As a growing number of European football clubs look to tap the ABS market in the near future, analysts say that the fate of a troubled securitization from U.K.-based team Leicester City plc - a club that has recently been relegated to the lower ranks of the Premier Division - may determine whether asset-backed funding will continue to be a viable, logical option for the beleagured sports organizations.

So far, the so-called "relegation risk" of being dropped to lower rankings is not expected to disrupt bond payments on the GBP28 million privately placed Leicester transaction, and football team securitizations should continue from all over Europe, said one source familiar with the deal. Luckily, television stations such as Sky TV have offered "parachute payments" to Leicester over the next several years to bail the team out. "The club will be able to meet bond payments for the duration of the transaction from BskyB's GBP3 million parachute payment for the next two years along with sponsorship payments, even if the team is relegated and remains in division one," the source added.

Last June, Leicester placed the bonds backed by broadcasting and sponsorship revenues, which were purchased by the Teacher Insurance and Annuity Association. According to Dresdner Kleinwort Wasserstein, since launching the deal the football club has dropped in rank to the bottom of the Premier Division and its share price has fallen by 75%.

Many of the problems facing the Nationwide League football clubs stems from a failed deal between ITV Digital, a competitor of Sky, and the Nationwide League, which unraveled amid the global economic slowdown. "Carlton and Granada (parent companies) placed ITV Digital under administration last week and it is thought that any other company that negotiates for the broadcasting rights to the league matches will not be able to match ITV Digital's previous deal," Dresdner noted. In other words, analysts explained, if the Leicester team is relegated to a lower division, it will no longer benefit from the advantages associated with belonging to the premiership in terms of broadcasting revenues.

Because of this, Leicester City faced a loss of GBP6.4 million in 2001 and is liable for GBP2.5 million payment arrears for the first three years to cover debt service on the bonds, explained Dresdner analysts. After this period, costs will increase to GBP2.8 million. Analysts said that in the past the team has heavily relied on its Premiership ranking and derived over half of its revenue from television. With its status rebuked, it's clear that it could pose a negative impact to its television and media packages.

Nonetheless, market sources said many of these deals have already taken such an issue into account. "It's always been considered as part of the life for any team because these deals can be anywhere from 20 to 25 years in term," said one source familiar with this structure. "Even if it's the best team today they may not have the same profile over time."

Recent deals

To date the U.K. has seen the number of football deals increase with at least six other deals completed in the last two years. The structures are fairly similar with most teams opting to securitize ticket receivables, and because of the small size of these deals they are generally completed within the private placement market (see ASR 10/1/2001). The latest of these was completed late last month for the Everton football club.

Bear, Stearns International led the GBP30 million private placement securitization of Everton's current and future season ticket receipts. Also a member of the Premiership, in its 130-year history as a football club Everton has only been relegated twice. The long track record has helped investors become more comfortable, sources close to the deal said. "Clearly the investors are aware that the key here is track history, which is why this deal was so well received and priced higher than some of the past football securitizations," one source said.

Although the structure is very much in line with past deals, sources agreed that Everton is looking to relocate to another arena in June 2005, an aspect that was addressed in the deal documentation, which dictates that the new stadium must have a similar seating capacity as their present setting.

As to the relegation risks, it is unlikely that the Leicester situation would cause any concern to a club like Everton that has a long history - even if the team were to be relegated it would likely still enjoy the same fan base. Sources added that despite this security, there were covenants in place that specifically addressed such a situation.

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