Project financing examplified by stadium financing

Table of content

List of figures

List of abbreviations

1 Introduction
1.1 Problem definition and objective
1.2 Course of investigation

2 Theoretical background
2.1 Distinction between general corporate financing and project financing
2.2 Definition and application of project financing
2.3 Participants
2.4 Forms of financing
2.5 Risk management

3 Case studies of project financing
3.1 Arena Auf Schalke
3.2 Westfalenstadion

4 Critical discussion and recommendation

5 Conclusion and outlook

Bibliography

List of figures

Figure 1: The structure of general corporate financing

Figure 2: The structure of project financing

List of abbreviations

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1 Introduction

Within the professionalization of the football business in Germany clubs face more se- vere licensing standards defined by the Deutsche Fußball Liga (DFL). This includes infrastructural adjustments of stadiums as well as training grounds. Especially hosting the World Cup in 2006 introduced a modernisation of stadiums in Germany through the DFL and challenged clubs in terms of stadium financing.¹ In Brazil the World Cup in 2014 and the recently finished Olympics in 2016 caused infrastructural adjustments in the hosting cities as well.

Even before the World Cup in 2006, German clubs tried to increase their revenue through the prosperous potential in the business of football and therefore improved their facilities to stay competitive.² Clubs turned from non-profit associations to growing business enterprises. Initially the club´s income were generated by ticket sales and merchandising revenues. Today sponsoring or TV revenues are part of the financial strategy as well as investments.³ The reason for this is that competition and financial requirements concerning sporting success increase continuously.⁴

This illustrates the new TV deal of the Bundesliga. As of 2017, public broadcasters pay 85 per cent more for television rights compared to the old contract.⁵ That extra money flows directly to the clubs. In addition in 2016 the stadium attendance doubled compared to 1990.⁶ To benefit from the growing popularity of football clubs have to be financially prepared to meet the new requirements. Hence appropriate financial structures are indispensable for a professional modern football club.

1.1 Problem definition and objective

Clubs need financial concepts to realise player´s transfers as well as the improvement of facilities like the club´s stadium. The second will be explored with this term paper. Foremost project financing is used in terms of stadium financing and other major infra- structural projects. But what do the participants have to consider in financing major projects? In doing so, what is important to accomplish the fulfilment of the project and what issues can arise?

To answer these questions this work should give an insight into financing major projects exemplified by the stadium financing of FC Schalke 04 and Borussia Dortmund. In the course of this the main characteristics of project financing will be presented in detail. Also risks are displayed. The findings should lead to a recommendation of project financing for stadium financing.

1.2 Course of investigation

Following the introduction, the second chapter provides the theoretical background on the subject of project financing. After distinguishing the fields of general corporate fi- nancing and project financing, this chapter will serve to the theoretical preparation of the case studies described in chapter three. This includes the definition of project financ- ing and answers the question of how project financing is applied. In addition the partici- pants and different financing forms are mentioned as well as the risk management.

Chapter three introduces two case studies of stadium financing. The projects of Schalke and Dortmund to build or rather modify their stadium are both described firstly and compared and analysed in terms of financing in chapter four afterwards. Finally chapter five gives an overall conclusion and recommendation as well as a brief outlook for further developments in project financing.

2 Theoretical background

To provide basic knowledge of project financing, this chapter distinct between general corporate financing and project financing. Beside similarities and interfaces the main differences are highlighted. Afterwards the definition and application of project financ- ing follow. After identifying the main participants in project financing typical forms of financing in projects are illustrated as well as forms of financing and risk management.

2.1 Distinction between general corporate financing and project financing

General corporate financing describes the financing of an investment through the combination of debt and equity as illustrated in figure 1. Money is raised by private equity, bank loans or debt capital from outside creditors.⁷ In the course of conventional financing of an investment the debt service is ensured through all corporate earnings.⁸ Basically all assets of a company serve as a security.

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Figure 1: The structure of general corporate financing

Source: Referring to Backhaus, K., et al., 1993, p. 532.

Within general corporate financing bank loans and bonds are served thereby. These securities might result in risk reducing diversification effects.⁹ But general corporate financing has immediate effect on the balancing. The future ability to borrow money is restricted due to the reduced financial performance.¹⁰

In contrast project financing is independent within entrepreneurial activities. To finance an investment via project financing a project enterprise is established.¹¹ As a result the liability of shareholders in a project enterprise is limited to their equity share. Outside creditors cannot fall back on shareholders directly. But under special conditions it is possible. E. g. shareholders bear liability temporarily and in terms of their equity amount.¹² As shown in figure 2 project financing is executed through sponsors and fi- nancial institutes. Since equity providers do not have to record assets and liabilities of the project corporation in their balance sheets, project financing is considered as off- balance-sheet-financing.¹³

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Figure 2: The structure of project financing

Source: Referring to Backhaus, K., et al., 1993, p. 532.

Both corporate and project financing use similar resources to acquire money. Hence the participants in project financing are similar as well. But in terms of balancing project financing is different. The participants of general corporate financing have to record all assets and liabilities on-balance. This results in a lower risk-bearing capacity and bank loans cause high costs if granted at all.¹⁴ Consequently projects with high financing vol- umes like the construction of stadiums are not representable by general corporate fi- nancing. The cash flow orientation distinguishes both financing methods.¹⁵ In addition project finance bank loans apply as secure as general corporate bank loans because de- fault rates improved and trend towards single-A ratings, differentiating project finance bank loans from lower rated corporate bank loans.¹⁶

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¹ Cf. Rebeggiani, L., et al., Finanzierung von Projekten, 2007, p. 1.

² Cf. Dobson, S., et al., Football economics, 2011, p. 6.

³ Cf. Schefczyk, M., Venture Capital und Private Equity, 2006, p. 123.

⁴ Cf. Horch, H.-D., Sportfinanzierung, 2002, pp. 7.

⁵ Cf. Handelsblatt, TV-Vertrag der DFL, 2016.

⁶ Cf. Kicker online, Zuschauerzahlen Bundesliga, 2016.

⁷ Cf. Moles, P., et al., Corporate finance, 2011, pp. 603.

⁸ Cf. Wiebusch, A., Großprojektfinanzierung, 2014, p. 49.

⁹ Cf. Wolf, B., et al., Projektfinanzierung, 2011, pp. 88.

¹⁰ Cf. Wiebusch, A., Großprojektfinanzierung, 2014, p. 49.

¹¹ Cf. Daube, D., et al., Private public partnerships, 2008, p. 378.

¹² Cf. Wolf, B., et al., Projektfinanzierung, 2011, pp. 88.

¹³ Cf. Jürgens, W. H., Projektfinanzierung, 1994, p. 5; Wolf, B., et al., Projektfinanzierung, 2011, p. 88.

¹⁴ Cf. Damodaran, A., Corporate finance, 2011, pp. 20.

¹⁵ Cf. Wiebusch, A., Großprojektfinanzierung, 2014, p. 49.

¹⁶ Cf. Moody´s, Bank loans, 2015.