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When critiquing the financing of the Wembley Stadium project ii is important to analyse the financial instruments used. The main financial instrument used was a senior loan agreement. This consisted of a 13-20 year £426.5 million loan from the German bank WestLB to WNSL.
The long natured maturity of the loan arrangement used in the Wembley stadium project is a fundamental advantage to the project. Loans are usually more short-term agreements that are usually repaid in full over 5-10 years. Thus, the longer-term agreement is an advantage as it allows WNSL more time to generate significant cash flows due to lower repayments as they are spread over a longer time period. In terms of the range of financial instruments available, a loan agreement was chosen due to the possibility of re-financing.
Furthermore, the Wembley stadium project also used senior subordinated debt. Subordinated debt is a lower level type of debt that is considered to have a second claim on assets . In the case of the project defaulting, the financiers of the senior subordinated debt will claim the leftover assets once the outstanding amount of the senior loan has been settled. The senior subordinated debt consists of a £7 million loan from Credit Suisse. The arrangement was for the loan to be repaid in full when the senior loan was to be refinanced. The primary reason for selecting a senior subordinated debt facility is to increase flexibility and have greater sources of funds in case of delays or cash flow shortages. This is not considered to be a highly significant aspect of the financing, as it forms a relatively low fraction of the entire project finance structure. One main factor is that this debt facility has a higher interest rate than the senior debt facility. The interest rate amounts to approximately 2-4% higher than the senior debt facility and amounts to between 9.9558-11.9558%. The inclusion of a senior subordinated appears to be a sensible option as the project is considered to be a high-risk venture.
In addition, when analysing the reasons why a senior loan was used we must consider why other financial instruments were not used. An alternative method of external project finance is a bond issue. A bond issue can be advantageous given its long natured maturity and the possibility for gaining a lower interest rate. A bond issue has far greater flexibility than a loan facility. Flexibility was a key issue given the high-risk nature of the project. A bond issue was considered by The FA but was dismissed early during the inception phase of the project. A further factor that hampered the use of bonds was the unfavourable external market conditions. During 2001 there was a minor recession in the United States that severely affected the bond market and created a market where bonds were unpopular due to their low yield (Kubarych, 2004). Thus, given government involvement and high-risk nature of the project, it was felt that a bond issue was not a viable option.
Critique the structure and parties used –
A key part of any project is the financial structure used. One of the most crucial factors in a project is to create a right balance between the debt and equity within a project. Projects that employ a project finance structure typically have a debt-to-equity ratio of 90/10. This is often an attempt to transfer the risk from the project sponsor to the lenders. However, this is not the case in the Wembley Stadium project as it has a debt to equity ratio of 57/43. The project employs a greater amount of equity that is usually employed in project-financed schemes.
In terms of stadium projects there is an important distinction between projects that are public sector based and solely commercial activities. This is important as it affects the debt-to-equity ratio. It appears that projects with government support have a far lower debt-to-equity ratio than commercial stadiums. Despite this, Wembley stadium appears to have a higher amount of debt compared to other equivalent stadiums that have had government support. The project required substantial funding that exceeded the amount the UK government was willing to commit to. As a result, external financing was required. WestLB agreed to finance the full package as the lead arranger of the syndication. After the project became operational WestLB sold some of its debt held in the Wembley Stadium project to Barclays, RBS and Lloyds TSB.
Furthermore, the large amount of debt has been criticised and is seen as unmanageable due to the size of the loan large revenues are required to cover the interest and repayments. There have been substantial fears that the project may default on the loans (Grant, 2009). The FA also examined the possibility of issuing a bond in an attempt to re-finance the senior loan as it is considered to be “too expensive” (Gibson, 2011). The FA also admitted that the loan arrangement is a more “expensive financing solution” (Carter, 2002). This may suggest that the proportion of debt used in the project was too high and the project may have been better served to have a higher percentage of equity. If the FA invested more or the project was granted increased government funding, the level of debt required would have been lower. This would have potentially made the project more viable and decreased the level of interest and repayments. Despite this, the loan is beneficial for the project sponsor, as it acts as a mechanism of transferring the risk. As the senior loan facility is a non-recourse vehicle the lender only has the rights to claim assets of the special purpose vehicle. This is a method for substantially decreasing the exposure of risk to the FA. This is especially important for as the Wembley Stadium project was considered to be a high-risk project. One of the main reasons the FA was not willing to invest more equity in the project is that it did not want to limit investment in other opportunities in other projects.
A fundamental criticism of the Wembley Stadium project is the viability of the business model. The overambitious model is attributed to the reason for not being able to cope with the debt obligations. The proposed business model severely hindered the FA attempts in gaining finance at the start of the project. During the process of attempting to gain external financing WNSL twice failed to secure lending “principally because the business plan failed to provide and justify compelling long term bankable revenues capable of sustaining borrowings” (ISG, 2004). Lenders were also concerned with the overall viability of the business model, in particular with the overoptimistic and unrealistic revenue forecasts (Sale, 2001).
A key problem is the overreliance on the sales of premium seating. The number of premium seats was increased to maximise revenue inflows and is expected to form a high proportion of the total revenue (The House of Commons, 2004). The need for high revenues level is “demonstrated in projected figures showing the development’s reliance on corporate hospitality income” (Gledhill, 2000). A problem with this model is that it is very one-dimensional and inflexible and is highly dependent on one source of income. The recession may be viewed as a barrier that may severely affect WNSL’s ability to sell premium seating. This suggests that the economic climate is an important consideration and may be a reason why the project has not generated the high level of expected revenue and exhibits the fragility of the business model adopted. It also questions the accuracy of the forecasts and reflects the concerns from lenders that the “projected revenues for the stadium were significantly over-estimated” (Project Finance Magazine, 2002).
In addition, a key consideration in many projects is the types of parties and stakeholders involved. A stadium project often involves “trade-offs between the development, the range of facilities offered and overall affordability, which increasingly depends upon the success of turning a stadium into a year-round operation” (Langdon, 2004). The main parties involved are the FA, government, government agencies and WestLB bank. The FA is considered to be an appropriate project sponsor, as they are heavily involved in football and are the national governing body for football in England. The Government is an additional party involved. The role of the government is primarily through grants. The Government and government agencies have contributed to the project, as the project is for a new national stadium. The government was also used to add greater stability and credibility to the project, given the high-profile nature of the project.
However, the combination of the parties involved created greater possibilities for conflict of interests during the project. The Wembley stadium project encompasses an interesting mix of parties that have differing interests. A key conflict revolved around the idea of value for money (VFM). Any projects that include government funding must be VFM. The FA wanted greater government funding but “it was unacceptable to expend significant public money on assets of which a significant portion could then simply be lost” (Committee on Culture, Media and Sport, 2002). This created greater dimension to consider, further complicating an already highly complex contractual process. The inclusion of the government within the project meant that the FA was forced to consider the social benefit rather than simply focus on profit maximisation. This was mainly through having provisions included in the contract that involve investment in community sports projects, invest 1% of turnover into local sports projects and a commitment to redevelop the surrounding area and underground stations (House of Commons, 2004).
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