March 28, 2017
As I wrote here last Thursday, and spoke on The Blue Room Podcast with Dave Downie, the scheme announced jointly by Liverpool City Council and Everton Football Club is highly impressive, innovative and brings the stadium at Bramley Moore within touching distance of all Blues.
The dust has settled a little and the focus has turned to at what point Dan Meis will produce first drawings of his proposed stadium, and the view is it will be sooner than later, weeks not months. At the same time, the Council Cabinet has to agree the scheme, the SPV drawn up and funding partners determined.
On funding I’ve already heard that several large institutions, some household names, have been sounded out with positive feedback. As I said in my original piece, this is a highly attractive debt instrument to pension and life assurance companies, ticking all the boxes of a low risk, asset backed, index linked, long term debt product.
Having had time to think it’s interesting to realise that the scheme whilst remaining highly attractive does have several consequences, as yet unexplored by the media.
Whilst not in anyway deterring from the attractiveness of the scheme, several items should be noted:
The precise terms of the security package required by LCC are yet to be disclosed. The Rent Deposit scheme requires the building up of “ring fenced” deposits over the first five years of the scheme. Additionally in the very unlikely event that Everton are relegated, then we will be required to top up the Rent Deposit Account using parachute payments paid by the Premier League – I look forward to seeing those details.
Impact on any immediate or near term Board changes and/or exercise of options by Farhad Moshiri
One of the consequences of the timetable suggested last week is that
(i) it is unlikely that Moshiri will exercise his options (allowing him to acquire Bill Kenwright, Jon Woods and Arthur Abercrombie’s remaining shares) any time in 2017. It is widely believed that the options relate to the confirmation of the stadium. Hence, until Planning Permission is granted it seems very unlikely he can/will exercise those options.
(ii) as a result it is unlikely that Bill Kenwright and Jon Woods will give up their seats on the Board. Furthermore, it may be less likely that there are executive changes within the club also.
Use of short term funding loans
For several years, Everton have used short term borrowings from offshore lenders to meet ongoing cash flow obligations throughout the season. This form of lending has relied upon the assignment of broadcasting revenues to the lender. Under the terms proposed by the City Council, LCC will have a first charge on all revenue streams (and assets), therefore this form of lending will no longer be possible.
Now it could very reasonably be argued that this form of lending is not likely to be required in future years given the increased cashflow arising from the new broadcasting deals and Moshiri’s £80 million loan to the club, repairing the balance sheet, nevertheless it will no longer be available to the club once we get our financing package in place.
The Usmanov connection
Regular readers or listeners will know I have always said that Usmanov would not be an equity investor in Everton – he would remain a 30% shareholder of Arsenal FC and therefore not able to acquire any shares in Everton.
The structure of this debt deal confirms this view in my opinion. It would be highly unlikely that such a deal would be put in place (long term structured debt) if there was any prospect of Usmanov becoming an owner/part owner of Everton FC.
As we know, through the Finch Farm naming rights deal with USM there is a connection and I’m sure that related companies may well appear in stadium naming right deals in the future. This deal does not change the prospects of that, but does, I believe, put an end to any thought of him being a shareholder.
I don’t want anyone to get the impression I’ve suddenly turned sour on the nature of the proposed deal to fund Bramley Moore, far from it. I’m hugely excited and impressed by the elegance of the proposed deal, something which would not have been possible without the input of Moshiri and his people I’m sure.
This is a fantastic deal for the club, let it be said, I’m just adding a bit more meat to the bone in terms of the consequences of the deal.
I’ve done several models of the financing of the stadium and future revenues, I’ll put up a new one in the next few days taking into account the nature of this deal and our prospects of further increases in commercial income and match day income through the new stadium.
As it’s Derby week – the contrast between what is proposed for us, an iconic stadium on the Banks of the Royal Blue Mersey, and a trip to a partially redeveloped Anfield will not be lost on any Blues.
March 23, 2017
Already much has been spoken about the news today concerning Everton Football Club, Liverpool City Council and Peel Land and Property (Ports) Ltd.
I’m going to attempt to reduce it down to the minimum and explain the reasons why certain structures are in place.
Let’s start with the big news – the news that Everton Football Club and Peel have agreed heads of terms which will allow (subject to certain conditions) Everton to build our stadium on the Bramley Moore Dock site.
Briefly this is how the deal works, with explanations below:
- Peel are offering a 200 year lease on Bramley Moore to the “funder”
- Everton Football Club are responsible for finding the funder
- The funder will offer a 40 year lease to a Special Purpose Vehicle created by the City Council
- The funder is responsible for all the development costs of the stadium
- The SPV offers Everton Football Club a 40 year (less one day) sub lease. At the end of this lease Everton can buy out the remaining 160 years of the lease at minimal cost.
- Ownership of the stadium will be with Everton at this point
- Everton pay rent to the SPV. This rent covers two elements, the financing costs and a premium paid to the SPV which covers the cost of providing a guarantee from Liverpool City Council. The financing costs are passed onto the funder and the City Council benefit from the guarantee fees.
Who or what the funder is isn’t specified. It can be either a single financial institution like a bank or insurance company, a group of companies, or a high net worth individual or group of individuals. In return for the capital (in excess of £300 million) the funder will see a regular return of capital and income at market rates. Importantly the funder will have this return guaranteed by Liverpool City Council. So should Everton get relegated or football lose its current financial strength, the City Council guarantees payment. (There are security measures also to reduce the risk for the Council, more below).
The Special Purpose Vehicle
Often used in the commercial world. As a separate legal entity it allows businesses and public bodies to park particular projects or investments in a stand alone vehicle. In this case the SPV, owned by the Council collects the rent, pays the financing costs to the funder, and provides the Council with its guarantee fees.
The SPV serves to protect the interests of all parties, largely separate from their other activities.
The role of the City Council
The City Council plays a key role in this whole venture. By offering a guarantee it provides the funder with security against default, thereby reducing the cost of borrowing. As a guarantor the Council charges Everton a fee for providing the guarantee. The cost of the guarantee is calculated by considering the relative differences in the creditworthiness of both the Council and Everton.
The Council receives two benefits from being guarantor. Firstly it creates much needed income for the Council, somewhere in the order of £4-5 million per annum for the period of the lease (40 years). Secondly by enabling Everton to find a funder and thus the stadium development it goes along way to assisting the redevelopment of the whole area – a key objective of the Council.
The Council will also take security from Everton. In addition to the fees payable to the SPV Everton have to put funds aside to protect against future non-payment of their rent. This is not an unusual arrangement, Arsenal for example have a similar arrangement with their funders. In the event of this not being sufficient to meet liabilities, the Council will also hold a charge against future season ticket sales, and all other assets, including players.
Why would Everton go for this type of scheme?
As we get to know a little more about out our major shareholder it is very clear that he brings a level of innovation and sophistication to our business dealings that we’ve not seen since the days of John Moores. A number of things strike me about this deal. It’s elegant and thought through, benefiting all interested parties.
Firstly it’s a great enabler – a scheme backed by guarantee from the City Council, further backed by the resources of an ambitious and likely successful football club is a highly attractive lending proposition. Thus competition should be high and interest costs highly competitive.
It’s very capital efficient both for Everton, and also Moshiri himself. Successful business people excel at making capital work hard, and here’s an example of leveraging up on partners to make his investment in Everton most likely very profitable. For Everton it means not only do we have the funds for a new stadium but we have funds and resources available to continue the development of our squad given the stadium should be cash generative from the moment the doors open.
The scheme also allows us to keep all stadium incomes, participate in non footballing activities, arrange naming rights and potentially be involved in further developments around the stadium.
Don’t get tied up with the idea we are tenants. We are by name because of the nature of the lease arrangement but this is a stadium purchase funded by a long term mortgage. At the end of the 40 years we will own the stadium outright – just like our own homes when our mortgage is paid off.
For the Council, it’s cash generative and is the enabler of significant future development in and around the area – a key objective. This is a highly attractive proposition for the City be in on doubt about that.
There are self-evidently still hurdles to overcome. Financing I don’t see as an issue given the comments above. Planning, again should not be an issue given the Council support, but it’s fair to say this is the greatest risk or variable to the project. Finally there’s the standard project risks of time management, cost control and mitigation of unforeseen problems. One would think on the evidence to date, Moshiri will bring in a highly competent project management team to deliver on time and in budget.
It’s estimated the SPV will take another 3 months to be agreed, meanwhile we continue with Dan Meis the stadium design including fan engagement according to Elstone today. Planning is anticipated early in 2018. All being well that might see us playing our first games at Bramley Moore (insert sponsor name here) at the beginning of season 2020/21.
What does it mean for our future?
Simply – everything. It will move us onto the next level in every sense. Our finances will strengthen, our ability to generate income will increase, and we’ll be a highly attractive club, still in touch with our community, still doing great work, but and perhaps as this is our raison d’etre, most importantly being competitive and winners once more.
The club has changed hugely in 13 months with more change to come. Today is a huge, necessary and brilliant step in the next stage of our redevelopment and I for one cannot wait….
As a footnote – one very important thing – the future use of Goodison – absolutely brilliant news:
“EFC intend to use the Stadium move to facilitate a vital Legacy Project at Goodison Park, delivering health, education, affordable housing and public spaces for the local community which is likely to stimulate further investment in the L4 area and will create social, environmental and economic benefits. Details of this will emerge from EFC in due course.”