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All change – how player transfer funding has evolved

3 February 2021

Lisa Seidel

Commercial Director, Capital Markets

Lisa Seidel

Commercial Director, Capital Markets

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The game-changer to football player transfer funding has been long coming. Some may point the finger at the virus first detected from China and call that the “black swan event” in football’s history but in fact, it has been a longer-term complex issue which has seen significant financing evolution.

Back in 2018/19, the “big five” leagues in Europe saw their clubs’ revenue hit record heights. This was bolstered by the new broadcasting arrangements with, for example, BT, Sky and Amazon, which mostly benefitted the top performing clubs. As a natural consequence, clubs inflated wages in their continued race for league and cup titles. However, increasing talent retention and acquisitions within the top-level clubs saw operational pre-tax losses creep in. To add insult to injury, these unforeseen losses were then vastly accelerated by the seismic Covid-19 pandemic that continues to this day.

With stadiums closed, and games silently progressing behind closed doors, leagues and clubs have seen their financial virility tested with significant losses and rising cash flow issues. However, the race for quality and performance – both on and off the pitch – remains.

Third-party player transfer funding has evolved over the years. If a player moves from Club A to Club B, Club B will raise financing to pay for the transfer. This then creates a receivable that is repayable in instalments over a medium-term, typically three to five years, with a certain percentage payable on the actual transfer. This upfront proportionate repayment enables the selling club to use such capital for other player transfers. The rest of the debt will be repaid on predetermined dates.

New players on the scene

Traditionally, it was certainly banks that saw merit in this niche space as far back as the mid-90s. With their financing prowess, they continued to push more debt into the clubs, with the Champions League Clubs’ debt ratio growing to 14 per cent during the summer of 2018.

But it was not long before fund managers woke up to the opportunities in this sector and a new game was afoot. Fund managers have, by their very nature, a different risk appetite to the banks and do not have to battle with capital allocation like banks. They saw the gap in the market and realised this more esoteric asset type would make a great investment. The structures to date typically use investment vehicles to onward lend to clubs to fund player transfers. Billions were raised to match the desire for high club wages. But when Covid-19 took its toll on the entertainment industry as a whole, it sadly kicked some of its funders into touch.

The consequences included loans being subject to early repayment, payment holiday requests, or, in the worst cases, payment defaults. These, in turn, triggered major cash flow issues, causing myriad disruption to the upward flow of funds to investors. Some simply got out of the game, while others restructured – which on its own, is an expensive business.

More recently we’ve seen a demand for increased bespoke financing arrangements which continue to use the capital markets route via special purpose vehicles (SPVs). These are bankruptcy remote lending entities for isolated player transfers, as opposed to balance sheet lending or complex fund-like structures. The key players in this space are the pension funds who, in such a continuously low-interest environment, are seeking enhanced yield and adding transfer debt to their investment portfolios. If carefully selected, the risk on return is low and the cash flow is easily predicted in what’s still a relatively short-term asset. We’ve also noticed a more centralised approach to lending, namely that the leagues are now looking to secure larger pools of funding via pension funds and insurance companies on a (largely) secured basis and funnelling the cash down into the clubs.

Weathering the storm

The leagues and clubs are certainly going to have to review their wage expenses and how they recalibrate their income stream to match their growing book of debt. The inherent corporate restructuring will become the subject of closer scrutiny, bringing desired operational enhancement and cost efficiency to reduce costs. Thankfully, loyal fans who are currently avidly watching closed games in front of empty seats will be dying, once permitted again by the governments, to return to the stadiums and pay to see their favourite clubs play again, supporting pre-mapped cash flow models.

At Intertrust Group, we pride ourselves on being one of the leading custodians of this asset class. Our track record on football, outside of assisting on player transfer deals, is leading in the industry. We’re extremely well connected to the funding partners, the intermediary agents, the clubs and leagues and even supranational governing bodies.

We appreciate the paramount importance on client confidentiality to help our clients focus on the real job in hand. Our services compliment group-wide to transaction-specific corporate governance, accounting, loan servicing, cash management, verification and trustee services across over 30 jurisdictions to provide a 24/7 client service model that will put your needs first.

Get in touch today to learn more.