Types of Securitizations in Sporting Franchises

Securitization is now becoming an integral part of the way in which international sporting franchises finance themselves.

There is no doubt about the fact that securitization is on the rise in the sporting industry in almost every part of the world. This can be easily verified with statistics. However, it needs to be understood that the securitization being followed in different parts of the world is quite different.

There are various versions and types of securitizations that have come into existence in the sporting industry in the past few years. It is very important for any student of sporting finance to know the various types of securitization techniques as well as their pros and cons.

1. Open Vs Closed: Firstly, it is important to realize that the assets, as well as the liabilities of a sporting club, keep changing at any point in time. Also, as far as the risks borne by the investors are concerned, these risks also change in relation to the assets that are held by the special-purpose vehicle.

   There is a classification of the types of securitizations in this regard. On the one hand, there are open securitizations. In such cases, the sporting franchise can add or change the types of intangible assets that are held on the balance sheet of the special-purpose vehicle.

   Hence, if a new player has been purchased, the monetary value of their contract can be securitized in the same special purpose entity. This is beneficial to the franchise since it does not have to spend time and effort while creating another special purpose entity.

   On the other hand, it becomes a bit difficult for the investors to value the debt since the risk keeps changing continuously. This is the reason that certain investors do not want the asset-liability composition of the special purpose entity to change during the course of the investment tenure. Such a type of securitization is known as closed securitization.

2. Type of Investors: The types of securitizations can also be classified based on the type of investors who are allowed to invest in them. There are certain types of securitizations that use credit enhancement methods such as over-collateralization and tranching in order to ensure that the resultant securities are very low risk in nature.

   These securities typically have a high credit rating and hence can be sold off to a wide variety of investors including institutional investors such as pension funds. On the other hand, others may not use such techniques.

   As a result, the risk profile may be quite high. In many such cases, the special purpose entity may not be legally allowed to sell these securities to certain types of investors such as retail investors.

3. Listed Vs Unlisted: The types of securitizations can also differ in the manner in which these securities are sold and whether or not a secondary market exists for such securities.

   For instance, there are some securities created as a result of securitization which are listed on the debt market. Hence, they can be purchased and sold easily. Such types of securities are called listed securities.

   On the other hand, there are some securities that are privately placed by the issuers to banks or to other financial institutions. There is no active secondary market for such securities. They are generally held till maturity. If the investor wants to sell such securities before maturity, then they themselves need to find another party who is willing to buy them. Such types of securities are called unlisted securities.

4. Whole Business Vs Operating Asset: Securitization can also be classified based on what is being securitized as well. In most cases, there is an identified operating asset that is being securitized.

   For example, the cash flows resulting from gate receipts at a stadium are securitized. In such cases, the investors are only able to get the cash flow generated from the underlying operating asset.

   The ring-fencing of cash flows is significantly easier in this case. On the other hand, it is possible for securitization to be done for multiple underlying assets.

   Multiple assets such as player contracts, stadiums, gate receipts, etc may be securitized and the cash flows from all of these assets may be used interchangeably in order to service the debt. Such a type of securitization is called whole business securitization.

5. True Sale Vs Synthetic: Last but not least, securitization can also be classified as being a true sale or synthetic based on whether or not the assets are being moved permanently to the balance sheet of the special purpose entity.

   In the case of true sale securitization, the assets are moved out from the balance sheet of the franchise to that of the special purpose entity. However, in the event of a synthetic securitization, the assets are only referenced by the special purpose entity. However, they still lie on the balance sheet of the sporting franchise and are not actually transferred to the special purpose entity.

From the above examples, it is quite clear that there are various types of securitizations that are currently used by different sporting franchises. Each has its own advantages and disadvantages. Also, the valuation of the securities is heavily influenced by the type of securitization used.

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