If any project ran the risk of falling under the shadow of a neighbour it is the new Arsenal stadium, writes Simon Ellis. Located just 10km from the new English national stadium at Wembley, two thirds of the size and at just over half the cost, the £357m (US$668m) new home for Arsenal football club looks a poor relation to the national stadium.

But the largest club project in the history of British football has proved a feat of tactical wizardry that would put even the wiliest premiership manager to shame. 

The rationale for the project was simple. In recent years, Arsenal’s cramped 38,000-seater Highbury stadium has held the group back from securing the ticket, sponsorship and corporate hospitality returns that the team’s on and off-pitch performance – three Premiership titles in six seasons and an accumulation of millions of pounds of playing assets – has merited.

In November 1999 – after years of frustrated searching for a site in north London with its high density – the board of Arsenal Group proposed Ashburton Grove, a site that was used to house the London borough council’s waste transfer centre.

The developers immediately recognised the problems the site was facing and the issues it would have to handle, appeasing the local authority along the way.

The fist issue was space – the development would have limited leaway as the site was only 27 acres in area – less than 20 per cent of the size of the Wembley plot; it would have to build a new waste transfer centre to replace the one it was building on top of, and this had to be operational before work could start in earnest on the Ashburton site; because the site contained several houses and small businesses, Islington council would be likely to demand a substantial commitment to community regeneration to justify awarding planning permission. 

The Arsenal Group responded with a plan based on proposals for three sites:

a new 60,000 stadium would be built at a capital cost of £160m (US$300m) at the Ashburton Grove site in time to open for the 2005-6 season. The stadium site would be operated by Arsenal subsidiary Ashburton Properties the existing Highbury stadium would be demolished and the land used for a residential development – including social housing – to be managed by Arsenal subsidiary Highbury Holdings the Arsenal Group would build a £60m (US$112m) state-of-the-art waste recycling centre (WRC) at a third site at Lough Road. The WRC would be ready to take over operations of the Ashburton waste transfer centre by July 2004

After a year’s deliberation Islington council granted outline planning permission for the scheme in December 2001. Arsenal contracted Sir Robert McAlpine to carry out the construction works for the project in January 2002.

Design firm HOK – which was already working on the Wembley stadium – was commissioned to design the new stadium.

In May 2004 the ODPM approved the compulsory purchase order (CPO) and the scheme cleared the last regulatory hurdle. In addition to planning issues the consortium faced legal challenges brought by local residents and businesses.

A final law suit – which challenged the CPO on grounds of ‘improper use’ – was quashed by the High Court on 18 January 2005 which judged the development to be in the public interest.

Financing

In early 2003 the project faced serious financing hurdles. The Arsenal Group had incurred debts of £43m (US$ 80m) and was forced to delay work on the stadium – setting the proposed opening back to August 2006.

In August 2003 a £130m (US$244m) kit sponsorship deal arranged with Nike, with £55m (US$103m) payable in July 2006, put the project back on track.

With a strong equity footing in place, the Group charged Royal Bank of Scotland (RBS) as facility agent to find the £260m (US$486m) needed to refinance the amount by which the Ashburton Properties had exceeded its proposed equity stake and to fund the balance of the project.

RBS engaged Bank of Ireland (BoI) and Espirito Santo Investment of Portugal – which had a strong pedigree having led the financing for the Wembley, City of Manchester and Portuguese New Stadium projects – to act alongside RBS as mandated lead arrangers.

RBS and Espirito Santo Investment and BoI formed a syndicate with Allied Irish Banks, CIT Group Structured Finance and HSH Nordbank. In February 2004 the banks signed off the £260m (US$486m).  

Interest on the senior debt was to be repaid at a commercial and fully hedged fixed rate over the 14-year term.

Interest on the senior debt would roll up until the opening of the stadium and thereafter interest and debt repayment was to be serviced from the operational cashflows of Ashburton Properties. The latter would be generated under a formal agreement with Arsenal Football Club in relation to the staging of first team matches at the stadium.

Security for the senior debt was provided by way of a charge over these cashflows and all other assets of Ashburton Properties as well as over its share capital.

The Royal Bank of Scotland and Espirito Santo Investment also provided a standby facility of up to £15.4m (US$28.7m) of senior subordinated debt to meet unforeseen contingencies.

The arrangements with the Royal Bank of Scotland provided a £42.6m (US$80m) committed facility which will be secured on the contracted amounts receivable from Wilson Connolly in respect of certain completed property development transactions at the Highbury site.

The facilities to be provided to Ashburton Trading, which are also at a commercial and fully hedged fixed rate, are available until 31 December 2006, by which time the Group expects them to be fully repaid.

On the completion of financing the Arsenal Group committed to investing a further £45m (US$86m) in the project, to be funded from future monies receivable under the Nike sponsorship contract. Arsenal Group’s equity stake had increased to £97m.

The loan also allowed Ashburton Properties to finalise the £220m (US$422) turnkey contract for the construction of the stadium with Sir Robert McAlpine. The cost covered costs incurred by the construction company on preliminary works at the Ashburton site and Lough Road site since 2003.

Rothschild was the Group's financial adviser on the transaction and Slaughter and May acted as legal adviser. Allen & Overy acted as legal adviser to the stadium facility banking group and Linklaters as legal adviser to Barclays.

In October 2004, the group received the first major return when UAE-based airline Emirates signed a £100m (US$187m) deal to sponsor the new venue – which became the Emirates Stadium.

Project name	Emirates Stadium
Location	London, UK
Description	A 60,000-seater stadium for Arsenal Football Club to replace the Highbury stadium which could only seat 38,000 and was holding back the football team from maximising returns potential from turnstiles and corporate clients
Sponsors	Arsenal Group
Operator	Ashburton Properties
EPC Contractor	N/A
Total project value	£357m (US$668m)
Total Debt	£260m (US$486m)
Equity	£97m (US$182m)
Equity Breakdown	Arsenal Group £97m (US$182m)
Debt : Equity Ratio	73:27
Financing	Equity provided by Arsenal Group, with a syndicated loan arranged by Royal Bank of Scotland, Banco Espirito Santo and Bank of Ireland funding the project debt
Tenor	14 years
Principal bank	Royal Bank of Scotland
Mandated lead arrangers	Royal Bank of Scotland Espirito Santo Investment Bank of Ireland
Participants	CIT Group Structured Finance and HSH Nordbank
Legal Advisor to the Banks	Allen & Overy
Legal Advisor to the Sponsor	Slaughter and May
Financial Advisor to the Sponsor	Rothschild
Date of Financial Close	23 February 2004