Given the number of deals that have reached financial close in the past 18 months, the market for European stadium deals almost seems to be looking up. But with some of those deals facing restructuring, some almost cancelled and some giving project sponsors and arrangers a number of headaches along the way, it could take a lot of change before European deals get done with ease and alacrity.

There is investor interest in stadium funding and, with the right structuring, more transactions will go forward, according to participants. But there may need to be some fundamental changes in the market as a whole - to reduce real and perceived football risk and ensure stable revenue streams - before many more financings reach close.

Stadium financing has never been an easy proposal, but with upheaval in the market over the past two years and several banks burned on stadium deals, it is now more difficult than ever for deals to be done, in particular for those clubs looking to build a stadium housing just one team.

As Stuart Brinkworth, a lawyer at Ashurst, explains, there is a huge difference between financing a national stadium, such as Wembley in the UK, versus one for a single football club. "It has become apparent where you have an asset only used by one particular team that there is no such thing as there being no credit risk from that team."

"Lenders are theoretically taking on risk based on seat sales - not on the team - but in particular with the financial difficulties faced by teams over the past two years, revenue risk is also a credit risk on the club because you are relying on that club to raise revenues." If the club does not do well for an extended period then seat sales will fall, thus impacting the revenue stream backing a stadium deal.

Says one adviser: "This is what we are seeing with Leeds United. They continued to bring in strong seat sales, but the cost-base was out of control and led them into difficulty with lenders." The group, which organized a £60 million securitisation in 2001, is now in the process of restructuring its terms with creditors on the transaction.

In addition, even when seat sales remain high, there are other factors affecting a club that could have an impact on lenders. Adds Brinkworth: "Generally the perception from lending institutions right now is that clubs cannot control their cost-base effectively enough to present a justifiable case to the credit community. While the name may be great and the club perform well, at the end of the day it doesn't matter if you are maintaining three-to-five times debt service cover, if the finances of the club are not in order, for example if the cost of players skyrockets, then this is still a risk for lenders, even in a non-recourse transaction."

Because of the way the industry is structured, clubs have an obligation to pay staff first, even before lenders that theoretically are secured against specific revenue streams. "Lenders become reluctant, because the reality is that even with that security they do not rank where they should if the club were to get into financial difficulty," says Brinkworth.

In addition, there are fewer and fewer lenders now within Europe that are willing to lend over the long term. To make a stadium project financially viable, sponsors need to be able to borrow over 15 to 30 years. In the past, private placements were taken up by pension funds and other groups that look for longer-term assets, but with new deals done through the public markets, either in the form of securitisation or project financing, there are few lenders who would take on this level of risk over that length of time.

One adviser adds that lenders fear serious loss of value should the worst happen and the club no longer operate. "There is little value for lenders in a stadium as a piece of real estate property." The size, generally the location and the zoning make it unprofitable to redevelop. "The value of a stadium is as a going concern, with a football team in residence. Given the financial state of the football market in recent years, this is a real risk, and makes lenders even more cautious."

At a recent conference, UK Football Association (FA) chief executive Mark Palios suggested that changing the perception of football risk must be dealt with by the industry as a whole. He noted that although clubs have seen high demand and strong gate receipts, both player salaries and debt levels have been rocketing. He said that the FA in particular has to be more than a governing body, ensuring investment and re-investment to secure football's long-term future.

According to Randy Campbell, managing director of SG Cowan in the US, European groups need to build and demonstrate more stable revenue streams outside plain ticket sales in order to increase investor comfort. "In the US it is slightly easier to get these deals done for a number of reasons. First, in the US the utilisation of premium products - for example, the leasing of gaming rights, corporate sponsorships, luxury suites and club seats - and the acknowledgement of the revenue streams they produce have been quite good. Lenders have become comfortable with the stability of these revenue streams, and consequently more comfortable in providing funding for major projects.

"In Europe, this is just opening up. The acceptance of the sale of premium products, and the stability of revenue coming from them, is just beginning to be seen," he says. "There will need to be more of a history showing predictability of revenue streams from such products before investors are comfortable with it."

"Second, the lack of government backing in Europe also makes it hard to finance stadiums on a strict project finance basis. You see far less in the way of tax breaks or public-private partnerships where the municipality puts money into the project in Europe than in US. If this was more common it would reduce the amount of debt that teams and companies would have to take on, which would improve the debt profile in general," says Campbell.

"Finally, the structure of the leagues makes it difficult to predict revenue streams over the long-term," he says. In a number of European football leagues, for example, having teams relegated to the next league down each season can have a significant impact on their financial stability, and thus an impact on lenders' perception of the risk of involving themselves in long-term projects within that market.

Campbell says that not only do teams need to show more solid revenue streams, but for project financings to go ahead teams need to be willing to give lenders more of a hook into the franchise itself and thus provide more security.

Brinkworth agrees. "There is no doubt that project finance, and possibly securitisation, are completely viable means of building a stadium. When you consider that no one is interested in putting equity into football clubs at the moment, these are probably the only viable means," he says. "But in order to make it comfortable to lenders there will have to be a strong corporate wrap, or recourse to the club itself. It is essential that lenders can control the creditworthiness of the football club." This means imposing strict financial covenants that control spending on players, other debt and so on.

He says to get a deal done in this market would require pricing it as a corporate credit risk rather than simply based on stadium revenue flows: "This is important so that lenders can ensure that areas where clubs historically get themselves into trouble, such as player salaries, and so on, can be controlled."

Stable revenue flows from secondary sources, extra security features and control were indeed essential ingredients in most of the deals that did get done in the past 18 months.

Although it was a bleak market, the UK and Portugal were the centres of what activity did happen, with a number of transactions closing in each region. Both countries saw deals that closed relatively well and deals that struggled through changing terms - and even changing lead banks - before reaching an acceptable conclusion.

Euro 2004

The Portuguese market was dominated by newbuilds and refurbishments for the Euro 2004 Football Championships. With just over a month to go now to Euro 2004, all eyes are turned to Portugal, and to the 10 new stadiums where matches will be held. The country managed to find financing for and build all 10 new sports complexes in just four years - an astounding feat promised as part of its bid to host the Championships. Of the 10, six were funded municipally, but for the remaining four - home to the four largest football clubs in Portugal, Benfica, Sporting, Porto and Boavista - financing was arranged by the clubs themselves.

The first of these to close was Sporting CP's Jose Alvalade stadium in Lisbon. The group made the decision to build a new stadium five years ago as part of a restructuring. Total project costs for the 54,000-capacity stadium ran to Eu150 million, funded through non-recourse financing and government subsidies.

The deal requires NEJA - the SPV set up for the stadium build - to design, build, finance and operate the stadium over a concession period of 25 years. It is backed by revenues from various streams, including seat pre-sales, corporate boxes, television rights (transferred from Sporting to NEJA to increase the robustness of the funding profile), and income from other development on adjacent land - the project includes shops and restaurants, a medical centre, an entertainment centre (with a number of cinemas), a fitness club, a Sporting superstore, and a seven-story office block.

In addition, 30% of the total revenues will come from monthly rent paid by Sporting SAD - the entity owning the professional football team - to NEJA for use of the stadium by the team. To mitigate the associated risk, Sporting group agreed to use monthly dues from the club's members as security on rent payment. As part of the agreement, NEJA must sustain an annual debt service coverage ratio over 1.5x and a loan life cover ratio of 2.0x for debt maturity with a limit of 15 years. The deal, which closed in February 2002, hinged around the restructuring of the Sporting Group and risk mitigation through the inclusion of revenue streams backing the deal that were not associated with the performance of the football club itself.

The other major deal using non-recourse finance to come out of Portugal was the Eu128 million financing of the Estádio da Luz - or Stadium of Light - the home ground of Benfica FC, which is the other major football club housed in Lisbon. The new stadium, adjacent to the old one of the same name, has a capacity of 65,000.

The 15-year deal was completed in June 2003 and priced at 250bp over Euribor scaling down to 150bp over. It involves a limited recourse structure with a 40/60-debt/equity split, where Benfica provides the 60% equity - with the help of government subsidies provided to stadiums used for the Euro 2004 championships. Cash flow certainty - to mitigate risk associated with performance of the football club itself - is enhanced with additional revenue streams, such as rent from commercial areas, long-term contracts for stadium seats and boxes, and long-term advertising contracts.

The deal was fully underwritten by arrangers Banco Espirito Santo, Banco Comercial Português and Caixa del Depósitos. As with many recent stadium deals, it faced a number of difficulties in getting done, not only because of tight market conditions for any bank financing for football clubs across Europe, but also because of the many setbacks faced by the group itself: while the deal was being negotiated the group's jailed former chairman had club accounts frozen with a charge of money owed; talks with lenders were sidetracked in the face of ongoing negotiations with municipal and federal entities over public subsidies for the project, and infrastructure funding for access to the stadium; and so on. The project was diverted more than once, but with consciousness of Euro 2004 fast approaching, it was pushed forward, terms were negotiated and close was reached.

UK struggle

In the UK there was much activity in the works and much less that actually reached fruition. A number of deals have been put on the shelf pending better market conditions, but the two deals that did manage to come to market made quite a splash.

First, and foremost, is the £426.4 million in financing for Wembley Stadium, which closed in March 2003. The deal, arranged by SG, WestLB and Lehman Brothers, was a long time coming but in the end the package satisfied the requirements of the market and met the needs of project sponsors. It took more than two years to reach close, with a change of lead arranger in the process and significant restructuring of deal terms. The deal has a debt/equity split of 55/45, and as it stands involves a split of funding between the three arranging banks, £161 million in government subsidies and £163 in equity from the FA. Bank funding went from a proposed margin of 150-200bp over Libor two years ago to eventually close at 250bp over. The deal went into general syndication in March.

Another UK deal that saw a lot of interest - although more from football pundits than from lenders - was the £357 million non-recourse financing for Arsenal FC's 60,000 seat Ashburton Grove stadium. After banks pulled out of the original £317 million deal, Espirito Santo Investment stepped in and organized a group of four lenders, along with former lead-arranger Royal Bank of Scotland.

The transaction includes £100 million in existing facilities from Barclays and a £260 million project facility with banks RBS, Espirito Santo, Bank of Ireland, Allied Irish Banks, CIT Group and HSH Nordbank.

As Arsenal chairman Peter Hill-Wood said in a statement: "The financing of the group is now complex, but throughout the financing structure we have retained the twin objectives of continued investment in our playing squad and separate funding for the building of the stadium." He added that balance of the stadium project costs would be covered by funds from Granada, Nike and the sale of surplus land assets relating to the stadium site.

Some market players have panned the deal and Arsenal's struggle to get it done but Brinkworth at Ashurst says it is a good deal for the group: "They wanted to ensure that the deal did not impact on the development of the team, and that is what they have done." It is a traditional non-recourse deal without the strict financial covenants that Brinkworth expects to typify the market in the future. "In this market, they are very lucky to get the deal they did and it is probably the best deal that anyone could have achieved. It will be some time before we see another one like this."

Aside from these deals, little has closed in the UK, although there are a number of plans in the works. Liverpool FC is in the planning stages for a new development, and Banco Espirito Santo is understood to be involved in the financing of Coventry City's new stadium. Brighton is going through the planning process for a new complex as well, and Everton FC - also in Liverpool - had a proposal and planning approval but, according to market sources, had some trouble raising its equity contribution. In addition, Portsmouth is believed to be looking to raise finance to redevelop its existing stadium but may be having some trouble finding lenders. Sunderland is also believed to be looking for long-term financing backed by its stadium, which was built a few years ago, however it also appears to be facing hold-ups.