The day after Islington Borough Council approved the Emirates Stadium traffic scheme Arsenal provided details of the much heralded refinancing of the debt taken on to finance the new stadium, writes Nigel Phillips.
To recap, the stadium is costing about £360m of which Arsenal have borrowed £260m. The balance has been provided by Arsenal from its own resources including the Emirates sponsorship money received in advance and also the additional £30m paid by ITV plc in March 2005 when it increased its shareholding from 5% to 9.99%. The existing stadium loan was provided by six banks and was a classic project finance structure with all the inherent risks including stadium completion. These banks were the only ones willing to financially support the project and it should be remembered that work was halted on the site for 8 months in 2003 when it was proving difficult to get all the necessary funding in place. Consequently the loans currently in place are “expensive” and Arsenal have always had the intention to refinance them once the stadium was completed and ready for use.
Interest rate swaps have been taken out to fix the interest rate payable on the existing loan which is due to be repaid by 2017. Arsenal will repay the banks early from funds generated from a soon to be launched £210m 22 year guaranteed bond and a 6 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 investors such pension funds, banks and professional investors. The investors are not however buying “Arsenal risk” as the debt has been guaranteed by AMBAC, a triple A rated monoline insurer. This insurance” wrap” has a cost to Arsenal but has raised the credit rating of the issue from BBB / BBB- to the AAA rating demanded by many investors and will lower the interest rate payable.
The Arsenal bond is primarily a securitisation of ticket receipts but also benefits from guarantees from and security over other assets of the wider Arsenal group. Details of the additional security are not yet in the public domain.
What we do not know at this time is the all in interest cost of the new debt as this will be “set” by the investors. This will be known within the next few weeks. We do know the benchmarks against which the interest will be set and also that the rate will be considerably lower than the rates currently payable. By extending the maturity of the debt by 11 years and lowering the interest rate Arsenal’s annual debt service obligations (principal and interest) could be as much as £6m lower than at present.
There is a cost to this refinancing as disclosed in the interim accounts for the six months to 30th November 2005 published in February. At this stage Arsenal expected to have to make an exceptional charge of £27m in connection with this refinancing. This charge relates to costs associated with breaking the interest rate agreements currently in place to fix the interest rate payable, a redemption fee payable to existing lenders and also writing off costs associated with putting the original loan in place. Whilst not individually disclosed I estimate these to be a £17m cash charge for breaking the interest rate swap, a £3m cash redemption fee on the existing loan and a £7m accounting charge for the unamortized costs of putting the original loan in place. This charge is a mixture of cash outflow and also an accountancy charge.
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.