how European clubs might go about financing their new homes by learning to exploit new revenue streams. However, the Portuguese deals were designed to deal quickly with the demands of an upcoming tournament and lender nervousness. US team owners have become much more adept at dedicating as few revenues to stadium debt repayment as financing costs allow. In the UK, for instance, clubs are still likely to err on the side of caution in assigning revenues to debt repayment.

Time for another securitization

With Wembley recently announcing it is in the market for a refinancing - a repetition of the 2006 Arsenal refinancing is probable.

The original 2004 financing for the Arsenal Emirates stadium, at the Ashburton Grove site in London, was arranged by RBS. It featured a £260 million 14-year project debt. It brought in five other banks, BES, Bank of Ireland, AIB, HSH Nordbank and CIT. The deal suffered several structural and pricing tweaks before it closed, with the margin being raised to around 250bp over Libor from 175bp for the first 12 years. Following financial close the team sold 15-year naming rights, as well as eight-year sponsorship rights, for £100 million.

Though the naming rights emulated certain aspects of US corporate sponsorship deals, under Union of European Football Associations (UEFA) regulations, the stadium's official name remains Arsenal Stadium (despite the large neon letters at the stadium entrance suggesting otherwise). Other European stadiums which have sold naming rights are the Bolton Wanderers Reebok Stadium, and the Munich Allianz Stadium.

The improvement in the team's financial situation allowed Arsenal to refinance the stadium in 2006 using £260 million of bonds underwritten by RBS and Barclays and wrapped by Ambac. Though monolines have been a serious presence on other infrastructure deals in the UK, this was a first for a stadium.

The refinancing involved a securitisation, the first in the football market for a number of years. Its predecessors had a low success rate, usually because they were extremely vulnerable to fluctuations in attendance. The Arsenal securitisation, however, was of not just the ticket revenues, but of the revenues from the Arsenal stadium as a whole. Slaughter & May advised Arsenal, while Allen & Overy advised the lenders and monoline.

Securitization, though, does have its adherents in the US. The New England Patriots was one of the first privately financed stadiums to securitize its asset's revenues in the US. Nixon Peabody represented the lender, Citi, on the deal. White explains that the Patriots deal was 100% privately financed whereas with the Yankees, as a comparison, lowered its cost of debt by issuing it tax-exempt debt through the New York City Industrial Development Agecny conduit: "We've seen over the years more of the costs paid for by the franchises, but there is always an element of public sector contribution to the surrounding infrastructure, and also it sometimes acquires the land, and provides it to the teams at rates lower than standard property taxes."

This recognition of the infrastructure needed to support a stadium, roads, rail links, parking etc, reiterates the interdependency of the public and private sectors on these deals, even for the ostensibly 100% privately financed stadiums.

The current public and PPP financings, such as in Lille, or the Olympic stadiums in London and Beijing, may be a dying breed. The evidence provided by the US deals, say US proponents, suggests that if a stadium can fund itself and its debt autonomously, public funding can be phased out, and directed at other public infrastructure.

The key question to answer for the investment bankers and lawyers pushing for such models is whether many European teams can generate robust enough revenues to make such financings possible. Moreover, public opinion in Europe still does not doubt that such facilities are public infrastructure, and may choose to finance them with public resources. International competitions demand the construction of public infrastructure at a furious rate, and government bodies will tend to be generous even to private builders. In the US, however, where a battle rages in Brooklyn over the tax-exempt treatment, and land condemnations, from which the forthcoming Nets basketball stadium in New York City will benefit, there is increasing evidence that public opinion is sceptical that such facilities are truly public.