What football expects from the bond market

Dusseldorf In a time of zero interest rates for several years, the framework conditions make you sit up and take notice: a bond that bears interest at 5.5 percent per year, plus a bonus payment of two percent if FC Schalke 04 plays first-class again by summer 2026. Exchanged bonds also have a small supplementary bonus. If it wasn’t just for the sporting and economic risk.

FC Schalke, one of the most traditional football clubs in Germany and currently fifth in the Bundesliga, has issued a new corporate bond with a total volume of 34.1 million dollars. The subscription period for investors and fans begins this Friday and ends on April 8th.

Schalke still urgently needs fresh money. In addition to the sporting construction sites, the club wants to press ahead with its financial restructuring. The most important key figures have surprisingly improved significantly despite the decline in the past year, as the annual report published on Tuesday shows (see chart). Various austerity measures have at least noticeably improved the trend. The new Schalke board is also much more transparent in terms of communication than in the past.

But the club is still extremely high liabilities of 183.5 million euros. Almost 100 million euros are accounted for by bonds and debts with banks. The bottom line for 2021 is a loss of almost 18 million euros after minus 52.6 million in the previous year. The ongoing pandemic and the relegation from the first Bundesliga are weighing on revenue – for example from TV marketing or game operations – and are significantly exacerbating the already tense financial situation.

The securities prospectus even mentions that without a timely return to the first Bundesliga, the economic situation could deteriorate “to the point of endangering the company’s existence” and “possibly leading to insolvency”. This is an extremely negative scenario. But the overall risk factors put the high interest rates into perspective.

In any case, football-related products, stocks and bonds, are in a difficult position on the capital market. Most experts are also skeptical. The performance of the bond is generally characterized by economic performance, which in turn is heavily dependent on sporting success.

Nevertheless, professional clubs continue to choose the route via the bond market. A step that may seem surprising at first glance, since the classic bank loan is usually cheaper and involves significantly less communication effort. Due to the tense financial situation in many places, bonds are now a necessary alternative, according to financial circles.

“The increased risk requirements for banks make classic bank loans very expensive or even impossible,” says Christoph Breuer, sports economist at the German Sport University in Cologne. Another point that speaks in favor of bonds: “Equity financing is equally unpopular with fans and the board because of the codetermination.”

Then there is the emotional factor. Fans and sympathizers of a football club also often subscribe to bonds – and this is mainly because of the connection with the club and not because of yield aspects. “They accept interest rates that don’t adequately reflect risk,” Breuer said.

Last year, for example, the traditional Bundesliga club Werder Bremen issued a bond for medium-sized companies. However, since Werder hardly won a game at the same time as the bond issue and were subsequently relegated from the first Bundesliga after 41 years, the capital collected was below the hoped-for level. Hertha BSC Berlin and Hamburger SV have also placed bonds.

Schalke gives itself more time for renovation

Schalke can also look back on many years of experience on the bond market. The bond instrument is an “important, long-term component of our corporate financing,” says Christina Rühl-Hamers, CFO of Schalke, to the Handelsblatt. “There we have the opportunity to address a very heterogeneous target group.”

The new bond is already the fifth. Once again, an expiring bond – this time for 2023 – will be refinanced by issuing a new bond. That’s how it was in 2016 and also in the sporting and economically black year 2021.

Breuer, on the other hand, sees the ongoing replacement as evidence “of the club’s structural underfunding”. The procedure shows that it is not possible to close the financial gap. “Instead, day-to-day business will continue to be financed on credit.”

Schalke is planning the new bond with income in the low double-digit million range. If a correspondingly large difference remains, it must then be repaid in 2023 to the investors who have waived an exchange. “We basically see ourselves equipped with options for action for every scenario,” says Rühl-Hamers. “The first reactions were very positive.”

As a result, Schalke creates more time to push ahead with the renovation of the club. This plan, in turn, stands and falls with the imminent return to the first Bundesliga – from an investor’s point of view, ideally in the current season.

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