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The business of sports can be asset-intensive and can lead to negative cash flows for a number of years.
Sporting franchises have to shell out huge sums of money in order to build new stadiums and also to ensure that the best players are playing for their teams. Also, the legal structure as well as the league rules related to sporting entities create certain limitations when it comes to raising funds using debt.
There are many financial institutions that are averse to lending funds to sporting franchises. Even if they do lend such funds, it is done at a high rate of interest. It is for this reason that sporting leagues around the world have had to resort to innovative measures in order to access funds.
The sporting franchises want to ensure that they are able to raise large sums of money without having to pay excess money in the form of interest. In order to be able to do so, sporting franchises are now selling their debt directly to investors.
Over the past few years, sporting franchises have started using structured finance to bypass the banking intermediary and directly reach out to the lender.
In this article, we will have a closer look at securitization which is one of the most widely used structured finance methods in the sporting industry.
The balance sheet structure of the sporting franchises is such that they carry a lot of current assets which are expected to provide cash flow in the short run. Some of these cash flows are predictable like tranches of payments related to the sale of broadcast rights or digital media rights. On the other hand, there are some kinds of cash flows which are unpredictable. These include gate receivable i.e., revenue generated from the sale of tickets.
Securitization is a technique in which the sporting franchise can sell securities in lieu of these future receivables. Hence, sporting franchises need to create a system wherein the cash flow received in the future will be passed on to the lender in the form of repayments against loans or cash flows which will be received immediately. The specific nature of the cash flows i.e. fixed and variable can be discussed with the lenders and the rate of interest can be decided based on the amount of risk that the lenders are willing to undertake.
The process of securitization in sporting franchises is similar to that followed in other businesses. This means that the main entity i.e. the sporting franchise does not indulge in securitization itself. Instead, the assets of the main entity are sold to a special purpose entity. Hence, these assets are listed on the balance sheet of a special purpose entity whose sole objective is to provide loans to the main entity.
However, most of the time, the sale is done with recourse. This means that if the required cash flows are not derived from the assets, then the sporting franchise will become liable to pay the same. Hence, it can be said that this transaction is actually a loan transaction that has been disguised as a sale.
Now, the asset side of the balance sheet of the special purpose vehicle entity has the current assets whereas the liabilities side carries the securities which have been issued in lieu of these notes. As and when payments are received, the intangible assets are amortized and the money is used to reduce the liabilities as well. The repayment of these loans can be a one-off case or it could be
The control of the special purpose vehicle does not lie with either the sporting franchise or the lenders. A specialist management company is appointed in order to administer the finances of this entity. Also, this special purpose entity is generally not required to be listed on the balance sheet of the main company. This is beneficial for both the parties.
The sporting franchise can use securitization as a source of off-balance sheet financing. At the same time, the lenders are not affected by the financial troubles including bankruptcy faced by the franchise.
It is also important to note that in most cases, the special purpose entity is not allowed to engage in other business transactions. The charter is created in such a way that their operations are severely restricted. The purpose behind these restrictions is to ensure that the asset-liability composition of the special purpose entity does not change.
The lenders who give money against securitized assets have a higher claim on assets as compared to almost any other stakeholder. This is because of the fact that these lenders are considered to be the customers of the company since legally the intangible assets have been sold with a recourse. Hence, they have a higher claim on the asset as compared to any lender. Their rights cannot easily be rescinded even in the event of bankruptcy proceedings.
Generally, in such cases, the rights of the lenders can only be rescinded if it is proven that the transaction was done with malafide intention in order to perpetrate fraud.
Hence, it can be said that securitization has already become mainstream. It is quite likely that an even larger number of sporting organizations will start using this innovative method in the near future.
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