Sports stars will always claim to give 110%. Can sports teams and clubs offer the same - In the interest on their borrowing?
Whilst that might be a fantasy rate of return, sports teams and clubs are increasingly turning to corporate bonds to raise funds by offering attractive rates of return and, depending on how they are structured, rewarding their fans and supporters for their loyalty.
To run and manage a sports team or club is a tough job and cashflows can, at times, be significantly stretched, making it difficult to find the resources to fund large items of capital expenditure. Banks are reluctant to lend to sports teams or clubs because of the reputational risks they could face with fans and supporters in the event that the team or club is unable to make the debt repayments.
In these circumstances, it is not surprising that teams and clubs such as Portsmouth Football Club, Lancashire Cricket Club, Jockey Club Racecourses, Caterham Formula 1 Team and Wasps Rugby Club have, in the recent years, looked to their fans to fund expenditure; raising various amounts ranging from £270,000 to £35 million by issuing corporate bonds. Corporate bonds can be listed or unlisted, and most of these examples used the unlisted - and less expensive - corporate mini-bonds.
Getting the fans involved
Mini-bonds have not only been used for fundraising, but also as a tool for fans and supporters to participate in the team or club's future and, hopefully, its success story. Many of the mini-bond issues have also been structured to reward loyalty whereby the issuing team or club gives the investor a cash coupon which is greater if cashed for merchandise or tickets.
Mini-bonds as a source of finance have been particularly successful with sports teams and clubs because of the strong and passionate support they have from their fans. Their database of several tens, if not hundreds, of thousands of fans and supporter act as a ready-made audience, who become the primary target for the test-marketing - which assesses the appetite for a mini-bond issue - and the ultimate issue of the mini-bonds.
Mini-bonds are not, and should never be presented as, a safe investment for an investor. They are usually structured as unsecured loans which are non-convertible, non-transferable and are not listed. Therefore, investors have little recourse against the issuer if the coupon is not paid when due. To encourage investors to invest in mini-bonds and accept the risk associated with them, issuers provide much higher coupon rates than those offered at UK high street banks. In addition, the denomination of the mini-bonds is kept relatively low to allow the investors to invest amounts that are not significant for them.
benefits of the mini-bond
From the issuing team or club's perspective, a mini-bond issue has several advantages:
- there is a huge amount of flexibility and room for creativity for the issuing team or club to decide the repayment terms and the manner in which it intends to pay its coupon - i.e. in cash or products or merchandise or tickets or a combination of them;
- the issue increases the general marketing profile and brand awareness of the issuing team or club;
- mini-bonds are significantly cheaper than other types of public funding, such as an equity or debt fundraise on the stock markets;
- as the mini-bonds are a form of debt for the issuing team or club, the shareholding is not diluted and there is no impact on its day-to-day running and management;
- even though the consent of any existing lender will no doubt be required before an issue of mini-bonds, because the mini-bonds tend to be unsecured, this tends to be straightforward; and
- the timeframe required for a mini-bond issue to 'go live' is short - typically four to five weeks - as the documentation involved is considerably lighter than other types of public issue and takes the form of an invitation document or an information memorandum.
While, as mentioned, mini-bond issues are flexible and relatively straight-forward, structuring advice will nevertheless be required, and regulations, designed to protect fans and supporters, need to be complied with. The rules are fairly light touch compared with other forms of public fundraising, but experienced legal advice should be taken.
The UK economy is improving and there are many ways available for teams and clubs to raise finance, but mini-bonds should not be viewed only as a fundraising tool, even if that is the underlying purpose for them. Their value in terms of marketing, advertising and as a means of aligning the interests of existing fans and supporters with those of the team should also be considered.