OREANDA-NEWS. Fitch Ratings has affirmed Arsenal Securities plc's notes, as follows:

GBP50.0m class A1 secured floating-rate notes due 2031: affirmed at 'BBB', Outlook Stable

GBP148.8m class A2 secured fixed-rate notes due 2029: affirmed at 'BBB', Outlook Stable

The affirmation reflects the solid financial performance at Arsenal Football Club plc (AFC) level with low net debt and unchanged average projected free cash flow debt service coverage ratios (DSCRs) of just over 1.5x under Fitch's base case. Fitch analyses the consolidated cash flows of the stadium and club as the Arsenal Emirates Stadium's (stadiumco) is significantly dependent on the club's performance. The notes also benefits from a guarantee from the club, and, among others, security over its shares.

The club's success, finishing second in the English Premier League (EPL) in 2015-16, is underpinned by its popularity, stable management, modern stadium, increasing commercial and broadcasting revenues, and favourable prospects for the team's performance. Stadiumco's performance driven by ticket sales has also been strong with average attendance close to full capacity and a DSCR currently standing at 3.9x, averaging 3.8x since 2007.

There are potentially some US peers but any direct comparison is difficult as the key US sport leagues are structurally different and more creditor friendly than the EPL (e. g. no relegation possible, different TV rights distribution, wages cap). Boston Celtics (Basketball) and NY Football Giants (American football) are both rated 'BBB-'. These two clubs are marginally smaller than Arsenal with lower revenues and less global brand. Their leverage is also higher, notably for Boston Celtics. In light of these credit characteristics, Arsenal's stronger debt structure warrants a one-notch higher rating.

The transaction is primarily a securitisation of ticket receipts from Arsenal Emirates Stadium, the home ground of AFC formed in 1886. The structure also benefits from charges and security over other income streams and the assets of the wider AFC group and as such represents more of a whole business securitisation.

KEY RATING DRIVERS (KRD)

KRD Industry Profile: Midrange

Sub-KRD Operating Environment: Midrange

The EPL is the most lucrative and followed football league in the world. The domestic TV rights will amount to GPB5.14bn for three seasons from 2016-17 (an increase of 70%) and the international TV rights GBP3.2bn (+50%). The distribution mechanics are 50% shared equally, with 25% based on performance and 25% based on TV appearances. The EPL introduced a profitability and sustainability regulation in 2013-14 (similar to the UEFA financial fair play rules), which effectively requires clubs to be profitable but the effectiveness and enforcement of these rules remain uncertain.

It is a relatively competitive league, although the key top four positions (allowing qualification to the cash generative European Champions League) often consist of the same teams due to the top six clubs earning and hence spending significantly more on players than the remaining 14 clubs. The league is also potentially exposed to discretionary spending.

Sub-KRD Barriers to Entry: Stronger

To access the EPL, the football clubs need effectively to be among the 20 best clubs in the country, with three teams being relegated and promoted to and from a lower division (the Championship) each year. To quickly own a competitive football club, a new joiner would typically need to buy an existing team from the EPL or a lower division at a high cost.

Sub-KRD Sustainability: Stronger

England is the birthplace of football, the most popular sport in the UK. The English football league has been in existence since 1888, with the current EPL formed in 1992 following a break away from the football league. Revenues generated by the league are expected to continue to rise.

KRD Company Profile: Midrange

Sub-KRD Financial Performance: Stronger

For the year ending May 2015, performance was strong, with football revenues growing by 10.2% to GBP328.5m, the fourth-highest in the EPL after Manchester United, Manchester City and Chelsea while EBITDA was up 3.6% to GBP64.2m. Revenues have been growing strongly since FY06 at a compound annual growth rate of 9.6%. Fitch also views positively the consistent stadium sell-out record and significant cash reserves available at the club level. In FY15 these were GBP228.2m and did not fall much below the GBP150m mark during the year.

Sub-KRD Company Operations: Midrange

AFC is viewed as one of the best well-run football clubs, having won 13 EPL titles and 12 FA Cups. Since the arrival of the current manager, Arsene Wenger, at the beginning of the 1996-97 season, the club has always finished in the critical top four (qualifying for UEFA Champions League football). The club benefits from a very strong brand. Management has been relatively stable. However, there is key man risk with regard to the manager under contract until only 2017. There are also some concentration risks with regard to the revenues, with a large portion being dependent on a few key contracts, notably the broadcasting TV rights (from Sky; BBB-/Stable, and BT; BBB+/Stable) and sponsoring contracts from Puma and Emirates.

Sub-KRD Transparency: Stronger

We do not view AFC's operations as complex and deem the insight to the underlying profitability of the club good.

Sub-KRD Dependence on Operator: Weaker

Due to the nature of the industry, only a high-end football club such as today's AFC could guarantee sufficient attendance and revenue stream for the Emirates stadium.

Sub-KRD Asset Quality: Midrange

Completed in 2006, the stadium is modern and well-maintained. With a capacity of 60,400, it is the second-largest stadium in the EPL behind Manchester United's 75,700. The secondary market for selling the stadium is very limited and it is a single site.

KRD Debt Structure: Stronger

Sub-KRD Debt Profile: Stronger

The notes are fixed and fully amortising and the debt service is flat. We view the debt profile as commensurate with the industry/company risk profile.

Sub-KRD Security Package: Stronger

The notes benefit from a strong security package with first ranking fixed and qualifying floating charges over the issuer's rights, all the assets and undertakings of the issuer. The secured property includes among other things the leasehold and freehold land at Ashburton Grove, London (including Emirates Stadium) and the freehold title to the training ground as well as assignments of net ticket revenues (minus appearance fee payable to AFC). Furthermore, there is a qualifying floating charge over AFC's assets and security over shares in AFC.

Sub-KRD Structural Features: Midrange

The structural features consist of a good range of financial and operational covenants down to the operations of the club. However, the dividend lock out provisions are essentially limited to forward-looking covenants (working capital test at AFC level) or are only linked to the performance of the stadiumco financing and not of the consolidated group (viewed as critical). The transaction benefits from a large liquidity facility covering 18 months debt service. The issuer is included in the wider VAT group and as such is not a bankruptcy remote vehicle. However, there is an independent director at the issuer level.

The notes benefit from an unconditional and irrevocable guarantee from Ambac Assurance UK Limited (Ambac) in respect of timely payments of interest and timely repayment of principal according to the schedule. However, the ratings reflect the underlying ratings of the transaction without credit given to the financial guarantee from Ambac, following Fitch's withdrawal of Ambac's Insurer Financial Strength rating on 26 June 2008.

Debt Service

Under its base case, Fitch expects revenues to continue to grow beyond GBP380m in FY18 with wages to revenues fluctuating between 55% and 62%. Cash available for debt service DSCR is highly volatile due to the nature of the business with fluctuations in player costs but it is expected to fluctuate at around 1.5x at AFC level in line with previous reviews. Fitch has also run some sensitivities notably with wages to revenues at FY13 peak of 64% and no Champions league revenues, which, supported by the large cash balance, demonstrate the long-term resilience of the debt servicing. Currently, the club's wages could reduce by around 15% and Arsenal would still expect to remain a top four EPL spender in wages, underpinning the likelihood of finishing in the critical top four position.

RATING SENSITIVITIES

Failure to qualify for the UEFA Champions League combined with a worsening in net cash position at AFC group level and/or a wage ratio of consistently around 70% or higher may result in negative rating action. An upgrade is currently unlikely.