Football finance: the 'Cristiano Ronaldo' bond
19 February 2019
Juventus Football Club, winner of the last seven consecutive titles in Italian Serie A, recently announced the placement of a corporate bond for €175 million to institutional investors such as large banks and funds. The bond offered a coupon rate equal to 3.375% and 5-year maturity and the sale to institutional investors, mainly from Europe and Asia, was managed by Morgan Stanley and UBI Banca SpA.
The yield of the bond, i.e. the return that an investor realises on the bond, was equal to 3.5% and overall demand, €250 million, was only 50% more than the final deal size* ; the higher the demand of the bond, with respect to what it is offered to the market, the lower the yield is.
Companies usually issue corporate bonds to raise funding and use the borrowed money to improve their business activities and investment plans. It is not the first time that a football club has issued a bond, for instance, Manchester United issued a £500 million bond in 2010 and Inter Milan in 2017, for a total equal to €300 million. However, issuing bonds is not a common practice in the sport, as investors prefer more predictable future cash flows offered by other industries.
The ‘Ronaldo’ bond?
At a first glance, you might think that the bond was issued to finance the purchase of Cristiano Ronaldo; indeed, in July 2019, Real Madrid accepted an offer equal to €100 million made by the ‘Bianconeri’ for the player.
However, there is more to it than that, issuance of a bond allows the Club to expand its investor base and attract international investors.
According to Marco Re, Chief Financial Officer of Juventus,
“the aim of the bond is to provide additional resources for our business activities by optimising our debt structure and extending the debt maturity at competitive costs”
In essence, it will allow Juventus to diversify its funding sources, re-finance current debt, and change the average maturity of the debt. Indeed, the proceeds received from the ‘Ronaldo bond’ will be partially used to repay the Club’s current debt.
Has the bond also been issued to help with buying other new players? While it is possible that other famous players will join the club, it would not be advisable for these transfers to be financed with the cash obtained from the ‘Ronaldo bond’. Indeed, the level of indebtedness of the Club has reached its peak in this recent history; for example, the credit risk of Juventus has recently increased, raising to a 4-5% probability of default over a 5-year horizon and investors have to pay a market premium of circa 2% in order to get insurance for such risk. Hence, the same investors would not be happy to know that the Club is using their money in a non-sustainable way.
Has it had the intended impact?
Following two weeks of speculation, the purchase of Ronaldo was announced on 10 July 2018 and an upward trend in Juventus’ stock price was seen, 0.80 Euros to 1.40 Euros, from that month.
Despite the positive impact on stock price, possibly due to new revenues the Ronaldo brand could bring to the club, the price of the bond is lower than comparable corporate bonds in the market.
While the Club revenues are set to increase in the next 5 years, the overall profits and losses are forecast to only be positive again in 2021-2022. In addition, the net debt position is 3.5 times higher than the earnings before interest, taxes, depreciation, and amortisation (Ebitda) and more debt could potentially threaten Juventus’ financial sustainability.
Ronaldo might be the king among football players, but cash and financial fundamentals are still the king for financial market instruments. Financial stability is an ongoing battle and the long-term impact and success is still to be seen – they think it’s all over…it isn’t yet!
Juventus.com, 13.02.19, ‘Placement of a bond of 175 million’
Bloomberg, 13.02.19, ‘Cristiano Ronaldo’s star fails to attract bond investors to Juventus’
Bloomberg, 12.02.19, ‘Cristiano Ronaldo’s Juventus is said to plan debut bond offering’
Football SpA, 14.02.19, ‘Juventus, what is the 175 million bond worth?’