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In the previous couple of articles, we have already seen what securitization is and how it is used in the context of sports. We also know that there are various types of securitizations that take place in the sporting industry and that the popularity of securitization has increased over the years.
It must be understood that the increasing popularity of securitization is not without any reason. This method of raising funds offers several advantages to the sporting franchises as compared to other methods. This is why it is being widely adopted by the sporting community.
In this article, we will have a look at some of the main advantages that are offered by securitization.
For instance, if a sporting franchise sells an equity stake in order to raise more funds, then there is a chance of loss of control. Also, if a sporting franchise raises debt, then the bank or financial institution imposes some covenants that impose restrictions on the management. There are some restrictions imposed by securitization as well. However, they are very less as compared to other means of financing. As a result, there are many franchises that prefer raising money using securitization.
On the other hand, the sale of debt can also be quite expensive for sporting franchises since they are known to have unpredictable cash flows and hence are perceived to be quite risky. This is not the case as far as securitization is concerned.
Securitization provides finance to the special purpose company which has been created from the main sporting franchise. This special purpose vehicle is supposed to have predictable cash flows and hence lower chances of bankruptcy. This structure lowers the risk for investors who are then willing to buy debt for a lower cost of capital.
It is common for sporting franchises to hold on to the lower tranches themselves and sell the low-risk higher tranches to investors. Since the threat of default is further reduced, it is possible to raise finance at very attractive interest rates using this technique.
However, when securitization is used, the sporting franchise is able to access a much wider range of potential investors. Also, they do not need to raise funds from one or a few investors. Theoretically, they can sell their debt on the bond market and can raise funds from a multitude of investors. This increases the bargaining power of the franchise and also helps maintain a lower cost of capital.
For some reason, if the amount falls short, the franchise generally has to make good the loss. Conversely, if the gate receivables are higher than expected or more revenue has been generated from the sale of digital rights, then the sporting franchise is also entitled to these excess funds.
However, if that is not the case and there is some residual value present in the asset, then such residual value belongs to the sporting franchise which has the right to once again take possession of the asset and realize this value.
The amount of money flowing into the entertainment industry generally doesn’t correlate with other industries such as manufacturing or information technology. Hence, the addition of securitized debt to the balance sheet of such investors helps them diversify their portfolios and increase their overall returns.
As a result, it can be said that securitization is one of the cheapest and most convenient modes of financing available to sporting franchises. As a result, the popularity of this financing approach has been skyrocketing. However, there are some disadvantages to this method as well which will be discussed in the next article.
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