Banks and funds are increasingly turning to credit insurance to help them facilitate funding to football clubs across Europe’s top leagues.
As football clubs’ TV earnings and sponsorship rights continue to grow across Europe’s top divisions, teams have looked to institutional lenders to accelerate future trade receivables and cash flows through media and transfer financing. Access to these funds have allowed them to pursue their ambitions, ranging from player investment to stadium development. A bank lending money is hardly front-page news of course, but what has changed is the growing role played by the credit insurance market to enable banks and funds to do more business with football clubs.
Facilitating up front transfer fees
Aon has worked in the Sports Finance arena since 2014 and over that time we’ve been involved in over 100 transactions, working with football clubs and financiers to cover credit risk and improve finance covering player transfers, loans and media sponsorship. A typical deal involves a club selling a player to another club on deferred payment terms, which might be staged over two to three years. The seller would prefer to access the transfer fee up front, which is where the bank will come in and advance those funds to the club, taking assignment of the future receivables. To protect its own position and optimise the return, the bank will work with a credit insurer by procuring credit insurance to protect against non-payment by the buying club.
Another structure relates to the income football clubs receive from their respective league in relation to television and commercial rights. Again, by establishing a working capital facility with a funder, the club can access the capital up front, providing the bank with security over future media cash flows. As with the player transfers, the lender works with credit insurers to protect its own position in the event of a non-payment.
Freeing up banks to do more deals
Importantly, the use of credit insurance allows banks to provide more capital to clubs. Aon’s most recent C-Suite Series report – Driving growth through uncertain times which focuses on the role of credit insurance – highlights this objective saying that “banks that use insurance can put less capital aside against the finance extended, which increases their lending capacity.” The report further estimates that across all industry sectors, the amount of bank credit exposure being covered by credit insurance is $300 billion.
While available to corporates and banks alike, banks have a greater awareness of the benefits of credit insurance both in terms of pure risk mitigation but critically, from a capital optimisation and concentration risk standpoint. Where a funder has several facilities in place with one club for example, a bank may hit their internal counter party limit. By credit insuring a proportion of those facilities, the funder can cede some of that risk to an insurer on an unfunded basis, allowing them to free up internal headroom and facilitate additional business with that club.
From the insurance industry’s perspective, we’ve put a lot of effort into expanding the market in this space by getting insurers comfortable with supporting football related credit risk. This has been aided by a greater level of transparency in the football industry, brought on by UEFA’s Financial Fair Play Regulations and while a club’s standalone finances can look precarious, the default rates are low in comparison to other sectors. We’ve also seen instances where clubs have gone into administration only to come out the other side in a stronger state. The strength of these risks is evident when you consider that out of the more than 100 transactions we’ve been involved with, we’ve never encountered a loss.
Essentially our work as a credit risk professional advisor is to help both football clubs and funders mitigate payment risk but also facilitate the underlying trade in those big-name players you see dominating the back pages of the sports news. Funders can provide larger, longer term lending facilities to football clubs looking for additional liquidity allowing them to access capital and build that next title winning team. And while it is still a relatively niche area of financing, it’s growing fast and demonstrates the impact of applying innovative non-payment solutions to non-traditional sectors and asset classes.
Download a copy of Aon’s latest C-Suite Series report ‘Driving growth through uncertain times’