One sector of the trade finance market which has seen pricing unaffected and deals on the increase is football. As the sport becomes more international and commercialised, more and more banks are realising the opportunities available by applying trade finance techniques to the transfer market, as Rupert Sayer finds out.
Been hit hard by market downturns? Can't find any buyers? Looking for safer options? Then try football - or soccer as some of us might call it. 'The football world is an emerging market which most banks have neglected,' says Albert Traunthaler, Director of Trade Finance at Deutsche Bank in Frankfurt. 'We are marketing this product quite aggressively.'
So are others. Singer and Friedlander set up a scheme in May 1996 called Transflo which is structured to help football clubs in the UK buy players. 'We've done near to 120 transactions since then,' claims Andrew Jones, Assistant Director at Singer and Friedlander in London. 'Some include foreign transfers.'
Transflo's birth came about when director Darrel Keyes started talking about football to a member of staff dealing with timber trading. They soon saw the opportunities to use trade finance techniques for football transfers. 'The whole thing took off and is very simple,' says Jones.
To recourse or not recourse?
But whereas Singer and Friedlander discounts transfer payments on a with-recourse basis, other market participants are willing to do deals on a non-recourse basis - as in a forfaiting transaction. Deutsche Bank, claims Traunthaler, has done during the last two years seven transfers on this basis, which involved football player exports from two European countries and one in Latin America. 'We also did one deal in November that we on-placed,' he says. 'It was pure football club risk, with no bank guarantees.'
Another German bank, DG Bank, has also joined the club. One of the most recent deals for the bank was selling Swiss national player, Murat Yakin, from VFB Stuttgart to Turkey's Feherbahce in August 1998.
'The two clubs had been talking for a while, but Yakin had to be registered in Turkey by August 1,' says Martin Broadhurst, Manager in the trade finance department of DG Bank in London. 'Then suddenly everything fell into place and we signed. Feherbahce had issued Dm10 million (US$5.5 million) in notes and these were guaranteed by Turkish banks Garanti and Ziraat. DG and a local Volksbank in Stuttgart put the deal together, got the documents and forfaited the deal. It's like a trade deal with no bills of lading, insurance certificates, and so on. The fees are no different from a normal trade financing really. These were based on Turkish bank and country risk. The deal is not conditional on the player's performance or the club's. Many might question whether this is trade finance, or if it is pre-finance or working capital, but we consider it to be trade finance.'
The differences compared to straightforward trade finance are not very great. There are no transport documents, bills of lading, certificates of insurance covering the freight of goods and so on, but beyond these small documentary issues, 'there is nothing here which is different to trade finance deals,' says Deutsche's Traunthaler. Most of the documentation is really the same too 'bank guarantees, letters of credit, promissory notes and so on. The only real difference is the negotiations with the football clubs. You need a lot more patience. Football clubs are not that aware of the trade finance business and on the other hand, the banks need to know the mechanics of the football world.'
Only the brave need apply
Despite the apparent safe opportunities such deals might offer banks, the business is not for the faint-hearted, according to Ray Webb, Director at Aon Trade Finance in London.
Aon offers non-recourse finance for transfers and then finds the best and willing banks for the deal. It has no less than Sir Geoff Hurst, scorer of three goals for England in the World Cup-winning squad of 1966, as a director of one of its subsidiaries as a spokesman with the UK Premiership clubs. 'Outside the top five Premiership clubs,' says Webb, 'the others are really losing money. As lending risks, few people would touch them. But with transfer deals, it is a different matter. If a club does not honour a transfer payment, it will have its licence taken away, so this is the last thing clubs will not pay. The rules covering the transfer of players are tough. The FA deems the upholding of transfer payments as very important. Money filters through to smaller clubs through the transfer system - especially if bigger clubs buy up through the lower ranks from lower divisions.'
On some occasions Aon might receive an enquiry from a marginal club where a bank is unwilling to offer finance. 'The bank might say no, so we will insure against insolvency and then the bank is happy,' says Webb. 'Adding credit enhancement like this is becoming increasingly common, as most clubs, as they stand, are not bankable.'
As football becomes more commercialised and increasingly a cross-border business, the opportunities for the use of trade finance techniques will increase. German clubs are catching up with UK counterparts and starting to list on the stock exchange; Dortmund and Bayern Munich will be among the first to list. Banks such as DG and Deutsche are aiming to use their experiences and relationships in the transfer business to get involved in the listings of these clubs and then hopefully increase their share of the transfer business. As DG Bank's Broadhurst says: 'It shows the limits and boundaries of forfaiting - it's not just for textile machinery!'
How forfaiting kicked off at Swindon Town
Peter Godwin (Head of Export Finance at Commerzbank's London branch), a lifelong supporter of Swindon Town, was invited to join the board of the footbal company in January 1995. Looking at the management accounts he spotted an item of income scheduled for July of nearly £300,000 (US$480,000). On enquiring as to the details, this item turned out to be the last instalment payable by Manchester City Football Club for Nicky Summerbee who was transferred in July 1994.
The immediate thought of discounting this receivable to enhance the inevitable mid-season tight cashflow was taken up by Godwin (then a Managing Director at WestMerchant Bank) with his forfaiting colleagues and the deal was done within a matter of days thanks to excellent co-operation between the two clubs, the Football Association (FA), the Football League and the bank on the relatively straigthforward documentation which effectively assigns the payment of the funds to the bank.
Without wishing to add more pain to long-suffering Manchester City supporters it is worth remebering that Man City, as a Premier League club who had recently carried out a successful rights issue of some £11 million, was a top class risk in footballing terms. From the Swindon perspective the ability to bring forward the payment enabled the club to fund the purchase of striker Peter Thorne from Blackburn Rovers.
'The forfaiting route has certainly been of help to Swindon,' says Godwin. 'Subsequent transfers of Norwegian international Jan Aage Fjortoft to Middlesborough, Northern Ireland midfielder Kevin Horlock to Manchester City and striker Wayne Allison to Huddersfield were all handled by the same method - the latter dealt with by Singer and Friedlander.
The forfaiting covers all of the instalments which are certain as to amount and time i.e., excludes payments whcih relate to such things as number of appearances, goals scored or being picked for an international - any of which may feature in a transfer deal. Payments in respect of transfers among the English clubs are closely monitored by the FA and League and failure to pay on time is the most serious sin a club can commit thus giving additional comfort to the forfaiters.
The downside of this is that the FA/League retain the right of set off in respect of any default situation so the forfaiter does have some risk on the selling club. Clearly the co-operation of the purchasing club is crucial and we did have a refusal from one club who felt that to enhance Swindon's cashflow could be disadvantageous to them in a tigth relegation battle. Fair point, I suppose!'
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