In April last year, 23 Capital chief executive Jason Traub said his boutique lender aimed to provide $20bn in financing across the sport, entertainment and music sectors in the five years from 2019 to 2023, becoming sport’s most aggressive lender in the process.
Traub wanted 23 Capital to be at “the cutting edge” of lending across the sectors, perhaps taking risks others wouldn’t in order to fuel the company’s exponential growth.
And it might have come to pass, if not for Covid-19. Instead, 23 Capital is winding down just a year on from funding nine-figure football transfers.
Traub – along with fellow directors Andrew Bray and Nick Gonella – officially stepped down from the company on July 24. According to Companies House, corporate services and fund management firm Intertrust took the reins on the same day.
Intertrust is now responsible for managing 23 Capital’s hefty loan book, headlined by a €100m-plus credit facility made available to Portuguese giants Benfica, a €96m loan to Atlético Madrid to cover the cost of João Félix’s transfer from Benfica, and a loan to FC Barcelona – thought to be €88m – to fund Antoine Griezmann’s move from Atlético.
Intertrust is already abreast of one of those loans. Back in 2018, the company was appointed as the security trustee (an entity that manages a debt on behalf of multiple parties) for Credit Suisse, Thomas Creek Capital and QBS Holdings – the three lenders from which 23 Capital borrowed in order to provide the €100m-plus non-recourse credit facility to Benfica.
The Financial Times reported that Traub, who headed up the company’s sport financing efforts, had ‘realigned’ 23 Capital’s borrowing arrangement with Credit Suisse and parted ways with his former business partner Stephen Duval, who headed up the lender’s music and entertainment business.
Experts in the football finance sector say that prior to Covid-19, late or missed payments on loans or credit facilities provided to clubs were almost unheard of.
The security provided by guaranteed broadcast rights payments, and the threat of sporting sanctions should transfer fees go unpaid, made football finance a golden balance of risk v reward for specialist lenders that could charge between five and ten per cent interest on credit to clubs.
That isn’t to say there wasn’t risk involved for lenders – as 23 Capital will attest.
Kieran Maguire, football finance expert and lecturer at Liverpool University, told SportBusiness: “The sense of security around broadcast payments wasn’t necessarily false. I think there was a false view that it could only head in one direction.
“The business of funding transfers is low volume, but high, high value. You only need one non-payment to cause what is ultimately a boutique institution to be very, very vulnerable.”
High risk, high reward
Traub is now understood to be in discussions with Credit Suisse over funding for a new football financing venture, implying his faith in the sector remains strong despite the challenges 23 Capital faced. Indeed, 23 Capital has been the only casualty in a sector that immediately kicked back into gear once football leagues and competitions restarted in May, June and July.
On June 29, English Premier League club Southampton struck an agreement with MSD UK Holdings Limited, a subsidiary of technology billionaire Michael Dell’s investment firm MSD Partners and a newcomer to football finance. Industry insiders say MSD is providing a credit facility of roughly £80m to the club at an interest rate of between nine and ten per cent – a rate considered unusually high for the sector, but representative of the risk MSD is taking.
MSD has also taken a debenture over Southampton’s assets as security for the loan, granting MSD the right to put Southampton into administration and recover its losses should the club fail to keep up repayments.
On July 29, fellow Premier League club Wolverhampton Wanderers struck an agreement with Australian investment bank Macquarie – a leading lender in the sector – which provides Wolves with up to £50m in credit. The credit facility is secured against the club’s broadcast income from February 2022 to January 2023 meaning that, should Wolves be unable to pay, Macquarie can reclaim the amount owed from Premier League broadcast rights payments received by Wolves during that period.
In addition, Leicester City (Macquarie), Sheffield United (Macquarie), Everton (Metro Bank; Rights and Media Funding), West Ham United (Rights and Media Funding), Watford (Barclays) and Derby County (MSD UK) have all borrowed against future broadcast rights income since professional football restarted.
This form of ‘receivables finance’ was a common arrangement before Covid-19. Clubs borrow large amounts at the beginning of a season to fund transfers and use broadcast rights payments staggered across the season to repay the loan(s).
23 Capital were also active in this market – the €100m plus loan to Benfica was secured against broadcast rights payments, while a £25m loan provided to Watford in 2018 was repaid with media rights fees received by the club.
For many clubs across Europe, the prevalence of borrowing money against receivables like broadcast rights, future transfer income, commercial income and even season ticket income means that it has almost become a prerequisite for clubs outside of Europe’s financial elite to be competitive in the transfer market.
As evidenced by the Premier League clubs borrowing against receivables this summer, it is mid-table clubs that are keenest to gain access to upfront finance in the top tier of English football. This is either to fund player acquisitions for the upcoming season or, in some cases, to protect against top six clubs taking advantage of tough economic circumstances and poaching players for less than market value.
“If clubs don’t invest in players, they increase the risk of relegation which in turn adds to their risk profile,” says Maguire. “They are between the frying pan and the fire. If they invest, they’re going to have to borrow money unless they have owners prepared to underwrite that investment, and many owners might be asset rich but cash poor following the pandemic.”
This practice has continued unabated post-shutdown, but both clubs and lenders are at greater risk due to the uncertainty surrounding a second wave of Covid-19 in Europe as well as a reduction in overall revenues at clubs.
Paul Tagg, senior director at Shawbrook Bank, has been active in the football finance sector since 2018, primarily funding transfers between English clubs. He told SportBusiness that while club demand for upfront cash has increased, the cost of borrowing has also increased due to increased risk for lenders.
“There are now greater pressures on financial stability given gate receipts are effectively zero and even broadcast rights income has been impacted,” Tagg said.
He continued: “We have seen an increase in inquiries, particularly since the transfer window has re-opened, and there appears to be plenty of transactions being completed. The shifting risks and fluctuating availability and cost of liquidity, particularly for non-bank lenders, has altered the dynamics of the market, including price. I suspect the range of pricing in the market has widened.”
For Premier League and English Football League-approved lenders like Shawbrook and Close Brothers, the risk has only slightly increased, if at all. To be a Premier League-approved lender, a company must be a deposit-taker in the UK – i.e. it must function as a bank, as opposed to specialist lenders such as 23 Capital, MSD UK or Rights and Media Funding.
Being an approved lender grants that entity a claim to being a ‘football creditor’ – meaning if a club it has loaned money to goes into administration, that entity is at the front of the queue alongside players, staff and other football clubs to claim what they are owed in full.
Richard Price, founder of specialist sports fundraiser New Century Finance, has worked with Close Brothers since the mid-2000s to provide credit to football and rugby clubs. He says that being a Premier League-approved lender added an extra layer of security for Close Brothers, enabling them to continue lending money throughout a crisis period without taking on greater risk.
“We don’t think risk has increased for us because the way we structure deals is quite robust from a credit point of view,” Price says. “Other funders don’t see it that way because they definitely take more risks.”
Close Brothers will lend no more than the value of a Premier League parachute payment – around £40m – to a club in any given season. This ensures the borrowing club has the means to repay the loan even if it is relegated from the league.
“Close Brothers have been great and have stuck with the business,” Price says. “A lot of my competitors pulled out of the market during lockdown, at a time when a lot of clubs were starting to experience cashflow problems.”
New Century Finance and Close Brothers provided over £50m worth of financing to English clubs throughout the shutdown of professional sport, much of which involved providing upfront cash to clubs secured against outstanding transfer instalments.
“Our deals are done at an interest rate of between 5.5 per cent and nine per cent,” Price says. “There are not many deals at nine and not many deals at five and a half, but plenty of deals at six and seven per cent, including our fee. For other lenders, that fee fluctuates depending on risk. Ours doesn’t.”
No sign of decline
Covid-19 may have delivered a sharp, unpleasant jolt to football and its financiers – as evidenced by 23 Capital’s winding down – but the sector looks set to grow in the coming years.
Football financiers remain upbeat about the future of the sector and believe that the part- and non-payment of broadcast rights from rights-holders to clubs this summer shouldn’t overshadow almost two decades of near-perfect performance.
“As a form of lending these structures will remain robust, accessible and relevant to the financial requirements of a football club,” says Tom Sheldon, senior partner at sports advisory firm Keith Harris & Partners and former head of high street bank Santander’s football finance department.
“From a credit perspective, receivables-backed financing structures in football have demonstrated a very strong track record in terms of loan performance. I’m not aware of a single default or impairment on contracted payments due under a player transfer deal.”
Sheldon cited the consistent commercial performance of top level of professional football and the introduction of Financial Fair Play – suspended for the 2020-21 season but otherwise still active – as strong indicators that, Covid-19 aside, football clubs will be good for the money they owe.
“Covid-19 has undoubtedly had an unprecedented impact upon the game, but it represents an exogenous shock to the system rather than market failure within the industry,” Sheldon says.
“Significant short-term challenges lie ahead but as the game returns to stadiums and screens I believe the long-term outlook for the market remains healthy. The availability of capital through relevant funding structures, including receivables financing, will be critical to help clubs navigate the present environment and secure future growth.”
Having been involved in financing transfers since the early 2000s at corporate bank Investec, it’s hard to imagine Traub will remain on the fringes of football finance for long given current market conditions. The FT reported that he will continue as a football financier under the 23 Capital name, focusing purely on providing capital to European football clubs.
As for the investors, banks, funds and holdings that provide capital for boutique lenders to distribute across the football industry, there will always be someone willing to provide credit to an experienced hand in the business.