As if further proof of the growing sophistication of sports law in the UK were needed, it took another large step forward with the first football club securitisation deal to finance Newcastle United's redevelopment of its stadium, St James' Park.
The deal, valued at £55m and repayable over 17 years, will pay for the club to expand its capacity from 36,000 to 51,000.
Securitisation (the issue of bonds backed by future revenue) of mortgages and other forms of debt has been around for several years. The principle has more recently been extended as a financing tool against future revenue for businesses such as motorway service stations, pubs, nursing homes and theme parks.
But Newcastle's deal is the first such arrangement conducted by a British football club to be based on future match-day receipts.
Concluded in October, it has several benefits for the club over more traditional bank lending or stock market financing. It guarantees a fixed interest rate for the duration of the loan and the requirements of the lender (the bond issuing company) are less onerous on the day-to-day running of the business than a bank loan would be. It is also potentially cheaper.
And, although it does not help Newcastle United much because it is already a fully-listed company, Stock Exchange reporting requirements are less stringent for bond issues than for share issues.
The other advantage for Newcastle is that repayments are based only on future gate receipts and corporate hospitality, not income from television rights or sponsorship, leaving these revenue streams free to finance the business or act as security to any future debt arrangements.
Although under UK insolvency law the financing company can take control of the club in the event of default, this also has the advantage that the bonds achieve a better credit rating if security is held over a wide range of assets. And the better the credit rating, the cheaper the debt is to finance.
Michael Smith, banking partner at Ashurst Morris Crisp, considers that the Newcastle securitisation may be the beginning of a trend for sporting clubs and organisations.
"The brand of sports businesses makes sports receivables an ideal candidate for this form of financing," he says. "Securitisation is not a magic trick but it is a financing tool that enables such businesses to make the most of their inherent resilience."
So why has everyone else not done it? After the Taylor Report that followed the Hillsborough disaster in 1989, Britain's top football clubs have embarked on a wave of stadium redevelopments or building new grounds.
Until recently, several methods have been employed to finance this redevelopment, in particular stock market flotations or debenture schemes sold to fans.
However, the former is now less of an option as football clubs have fallen out of favour with the stock market and their share prices have fallen. Newcastle United, incidentally, undertook not to raise money for re-development by a rights issue at the time of its stock market debut in 1997.
"The stock market tends to ignore companies with predictable rather than explosive revenues because it equates them with low growth," Smith points out. "But the use of securitisation has alerted people to the value of such predictability."
Debentures, which were employed by Arsenal and West Ham United among others, have proved unpopular with supporters and tend to be under-subscribed. The issue caused noisy protests at West Ham and the underwriter of the Arsenal scheme, the Royal Bank of Scotland, had to take many unsold bonds onto its books (although they have since been sold and now trade above their original value).
It is unsurprising, therefore, that football clubs are looking for more innovative forms of financing.
But a securitisation arrangement is not necessarily an achievable solution for many
football clubs. The potential issuer of the bonds that finance a securitisation deal wants to see a steady stream of income over the life of the debt and for the bonds to achieve an investment-grade rating. So do the investment rating agencies. As a result, a certain set of criteria must be in place before a bond issue becomes a realistic option.
The first of these criteria is a recognised brand name, a test that Newcastle United clearly passes, particularly among its 'client-base'
in the north-east. The credit rating agencies also want to see a company's performance throughout lean times (of which Newcastle has had a few, not least this season) – another test the club passes.
The investment bank behind the deal, Schroders, estimates that Newcastle's gate receipts would have failed to service the loan on only two periods in its 103-year history – during World War I and World War II, when little competitive football was played – and that for the club to default on the payments would require "the end of football as we presently know it".
A further stipulation is that the market in which the company operates has high barriers to entry, clearly the case in terms of professional football, whatever the precedents set by Wimbledon FC, which rose from non-league, semi-professional status to the Premiership in less than 20 years.
Fortunately for Newcastle, it does not take into account the fact the barriers to exit (such as relegation) are somewhat lower. The rating agencies also want evidence that an organisation can withstand a change in management, something that Newcastle has provided ample confirmation of in past years.
The final criteria – insulation from 'event risk' – refers to the likelihood of the company's product becoming obsolete, unlikely in the case of football, rather than one-off events such as relegation.
Overseas, Italian clubs have entered into similar arrangements. Lazio's is based on players, Fiorentina's on gate receipts over 15 years. In Spain, Real Madrid (the most indebted football club on the planet) arranged finance on the back of its intellectual property rights on the club's logo and sponsorship income.
But given the stringency of the criteria, only a few obvious candidates stand out in England – Manchester United, Arsenal, Chelsea and Liverpool and, in Scotland, Rangers and Celtic.
However, other unorthodox financing deals are under way in the UK. "Sports law on the corporate side is becoming more innovative," says Andrew Price, head of the sports group at Dibb Lupton Alsop, which together with Clifford Chance and Barclays Bank's advisers, Dickinson Dees, put the Newcastle deal together.
Price has completed two deals for Premiership clubs (and is working on three others) that are effectively 'sale and lease-back' arrangements for players, along the lines of what happens in Chile, where some clubs' players are 'owned' by a company in Argentina and, in effect, hired back to their teams. It was also rumoured last year that Nike would buy Ronaldo's registration in the same way.
Unfortunately, Price will not name the English clubs involved. But he does see this type of arrangement as indicative of the flexibility that will be increasingly required for clubs to finance their development now that the stock market has lost interest in the sector.
"It is two years since the last football flotation and the equity markets have not recently looked favourably on football clubs," he says.
"Equally, there is not a lot of private equity money around for them either. They therefore need innovative, debt-based financing schemes.
"Newcastle could enter into a securitisation deal because it has the 'comfort factor' of 30,000 season ticket holders, but other clubs may try to establish a security profile to match their borrowing profile – for example, short-term loans against their players, long-term against their future receipts or stadium."
But even if securitisation is suitable for the majority of football clubs, or other sports, it does have another potential use – sporting arenas.
The number one candidate in this respect is the new national stadium to be built at Wembley. It passes a number of the criteria tests, except that cashflows for a stadium where future events are less easy to predict cannot be guaranteed in the same way as a football club.
However, the Stade de France in northern Paris, which hosted the 1998 World Cup Final, was financed by a securitisation deal, although the Millennium Stadium in Cardiff (which, like Wembley, was partially funded by National Lottery money) was not.
The French deal, arranged by Credit Suisse First Boston, was secured on income from its contracts with the French Government and the French football and rugby associations. The bond issue (which achieved an AAA investment rating) was fully subscribed within 15 minutes of its launch.
The Stade de France's future cashflow was, however, better guaranteed by the fact that the French stadium was due to host the World Cup. If Wembley is to benefit from the advantages offered by securitised financing, its owners had better hope that England wins its bid to host the 2006 World Cup.