Article.

The future’s bright, the future is bonds!

07/01/2012

At a glance

Many football clubs have a passionate and loyal band of supporters who care deeply about the club that they support. Offering Retail Bonds to supporters (and others), enables fans to be directly involved in the growth and development of their club whilst receiving a return on their investment.

What are Retail Bonds?

The Retail Bonds are an unsecured debt of the issuing company (similar to an unsecured loan note). One of the great advantages of the Retail Bonds is their flexibility – subject to certain key legal terms, there is broad scope for the issuing company or club to decide their terms e.g. repayment terms, interest levels, and whether interest will be paid in cash or by way of products or services etc. For example, discounted season tickets or club merchandise could be offered as part of the interest coupon attaching to the Retail Bonds.

Many companies are experiencing a sustained period where bank lending has been difficult to obtain – at least on terms that are acceptable. Retail Bonds can be used as an alternative way of raising finance; either instead of bank lending or, more often, in addition to existing banking arrangements. In the latter case, the terms of existing banking arrangements will, no doubt, require that the bank’s consent is required to any further borrowing (which would include the Retail Bonds) but, given that the Retail Bonds are an unsecured debt, existing lenders tend to be supportive.

Some other benefits of raising funds by issuing Retail Bonds include:

*the ability to raise funds without incurring the

costs and delay associated with an issue of shares. Typically, from the point that advisers are engaged and the terms of the Retail Bonds agreed, to the point at which the Retail Bonds are offered to the public will be between six and eight weeks; and

*an increase of general marketing profile and brand awareness. The offering of the Retail Bonds will need to be advertised and carefully marketed and, with that, comes the benefit of raising the club’s profile in terms of its brand awareness and corporate identity.

Other companies who have carried out issues of Retail Bonds include The King of Shaves, Ecotricity, Hotel Chocolat, Caxton FX, and John Lewis.

Ultimately, the size of the database of potential subscribers for Retail Bonds will be an important factor in the success of Retail Bond issue. The database of fans, whether actual or simply the existence of an identifiable and receptive audience, which many football clubs have, is one which most commercial ventures would be highly envious of.

What are the key terms of the Retail Bonds?

For legal reasons, there are certain key characteristics which must be included in the terms of the Retail Bonds so as to avoid the need for the publication of a full prospectus to be published – which would significantly increase the amount of information required to be disclosed, and also the costs and timescales of an issue of Retail Bonds. The Retail Bonds cannot be traded on any market and must not be transferable. The Retail Bonds are not shares, and cannot convert into shares or other form of equity – which has the benefit that the Retail Bonds will not dilute existing shareholdings in the club, nor require shareholder approval.

The terms of the Retail Bonds will need to be set so as to be commercially attractive to potential subscribers and, therefore, the interest rate attaching to the Retail Bonds may need to be more attractive than can currently be commonly found at UK high street banks. To date, the rate of interest offered by companies who have carried out Retail Bond issues has been between 6% and 7.5% (gross) per annum.

Another key term will be the period of time before the Retail Bonds are repaid. Again, this can be decided by the issuing company and there is discretion as to what this term will be. Commonly, however, companies have chosen repayment terms of between 3 and 4 years. This can either be a fixed repayment date or, for example, an initial fixed term when the bondholder can redeem their Retail Bonds if they so choose and, after which, the Retail Bonds continue for further one year terms until redeemed.

What is the process involved?

The issuing company, with the help of its advisers, will prepare and publish an invitation document or information memorandum. The purpose of this document is to

explain to potential subscribers for the Retail Bonds the terms of the Retail Bonds themselves and provide information on the issuing company, club or its group of companies.

Essentially, the invitation document should contain enough information so as to enable potential subscribers for the Retail Bonds to make an informed decision as to whether they wish to apply for, and hold, Retail Bonds. Typically, this will include a letter from the chairman setting out the reasons why the company or club wishes to carry out the Retail Bond issue, what the funds raised will be used for, an explanation of the terms of the Retail Bonds themselves, and the risks associated with the Retail Bonds and the company or sector issuing the Retail Bonds. Financial information will also be included in the form of previous recent audited accounts and, depending on the reference date of those accounts, unaudited interim accounts. No financial forecasts are, however, made. An explanation of the application process will also be included in the invitation document together with a copy of the instrument creating the Retail Bonds.

The key statements in the invitation document (being the facts and information that potential investors are likely to consider important in deciding whether or not to apply for Retail

Bonds) will need to be supported or otherwise proven by reference to third party and other sources.

The invitation document and advertisements, and the offering of the Retail Bonds, will be a financial promotion under the Financial Services and Markets Act 2000. As such, these documents will need to be approved by a person authorised by the Financial Services Authority.The“authorisedperson”, in approving the documentation, will commonly require working capital projections to be prepared which will demonstrate the club’s ability to repay the Retail Bonds, and the interest accrued, as and when due. However, these projections are prepared for internal purposes and will not form part of the information made available to the public.

Many companies choose to use a primarily web-based application process, with the invitation document and application form being accessed via a sub-page of their website.

The success of the Retail Bond issues to date, coupled with the potential investor base in the form of club supporters, would suggest that the Retail Bonds could be a useful and significant fundraising mechanism for football clubs in the future.

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