The £260 million refinancing for Arsenal's new Emirates stadium is the first football securitisation to close in three years. Unlike previous UK football securitisations – most of which ended acrimoniously in default and restructuring – the deal is more akin to a whole business securitisation than a pure ticket-backed facility.

The key credit strengths of the deal, recourse to the whole business (its assets via a floating charge and its shares) and the raft of firm but flexible covenants which provide for the prudent running of a football club, set the Arsenal refinancing apart from its benchmarks.

The £260 million bond issue splits into an A1 £210 million fixed rate tranche with a 2031 maturity and a weighted average life of 13.5 years, and a £50 million A2 floating rate which has a 7-year expected maturity despite its 25-year legal tenor since it is assumed Arsenal will prepay the debt before the margin steps up to 2.5x in 2013.

Both notes were oversubscribed, with over £1 billion of orders placed. Pricing ended tighter than guidance at 52bps over Gilts for the A1 Note and 22bps over 3-month Libor for the A2. Over 30 accounts bought the fixed rate note, 10 were involved in the smaller FRN tranche. The majority of demand came from UK fund managers with some participation from pension funds, insurance companies and banks.

All notes were wrapped to triple-A by monoline Ambac. Using a monoline takes advantage of the current differential in pricing between expected investor margins for BBB and AAA paper compared with wrapped BBB paper (AAA paper plus monoline fee is cheaper than BBB paper given the current low monoline pricing).

Ambac was well placed to consider the risks – the insurer has extensive experience of wrapping stadium-backed debt in the US and looked at Arsenal's initial financing, so had built a relationship with the club. A monoline also ensures that ongoing monitoring of Arsenal's finances is timely and efficient, with one controlling creditor rather than 30 around the table.

The deal is structured around two separate SPV's – a projects management company, Manco, which collects ticket revenues and Arsenal (Emirates Stadium) Limited (AESL) established for the development and ownership of the stadium. Ticket receipts flow into Manco, which has to maintain a working capital account of at least £1 million. Cash is then fed into the stadium company AESL which must maintain a debt service accrual account and a debt service reserve account. The debt service accrual account is required to have a balance that is equal to at least 150% of the next semi-annual payment, and the reserve account equal to 18-months of debt payments less liquidity facilities.

A trigger event that activates a cash trap facility occurs if at the stadium company level (AESL) there is an historic or projected DSCR of less than 1.75x – this is calculated as all match day income received from Manco less stadium costs over debt service. The base case DSCR is 3.5x. Cleverly, an event of default at the AESL-level would not constitute the insolvency of Arsenal under the current football regulations, so would avoid the punitive action of point deductions, fines and release of player registrations under the FA Premier League rules.

Continual monitoring is crucial in applying the innovative covenants on the deal. Perhaps the most innovative aspect of the covenant package is the working capital test (WCT). It had been assumed, given the debacle of Leeds, that strict football-specific ratios such as the wages/ turnover ratio would be required to make the deal bankable. Yet the lead arrangers, in consultation with Ambac and Arsenal found that such ratios were too crude, with some clubs running out of cash despite a healthy wage/turnover ratio.

The working capital test is a three-season look forward assessment conducted semi-annually to conservatively determine Arsenal's net cash position. The calculation is based on a series of assumptions about league position, salary costs and transfer expenditure. The implications of a failed test vary in severity according to the timing of the failure, but will in all cases be a trigger event that activates the restricted payment conditions.

If the failure is in the current year it is an event of default, a failure in the second season will result in a distribution lock-up at the stadium company AESL, and a failure in the third will result in increased monitoring and a distribution lock for the football business as a whole, Arsenal Football Club (AFC).

The working capital test is particularly important to the underlying investment-grade of the deal because the insolvency of AFC is the principal risk in the deal. In its pre-sale note Fitch stated that it "believes that the test has been devised on an appropriate basis to ensure that it acts as a barrier against mismanagement of the club's finances, whilst not acting as so much of a straitjacket that it would result in the deterioration of the club to function at the highest level."

In the preparatory work before the structuring of the deal Ambac, RBS and Barclays spoke to the insolvency agent that acted in the Leeds securitisation. The principal reasons Leeds defaulted was over-exuberance in the transfer market, namely, not enough control in the financing and because the deal was not flexible enough to allow the club to round down its cost base by providing enough liquidity to sell players in the next transfer window.

As well as providing sufficient liquidity for Arsenal to lower its costs with a slide in form (the deal is robust enough to withstand three seasons in the Championship), the deal also benefits from a covenant on the limitation on indebtedness. Arsenal have a reputation as a conservative club in the transfer market and negotiating player's wages relative to their close peers so many on these covenants were codifying their current working practices.

AFC has also covenanted to spend a minimum of 75% of net transfer proceeds on player acquisitions, or other football-related assets or to pay off debts – this protects noteholders from current and prospective owners trying to asset-strip the club.

The Arsenal stadium refinancing template – the ticket securitisation backbone with recourse to the whole business supported by firm yet flexible football-specific covenants – has restored lenders' faith in football and seems certain to be repeated.

Arsenal Securities plc
Status: Closed 25 July
Description: £260 million bond refinancing Arsenal FC's stadium
Borrower: Arsenal (Emirates Stadium) Ltd
Issuer: Arsenal Securities
Lead arrangers: Barclays Capital; RBS
Monoline: Ambac
Legal counsel to arrangers and monoline: Allen & Overy
Legal counsel to borrower: Slaughter & May