A Bridging Loan Too Far

Posted by ttnbd on January 30, 2008, 06:15:54 PM

As expected there’s been a lot of consternation about the refinancing package procured by Gillett and Hicks.  Hopefully the following can allow a better understanding of the implications of the agreement and what the club needs to achieve to service this debt.

One thing I need to stress is that the figures in general are subjective as the latest set of accounts available for LFC relate to 1st August 2005 to 31st July 2006, while there are no accounts available for Kop Football (Holdings) Limited.  Once those are available a better analysis can be made as to what went on in the immediate aftermath of the takeover.

Liverpool Football Club –

£45m working capital to refinance existing club debt, thus freeing up short term cashflows.  This takes the repayment of existing debt from less than 1 year to more than 1 year.  As a result the overdraft the club had is likely to have been cleared.

£60m capital for preliminary work on new stadium in Stanley Park.  Until this starts the cash would either not have been drawn down from the bank, or it will be sitting in the clubs account accruing interest.  This debt should not be a big issue, as the stadium is a club asset and should be paid for out of the clubs finances.  The ultimate aim being for the stadium to pay for itself through increased revenues.

Total - £105m

At an approx interest rate of 8% this gives the club an annual interest charge of £8.4m.  Up to £3.6m of this will already have been going through the clubs books, depending on how the clubs existing debt was structured

This debt will be secured against the assets of Liverpool Football Club and Athletic Grounds Limited, this will be to ensure that the bank has a fall back if repayments are not maintained.  At the last available balance sheet date (31 July 2006) these stood at approx £140m.  However £80m of this asset value relates to players registrations and reduce in value by approx £25m per season without further investment.  So a £25m net investment is required each season to maintain the asset value at £80m.  The bulk of the remaining assets are the clubs freehold land, leasehold land and buildings.  Since one of these buildings is a football stadium, it is only the land it sits on that is of real value to anyone other than a football team.

Fans are understandably worried that players may be sold to fund the debt taken out.  However the debt on the club will have strict covenants attached.  Sometimes the club will take out a loan to purchase a player, the aim being to free up short term cash flows, and as a result they will use the players book value as collateral against the loan. The bank attaches a covenant (restriction) that if the player is sold in the period of the loan then the bank has the right to call in the debt immediately.  I suspect that this type of covenant will remain in place for the new debt placed on the club. 

As a result the holding company cannot use the clubs assets as collateral for the loan on it’s books.  What I believe they have done is secure the loan against the value of the shares, with personal guarantees from Gillett and Hicks.  This means that club assets cannot be sold to pay off the holding companies debt.  Also the subsidiary (LFC) is not liable for the debts of its parent company (Kop).  The likely result if Kop defaulted (or risk of defaulting) is that LFC is sold on to a third party as a fully going concern as they have more chance of getting their money back like this.

Kop Football (Holdings) Limited –

£174m to refinance borrowings to purchase shares

£11m to refinance costs of raising original finance

£24m, approx interest charge on original debt (assuming £298m borrowed originally)

£11m, approx cost to refinance debt.

£25m, extra finance taken.  Reason unknown but it maybe for covering the following years interest payment.

Total - £245m

At an approx interest rate of 8% giving an annual interest charge of £19.6m.

From all reports at present this debt is due to be either refinanced or repaid in 18 months time.  This may be when the next tranche of debt is required for the stadium project, but it suggests to me that the debt is, atleast initially, interest only.  Meaning the principal will not start being repaid until after the stadium opens.


Payment of the debt of Kop Football (Holdings) Limited

This can be done either by dividends paid from LFC to Kop, or via an inter-company loan from LFC to Kop.

In order for dividends to be paid the club must have distributable reserves available.  This mean profits must be available as well as the available cash flow to pay the dividends.  Without profits there are no dividends.  So for them to be able to fund the interest obligations of Kop, LFC would have to make pre-tax profits of over £19m per year.  Meaning an approximate operating profit of £30m per year (assuming transfer activity remains at levels it has been over the last few years) before profit/loss from sales of players.  Last time this was reported LFC made an operating loss of approx £9.8m and a pre-tax loss of £5.1m.  For the dividends to be paid the club would have to in the region of £19m in free cash flow each season, to at least break even cash wise.  The equates to an approximate £45m if transfer activity were to remain at present levels.

Inter-company loan can also be used to transfer cash to the parent company.  This is an advantage to Gillett and Hicks as profits are not necessarily needed to perform the transaction.  As long as the club has the cash it can be done any time.  The result of this is that Kop gets the funds it needs, however it remains in debt, albeit to it subsidiary LFC.  In the event of a possible takeover this would be the least favourable solution for Gillett and Hicks as most, if not all proceeds, would go back to LFC.

Projected operating cash flow 2007/08 & 2008/09

2006 Operating Cash flow £22.1m

New TV Deal increase of £15m

Carlsberg Renewal increase of £2.2m

Setanta deal approx £1m per year (unknown figure so using estimate)

Increased gate receipts (7% price increase) £2.3m

Increased net merchandise sales £1m increase estimate

Decrease in European cash flow (£4m), assuming not getting past quarters in europe

Net Increase general wages for players (£5m)  (New contracts, sales, purchases)

Estimated post 31 July 2007 operating cash flow £36.6m

That’s the cash flow available before financing, and purchase/sale of fixed assets.  If those estimates are correct then the operating cash flows are sufficient enough to cover the debt, but it’s getting close and leaves no room for investment in players.  But investment in players is needed to maintain sufficient levels to get through to quarters in Europe and ensure capacity crowds.

Projected operating cash flow 2009/10

2009 Operating Cash flow £36.6m

Adidas Renewal increase of £3m per annum

Increased gate receipts (7% price increase) £2.3m

Increased net merchandise sales £1m increase estimate

Estimated post 31 July 2009 operating cash flow £42.3m

New Stadium

Cost £300m

Capacity 71,000
Corporate seats 9,000 (£150 (excl VAT per seat per game)
Exec Boxes 110 (£50k excl VAT)
Regular Fans approx 60,000 (£34 per ticket excl vat, equiv £40 per ticket in 3 years)

In a 19 league game season this will bring in an estimated revenue of

Corporate £25.65m
Boxes £5.5m
Regular Fans £38.76m
Total £69.9m (assuming capacity crowds at above prices)

In a 24 home game season (league, 4 europe and 1 other cup)

Corporate £32.4m
Boxes £5.5m
Regular fans £48.96m
Total £86.86m (again assuming capacity crowds and corporate seats are sold on a game by game basis, boxes sold on a seasonal basis)

This is an approx increase of between £30m and £54m on revenue compared to current ticket revenues of £33m.

Also the extra 25,000 fans may spend other money on a matchday, for arguments sake £5 per person per game gives between £2.3m and £3m per season.  Add in potential naming rights, for example £3m per season.

Financing the stadium.

Assuming all debt finance at 8% per annum over 25 years.  On a mortgage basis this gives annual repayments of approx £28m.

As has been reported both Gillett and Hicks met with DIC with regards a capital injection of cash for the stadium project.  The following shows why they considered it.  This is reported as £150m.  If this were to happen it would reduce the need for loans to £150m and leave annual repayments of just £14m, instantly freeing up £14m of any future cash/profits.  Over the 25 year life of the loan it would save in the region of £150m in interest.

This is why the stadium is important, and why they went to DIC and why they are still talking to them.  Without the stadium their refinancing plan will have more holes in it than a sieve, and it will be them left to foot the bill for the purchase debt.

The term of the refinancing

It has been reported that the refinancing has a term of only 18 months.  This signals one of a couple of options.

1.   They hope to refinance at better terms in 18 months when the credit markets have calmed down, a risky proposal but gives a bit of breathing space.
2.   They have taken a short term bridging loan while they continue negotiations with DIC over a possible involvement, either purchase of existing shares or new shares.

Given the rumours that have been abound on various sites, and through own friends at games, the DIC involvement is real, which suggests the loan is only temporary while negotiations continue to reach a satisfactory conclusion. It allows the stadium to start, without tying in the loans to long term contracts.

Conclusion

The club is likely going to pay the debt of the holding company, either through dividends or inter-company loans, however to do this the club has to be successful both financially and on the pitch.  Also there is no legal obligation for it to pay the holding companies debts.  Missing out on European cup action is going to be hard to stomach for the club.  One thing to go slightly in their favour on this is that they now the top 3 go straight into the group stage, thus guaranteeing the group stage money (tv, tickets and uefa) straight away.  The new premier league tv deal has helped, while the potential new sponsorship deals can also help.  But ultimately the new stadium is a must and this debt will be the main reason the stadium will be 71,000 if they are to remain for the long haul.

Will DIC come in and do things differently?  No-one really knows, they may see the fallout from all this and do things slightly differently but I expect much of it to be similar financially.

Will the stadium be financed by debt?  Probably initially, although do not be surprised if there is an equity injection from a third party for shares, as well as vastly improved sponsorship deals.


What happens if Kop Football (Holdings) Limited defaults

This is a hot topic at the moment as can be seen from other threads.  Some are claiming that the clubs assets can be sold off to pay for the outstanding debt of the holding company.  This is infact inaccurate.  The debt on the clubs books will be secured on the clubs assets.  This means that, unless required for reinvestment, any proceeds from sales of assets by the club will have to go to servicing the club level debt first and foremost.  The club is not in a position to be asset stripped due to the main nature of the clubs assets.  For as long as there is debt on the clubs books there must be an equal value of assets, especially in the current financial climate, to secure as collateral.

In the event of the club defaulting the banks would do the following.

The first thing is to look for a buyer for the club, they have more chance of maximising the return by selling the club as is, as a going concern with all assets in place, than selling a vastly asset stripped club.  Then if the sale value is not enough to cover the debt outstanding they would then go to the personal guarantees provided by Gillett and Hicks to obtain the remainder.

© ttnbd 2008

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