OREANDA-NEWS. July 07, 2015. 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
GBP156.5m class A2 secured fixed-rate notes due 2029: affirmed at 'BBB', Outlook Stable

The transaction is primarily a securitisation of ticket receipts from Arsenal Emirates Stadium (stadiumco), the home ground of The Arsenal Football Club plc (AFC) formed in 1886. However, 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.

The affirmation reflects Arsenal's solid financial performance at the AFC group level (with a strong net debt position) and stadiumco level (with ongoing large historical and projected debt service coverage ratios; DSCR), all underpinned by the club's popularity, stable management, increasing revenues, and favourable prospects for the team's performance. Given the stadiumco's significant reliance on the first team's performance, in addition to the notes benefiting from a guarantee from AFC (and, among others, security over its shares), Fitch also analyses the consolidated cash flows of the stadium and club. The stadiumco's performance (driven by ticket sales) is mainly affected by the first team's performance on the pitch and the club's popularity. It has constantly been strong, with the DSCR averaging 3.8x since 2007 and currently standing at 4.1x (as of March 2015).

KEY RATING DRIVERS
Industry Profile: Midrange

Operating Environment: Midrange
The English Premier League (EPL) is the most lucrative and followed football league in the world. The recently announced domestic TV rights amounted to GPB5.14bn for three seasons from 2016-17 (an increase of 70%). The distribution mechanics are 50% shared equally, with 25% based on performance and 25% based on TV appearances. The EPL introduced in 2013-14 a profitability and sustainability regulation (similar to the UEFA financial fair play rules) which effectively requires clubs to be profitable. 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 on players significantly more than the remaining 14 clubs. The league is also potentially exposed to discretionary spending.

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 First Division) 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.

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.

Company Profile: Midrange

Financial Performance: Stronger
For the year ending May 2014, performance was strong, with football revenues growing to GBP298.1m (by 23.6%, the fourth-highest in the EPL after Manchester United, Manchester City and Chelsea) and EBITDA to GBP62m (by 146%) largely as a result of the new three-year EPL broadcasting deal and new commercial contracts (full year impact of Emirates' new shirt sponsorship and stadium naming rights). Revenues have been growing strongly since FY06 at a compound annual growth rate of 10.7%. Fitch also views positively the consistent stadium sell-out record and significant (unrestricted) cash reserves available at the club level (GBP207.9m in FY14).

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 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.

Transparency: Stronger
AFC's operations are not viewed as complex and the insight to the underlying profitability of the club is deemed good.

Dependence on Operator: Weaker
Due to the nature of the business only a high-end football club such as today's AFC could guarantee sufficient attendance and revenue stream for the Emirates stadium.

Asset Quality: Midrange
The stadium is modern (completed in 2006) and well-maintained. With a capacity of 60,400, it is the second-largest stadium in the EPL behind Manchester Utd's 75,700. The secondary market for selling the stadium is very limited and it is a single site.

Debt Structure: Stronger

Debt Profile: Stronger
The notes are fixed and fully amortising and the debt service is flat. The debt profile is viewed commensurate with the industry/company risk profile.

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.

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 GBP350m in FY17 with wages to revenues fluctuating between 55% and 59%. Cash available for debt service DSCR is highly volatile due to the nature of the business but it is expected to fluctuate at around 1.5x at AFC level in line with previous reviews. Fitch has also run some sensitivities on wages (with wages to revenues at 64%) and revenues (with lower expectations), which demonstrate the-long term resilience of the servicing of the debt, mainly as a result of the large cash balance.

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.