New stadium, debt re-financing and the EGM

Nigel Phillips of the Arsenal Shareholders Trust writes: To partially fund the construction of the new £357m stadium project Arsenal signed a 13 year £260m project finance loan with six banks during 2004. The interest rate payable on this loan reflects the construction risk that was inherent for this type of project when the loan was signed. (Just look at Wembley!).

The interest on this loan has not been paid so far but “capitalised” and added to the outstanding loan. The average fixed interest rate payable on this loan is 7.4% pa. Arsenal have funded the balance of the costs from its own resources, namely sponsorship money received from Emirates and Nike and also the additional £30m paid by ITV plc in March 2005 when it increased its shareholding from 5% to 9.99%.

The Refinancing

As the construction of the stadium is complete and it is ready for use Arsenal are in the process of refinancing the “expensive” debt with longer term money primarily secured against the revenue from the stadium. This refinancing has always been Arsenal\’s intention and it is set to be completed by the end of July. .

Arsenal will repay the banks early from funds generated from a soon to be launched £210m 22 year guaranteed bond and a 7 year £50m floating rate note (FRN). The FRN has a shorter term to match expected revenue from the Highbury redevelopment. These instruments, to be issued by Arsenal Securities plc (a newly created special purpose company), will be bought by predominately UK based investors such pension funds, banks and professional investors.

This finance deal is however very different to the ticket receivables transactions undertaken by clubs like Leeds and Leicester which ultimately saw the lenders lose money. The £260m Arsenal bond has been insured by an insurance company, Ambac Assurance UK Limited, which provides the debt with the very highest AAA credit rating.

Lenders / investors can look to this insurance rather than pure “Arsenal” risk which has been rated at a much lower BBB / BBB minus credit rating if Arsenal fail to make the repayments.

There is a cost for this insurance “wrap” but this is more than compensated by the lower interest rate payable on the bond. The rate on the £210m long term portion is to be fixed at about 5.6% pa whilst the rate of the FRN is variable but initially at about 4.75% pa. The combination of the lower interest rate and the longer maturity of the loans is estimated to reduce annual debt service charges by at least £10m pa.

Additional Security Whilst the bond is primarily a facility backed by future ticket sales its structure has been enhanced to make it more attractive to investors and subsequently lower the interest rate payable. The enhancements include:

* A working capital test, a twice a year look at the forecast three year net cash position of Arsenal

* Restrictions on future borrowings

* Agreements on minimum spend of proceeds from player disposals

* A charge over Arsenal\’s football assets

* Security over shares in Arsenal Football Club plc, the principal asset of the quoted entity Arsenal Holdings plc.

Whilst the working capital test is complex in its construction and monitoring it is designed to ensure Arsenal is run in a financially prudent way whilst this debt is outstanding. If Arsenal want to substantially increase its expenditure on players for example it must be done from cash generated from within the Club, a new injection of cash from outside and not from additional borrowings.

Extraordinary General Meeting (EGM) – 21 July 2006

The 1,650 shareholders of Arsenal Holdings plc have been invited to an EGM to be held at Highbury to approve the security arrangements necessary to finalise the transaction. It is proposed that Arsenal (AFC Holdings) Ltd, a newly created company and a subsidiary of Arsenal Holdings plc, becomes the owner of the football club and grants security to the lenders by way of a “first fixed charge” over all of the issued shares in the football club.

This resolution will be approved as the Directors, who own 62% of the shares in issue, have recommended shareholders approve the resolution and along with ITV\’s shareholding and other “family and friends” the 75% required will be achieved. This resolution means that in the event that future ticket receivables are not sufficient to meet repayments the secured creditors can take control of Arsenal. The Highbury stadium development is held outside of the security structure.

The Future Arsenal will become very familiar with Ambac, the insurance provider who are described as the “controlling creditor” as twice a year Arsenal\’s three season forward net cash position is forecast based on various assumptions to be agreed by Arsenal and Ambac.

At current levels of FAPL and Champions League achievement forecast debt repayments of about £20m pa can be met very easily. Even under various mid table and even relegation scenarios debt service is forecast to be achievable albeit with drawings on Arsenal\’s other banking facilities.

What should not also be overlooked is that over 40% of forecast matchday revenues are set to come from the 9,000 premium priced seats and maintaining this level of sales year after year will be of utmost importance to Arsenal in the years to come.

Summary

The money has been borrowed and spent to construct the new stadium. Arsenal are now putting this debt onto a longer term basis. To secure the most advantageous terms Arsenal have had to provide a complex and comprehensive security package including a pledge over the shares of the whole football club.

A suitable analogy would be the mortgage a bank or building society has over a residential property. In extreme circumstances the lender can repossess the property. This is not to dissimilar to the position now of Ambac, Arsenal\’s new “controlling creditor”.

If you have any comments on the refinancing please get in contact with the Arsenal Supporters Trust at info@arsenaltrust.org or on 07709 718545.