It's the second week into the World Cup and Europe has gone soccer mad, but it's done little to alleviate the problems facing future soccer securitizations, said market participants.

Even the recent completion of Fiordilatte (see ASR 5/13 p. 24), the Italian-based public market deal, was not enough to quell the growing apprehension surrounding the future of these transactions. Market participants said that the success of the Italian deal relied largely on its insurance wrap; for many of the deals - particularly the private U.K. transactions - an insurance wrap may not be a viable option.

With five deals completed through the securitization market, the U.K. football teams have steadily become leaders within the sector. But the recent plight and confirmation of relegation fears for Leicester City, which completed a GBP28million securitization of media and commercial income, highlights the vulnerability these deals could potentially face if ticket sales - or in this case, media rights - are affected by relegation.

Despite earlier optimism that the built-in covenants would be enough to thwart any adverse reaction to relegation, some investors believe that relegation, particularly when tied into media, ultimately means the team will get less money.

"It's the debt-to-coverage ratio that governs the performance of the deal," said one source familiar with the transaction. "The theory is that relegation fears will affect ticket receivables, and that this will ultimately affect the deals. If you take the view that less people will attend the match, that also means that the team is no longer in the league of the FA cup."

Although the media is available for premier football clubs, it is not to lower-tier clubs that, without which, there could be no Premiership, said the market source. But reconfiguring the system to include lower tiered clubs in TV rights deals means that clubs would have to dilute the payments to superstar players - payments that one source said have skyrocketed to unrealistic proportions, and may be the driver for the troubles clubs are experiencing lately.

The U.K. deals to date have been financed via a secured loan structure, typically involving a club and its holding company. In the securitization, the issuer issues the notes and lends the proceeds to StadiumCo., which in turn lends excess funds - after it has paid for the grounds - to the club. The aim of the securitization is normally to fund the redevelopment of the ground, but sources said that many clubs would like the option of using this funding to purchase the transfer rights of new players.

"You do it that way because you can't go around transferring stadiums - if you did, a stamp duty would be involved," said one source familiar with the structure. "Recently, one of the deals that we were looking at had a problem with the stadium, which was proving difficult to transfer into StadiumCo. It was suggested to us by the lead manager that the transaction proceed like a whole business securitization, but that would have been incongruent with the way the club runs its business."

In a whole business deal, the entire business is securitized - bondholders have the right to seek restrictions, at which point they may opt to put a cap on salaries paid to players in order to optimize returns. In terms of the evolution within this aspect of soccer, it would be an impossible limit to place on clubs.

Going forward, it is likely that the UK securitization market will rekindle its interest in soccer deals, but at the moment - until the media rights issue is resolved - investors are treading the area softly. "It's definitely a difficult sector in the U.K.," said one market source. "It's a challenging time, and the use of this option as a funding tool will continue to be challenged," said the source. "Securitization will continue to be a tool, just not in the short-term."

According to sources, Arsenal has been one of the teams that have been inquiring about the possibility of completing a deal in the public market. This means that it would be much larger than the deals completed as of late in the private market, and would likely include raising money from TV licensing rights. But despite completing a stellar football season this year (the team won the FA cup and Premier double, both U.K.-based tournaments) any possibility of doing a securitization right now is overshadowed by the ITV Digital fiasco.

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