Co-authored by Damien Vickovich
The case for expansion
For any rugby league fan in Australia, whispers of expanding the national first grade competition, the National Rugby League (NRL), brings great interest and debate. In recent months, the Australian Rugby League Commission (ARLC) Chairman Peter V'landys and NRL CEO Andrew Abdo have expressed concrete plans to add a second Brisbane-based club in 2023 and hope to introduce a further 18th club to the league by 2027.
In a three-horse race for the Brisbane franchise, the NRL has received official bids from the Brisbane Jets, Redcliffe Dolphins and Brisbane Firehawks. For the 2027 expansion, the favourite is a second New Zealand franchise to compete with the New Zealand Warriors, such as the Wellington-based Southern Orcas.
The fervour to expand the NRL seeks to match ongoing proposals for expansion from other codes such as the Australian Football League and the Australia’s national soccer competition, the A-League. The benefits of expansion are obvious – it would:
- Foster increased fan engagement from new geographical areas;
- Increase the volume of professional matches to be televised; and
- Provide greater opportunity for corporate sponsorships and advertising.
While NRL executives are touting these prospects, many question the league’s ability to sustain expansion. As spectator demand, sponsorship and player talent are spread across more teams, this can affect the quality of the product. According to a recent report commissioned by existing NRL teams and published by Gemba, a consultancy, a new Queensland NRL team would generate between $15.5m and $33.7m in revenue.1 However, as new teams ‘cannibalise’ existing fans, the report concludes these gains would be insufficient to offset the negative impacts to existing NRL clubs. Alongside these league-wide considerations, each prospective club must consider what challenges joining a professional league involves.
With these concerns in mind, this article series explores some of the legal and commercial challenges a new franchise and the NRL will need navigate. The series is in two parts:
- Part I focuses on the legal issues regarding initial financing and what could occur if a new club goes into financial distress.
- Part II focuses on the legal, regulatory and governance considerations of the corporate structure and the profit sharing and competition issues with regards to existing clubs.
The first and most pressing concern is for prospective clubs to have a clear roadmap to finance both its initial bid and early years. Generally, bidding franchises are either an established club at the regional level of the sport, such as Redcliffe, or a joint venture of multiple clubs at that level, such as the Brisbane Jets. Consequently, bidders have an existing fan base, sponsors and facilities.
Along with the financial demands of an initial bid, new entrant clubs will face high initial fixed costs that may take years to make returns on, such as establishing first-grade quality stadiums, training facilities and leagues clubs. This can make financing difficult to obtain and affects their perceived credit risk. Some bidders would be able to capitalise on existing sponsorships, rich asset pools and fan bases. Were Redcliffe to be successful in its bid, it would become one of the NRL’s most financially stable clubs.
The difficulty for lenders lies in the uncertainty of the immediate viability of the franchise. It may succeed (following which an ongoing debtor-creditor relationship could prove highly lucrative) or it may quickly collapse. Obtaining financing from various sources may alleviate these concerns. For the Brisbane Jets, its financing prospectus notes that to secure a $12m injection, the club is open to ‘direct investment, convertible note, debt financing and/or sponsorships.’2
Determining the method of financing that is best suited to the franchise’s needs is of critical importance. For commercial bank loan financing, a lack of equity in the franchise limits potential returns on investment and high initial costs cause difficulties in pricing risk. Typically, debt finance issued to sports clubs is secured against future income, such as broadcasting payments, ticket sales and sponsorship revenue. Future receivables can fluctuate and are often correlated to a team’s success, compounding the difficulties of debt financing.
Where personal property is used to secure debts, clubs must navigate Australia’s highly technical Personal Properties Security Act 2009 (Cth) (PPSA) regime. More complex forms of structured finance, such as securitisation or syndicated loan arrangements, may prove too complex and expensive to implement relative to the sums lent. Private equity financing may solve this conundrum for the lending party. In the event the club survives or even flourishes, investing in an initial equity stake in a franchise presents a possible return on investment that would not be possible with debt financing. Private, non-listed, and non-bank investment may also bypass regulation under the Corporations Act 2001 (Cth), PPSA and Banking Act 1959 (Cth), making transactions more cost efficient. Interestingly, BlueMount Capital is thought to be a prospective private equity investor for the Jets’ bid.
In summary, to effectively navigate the challenges of initial financing, clubs must consider the:
- Methods of financing (debt or equity) and how this can affect revenue streams in future;
- Assets or receivables clubs have available to them to secure financing; and
- Type of entities with which they wish to seek finance i.e. traditional bank lenders, private equity, individual investors, a consortium.
Financial distress and insolvency
The number of failed rugby league franchises in the wake of the Super League Wars of the late 1990s is a stark reminder of the delicate commercial issues that are to be navigated in an NRL expansion. New franchises often start with significant limitations. They must over-spend on talent for players and staff, encounter risk-averse sponsors, and face high fixed costs. Initial financial teething issues are often matched with limited on-field success. The Gemba Report found that 83 per cent of the time in the past 15 years, new teams that have entered Australian sporting competitions finished in the bottom half of their respective league. Lack of success inevitably affects financial performance.
The central governing body often acts as a creditor, complicating matters further. In practice, the ARLC tends to distribute funds to cash-strapped clubs where required, as it did during the height of the COVID-19 pandemic. Contracts with the governing body will generally involve in-built dispute resolution mechanisms, such that some level of mediation would be necessary before the league appoints receivers or strips a club’s licence. Seemingly ‘too important to fail’, the NRL has been willing to purchase struggling clubs until a new buyer emerges. In 2014, the NRL purchased the Newcastle Knights before selling the club to Wests Group in 2017. Similar arrangements secured the future of the Wests Tigers and Gold Coast Titans. Where the NRL and entrant clubs form a contractual creditor-debtor relationship, the parties may also be forced to navigate Australia’s recent ipso facto reforms. These have placed restrictions on the enforceability of some contractual provisions that trigger a creditor’s rights against a debtor in financial distress.
Premature expansion can therefore put financial pressure not only on entrant clubs, but also the central governing body and the shared revenue pool (including from broadcasting deals) in which all clubs have a financial interest. There are additional, non-financial harms to the NRL where a club joins and then subsequently fails – it harms fan engagement and leads to a more disjointed competition format.
Obtaining financing from various sources may lead to complications when financial distress subsequently results in an event of insolvency. Drawing from bank lending, direct private investment and internal sources such as the ARLC can lead to vastly divergent creditor interests in the event of default. Traditional financing restructuring methods that rely on creditor cooperation, such as deeds of company arrangement and court-sanctioned schemes of arrangement, may be of limited effectiveness where creditors’ commercial interests clash with the interests of the NRL, other clubs or fans. These externalities, whereby the financial position of the struggling franchise directly affects other clubs and the competition, complicate the insolvency process in a way that in traditional corporate insolvency they do not.
What legal steps should a new franchise take?
With NRL expansion an inevitability, the process will present fascinating intersections of legal and commercial issues for new and existing clubs, and the NRL. New franchises must focus on three key steps:
- Understand the method of initial financing that best meets their short- and long-term commercial objectives;
- Engage creditors with whom they wish to build ongoing commercial viability, including a possible creditor relationship with the league’s governing body where required; and
- Be ready and willing to navigate various creditor interests should administration or insolvency occur.
1 Gemba Group, ‘NRL Expansion Analysis - Final Report’ Published 17 June 2021. Accessed at <https://origin.go.theaustralian.com.au/wp-content/uploads/2021/06/Gemba_NRL-Expansion-Analysis_Final-Report_170621.pdf>.
2 Adrian Proszenko and Vince Rugari , ‘Brisbane Jets’ last-ditch attempt to raise $12m for expansion bid’, Sydney Morning Herald, 25 June 2021 <https://www.smh.com.au/sport/nrl/brisbane-jets-last-ditch-attempt-to-raise-12m-for-expansion-bid-20210625-p584bh.html>.