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As billions watch the ongoing 2024 Summer Olympics in Paris, the world is reminded that sports are an indelible part of our social fabric. Beyond amplifying the importance of physical and mental wellbeing, athletic achievement brings groups and communities together—and not solely as spectators supporting in the stands. Private markets participants are adding sports finance to their playbooks to fund stadium infrastructure, acquire clubs or teams, make investments backed by media rights and sponsorships, and more.

As investors increasingly allocate capital across private markets, evolving macro-credit and financial conditions may require a need for greater transparency. In this edition of Private Markets Monthly, Global Head of Private Markets Analytics Ruth Yang asks S&P Global Ratings' subject matter experts on project and structured finance why sports leagues are attracting private investment, how important individual club or team performance is for long-term cash flow compatibility, and what our ratings show about the future of stadium infrastructure.

This year has seen sports team and stadium finance solidify its shift in status from trophy asset to strategic investment, and particularly prominent and prodigious for private markets participants. What is driving the growth of private investment in the sports market?

Livia Vilela, Director of EMEA Infrastructure and Project Finance:  The global sports industry has exhibited remarkable resiliency since the pandemic paused play and left stadiums empty. To navigate the challenges created by the COVID-19 crisis during that time, professional sports franchises utilized existing cash, ownership equity, and significant league support, while arenas and stadiums developed contingency plans using cash reserves and revolving facilities.

The strategy to survive the shutdowns and subsequent slowdown was rewarded with significant support from sports fans—with a rebound in attendance and engagement that, combined with the strategic renewal of sponsorships and media rights, have played a crucial role in stabilizing the financial outlook for sports facilities.

Pablo Lutereau, Managing Director and Chief Analytical Officer for Global Infrastructure and Project Finance:  With the sports industry rebound in mind, different areas of sports finance have become more attractive to private investors, and less so to those in the public markets. Public markets feel more comfortable with history, predictability, and track records—which can be complicated to show long-term consistency in for sports team and stadium financing.

Darrell Purcell, Director of EMEA Structured Finance:  In typical structured finance transactions, such as residential mortgage-backed securities, investors can see years of historical data. But with sports like football (or soccer for the Americans reading), performance is also linked to the management of the clubs. Whether a team can successfully qualify for European competition or avoid relegation year after year can have a significant effect on the ongoing financial performance of that club, and, as such, increase the risks involved.

Greg Koniowka, Director and Lead Analyst for Infrastructure and Project Finance: 

Media rights and sponsorships have a different investor base than sports teams and stadiums, with the former being more private equity and the latter being predominantly wealthy individuals or public-private partnerships. The investors going into sports media rights are not largely those that are going to buy the clubs or build sports infrastructure, and are more likely to be focused on short- to medium-term investments with upside. Notably, more leagues are seeing private equity and venture capital, alongside other private markets participants like sovereign wealth funds, allocate their investments into the professional sports teams themselves—particularly where those investments are a growth play.

The Arsenal Emirates Stadium transaction is an example of the combined interest from both public and private investors in this space. Like most teams in the English Premier League, the Arsenal Football Club (AFC) has been in the hands of wealthy overseas investors for a number of years. However, the construction of its Emirates Stadium in central London was a project finance transaction, funded through a combination of bank debt and equity. Once completed, the stadium's debt was refinanced through the issuance of public debt backed by its ticket receipts for home matches and benefiting from several creditor protections, including security over substantially all of AFC's assets and a robust covenant package. In August 2020—with the effects from the lockdowns in the U.K. beginning to put pressure on both the operational and financial performance of the stadium, along with looming breaches of covenants—AFC was taken private and the public debt was redeemed.

Livia Vilela:  Overall, the last few years have shown that if a team has a strong fanbase, those people will spend and show their support as much as they can and want—and as such, the sector's resilience and rebound have strengthened the spotlight on the sports industry as an attractive investment for investors. And fan and corporate engagement is critical to continue the monetization of sports facilities. We're seeing stadiums and arenas originate project finance deals—all related to private funding—to reinvest in the fan experience, through technology and Wi-fi enhancements to facilitate connectivity; diversified and improved food and beverage offerings to fit changing tastes; and enhanced premium seating products to meet the requests of corporate or "VIP" partners.

How are sports projects financed, and what approach does S&P Global Ratings take in analyzing these transactions?

Darrell Purcell:  While sports clubs and leagues could certainly move to finance structures with their own money, their typical credit quality may lead them to look beyond their own balance sheets and low operating incomes to go into the capital markets or other sources of funding. Broadly, the performance of both sports teams on the pitch and the league overall highly influences long-term cash flow compatibility and the ability to repay creditors. But structured finance may offer a route to partially delink risk from the club, using the strength of their ticket sales and other sources of revenue--although some exposure to the business risk may remain.

The ability to do financing is different by region. In the U.S., leagues are closed and take more of a cash flow risk than the clubs/teams themselves; leagues also cap players' salaries, further adding to the long-term stability of a club's finances; and some municipal or local governments provide tax incentives for stadium financing in efforts of attracting or retaining sports teams for stadium financing. In Europe, cash flow stability is tied more directly to the clubs, where relegation from a top league may be a potential outcome.

Pablo Lutereau:  Project finance is typically suited for long-term secured financing for capital intensive assets that have a finite life. Creditor protections, in the form of both operational and financial covenants, help control the risk within the transaction and contractual arrangements are weighted against market exposures and growth expectations, which may increase cash flow volatility and may affect our view of the long-term stability of the transaction over the life of the project.

Darrell Purcell:  Our future flow criteria suits business lines with long histories and predictable cash flows, and may be used for certain sports securitization proposals. Subject to eligibility conditions, these criteria may allow for a limited differentiation from the credit risk of a sports club.

Livia Vilela:  S&P Global Ratings assigned the first public ratings in the U.S. for sports stadiums in August 2006, for the New York Yankees and New York Mets baseball teams. Now, we rate five sports and stadium project finance transactions across the U.S. and Europe, of which one is private. Our four public ratings are on: Jets Stadium Development (MetLife Stadium, NY/NJ), Queens Ballpark Co. (Citi Field, Major League Baseball's NY Mets), Louisville Arena Authority (Yum! Arena, Louisville, KY; Men's and Women's University and other events), and Inter Media and Communications (Inter Milan's media and sponsors' rights, Italy). Additionally, we rate Formula One (Delta Topco Ltd.) under our corporate criteria, reflecting the fact that it lacks the creditor projections and structural enhancements that we typically see in project finance.

The credit quality of sports-related financings is typically derived from the robustness of the fanbase and corporate partners—as well as of sponsorship, advertising, and media agreements, with a consistent track record of renewals.

Greg Koniowka:  Our ratings anticipate how stable or volatile the cash flows are going to be over the long term. When we look at sports finance transactions, we distinguish between the league's or club's top-line, including their contracted commercial arrangements (e.g. income from media rights and sponsorships), compensation for on-pitch performance (e.g. ticket sales and extra-league tournament play, such as the Champions League), and their credit positioning which can be weakened, primarily, through high player's salaries, including transfer fees.

The volatility or stability of the cash flows is key—and can vary in type and performance by sport, spanning more speculative player transfer fees, to potential high-growth media and sponsorship contracts, to tickets sales. Within financing agreements, risks regarding anything from relegation risk to financial fair play regulations can get in the middle, which may result in deals becoming less of a tale about growth and base-case cash flow generation and more of an assessment of the downside risks for an enterprise.

As private markets continue to grow along with their investment in sports and stadium deals, who/what is likely to emerge as winners and losers?

Darrell Purcell:  Football/soccer has been the focal point of proposals in Europe, unlike in the U.S., where sports stadium deals have covered various sports. Given the global reach of the top European clubs, we expect this to remain the case into the future. Despite technology and streaming allowing fans alternative access to watch matches, demand for the live stadium experience remains strong and we believe ticket sales will remain a significant revenue generator for clubs.

Greg Koniowka:  Ultimately, there is a virtuous (some may say viscous) circle between the fortunes of a sports team and its performance on the field. The risk appetites of investors will determine where capital is allocated and whether it's buying into a story of growth or one of stability. Either may be compelling, depending on the structure of the league and a team's revenue streams, profitability, and performance on the field.

Pablo Lutereau:  Private markets have taken an increasingly relevant place in sports assets and financing. Factors like sponsorship, media rights performance, and cash flows coming from premium sport properties have influenced investors' confidence in the strength of the revenue stream coming from the industry.

Certain opportunities may have risk profiles that are more attractive to private capital's investment strategies, rather than to public investment—and leverage has evolved and increased together with these trends. Trends aside, our ratings continue to put the focus on the stability and predictability of the cash flows and how different stresses may affect repayment capacity in the industry.

Writer: Molly Mintz