In the lead up to the publication of the 2016/17 accounts , I thought it would be interesting to review some of the changes in the club’s finances over the last 20 months or so.
Twelve months ago, Everton published their accounts for the 2015/16 financial year ending May 2016. It was the final financial year which included the previous lending arrangements prior to Farhad Moshiri’s initial loan of £80 million.
In the accounts, we had gross debt of £58 million including the secured long-term Prudential loan, Rights and Media Funding, and a small overdraft with Barclays.
The Prudential loan attracted an interest rate of 7.9%, Rights & Media Funding 5.2% culminating in total interest payments of £3.2 million.
I want to compare that position with the current (written before accounts are published). Beforehand, a look at other debt/ownership arrangements within the Premier League is useful background.
Premier League Club lending:
It’s important to remember that even 18 months ago there was little appetite from main stream lenders to lend to all but a few football clubs. As a result, those clubs without a hugely wealthy benefactor or institutional lenders were forced to enter expensive loans with offshore entities often funded by wealthy individuals who earned high levels of interest at almost no risk to themselves securing lending through the assignment of future Premier League media and merit payments. The cost of such lending was considerable. For example, in the 7 years from 2009 to 2016, Everton paid more than £34 million in interest payments – this at a time when income levels were booming across the Premier League.
Debt is an important part of many business models. A quick glance at the last available Balance Sheets of Premier League clubs confirms for football at least, it is an essential part of the plan.
Levels of Gross Debt (2016/17 or latest accounts)
|Manchester United||£503 million|
|Arsenal||£227 million (net debt £6m)|
|West Ham United||£94 million*|
|Hull City||£81 million|
|Stoke City||£76 million|
|Manchester City||£66 million|
|Leicester City||£30 million*|
*2015/16 accounts **prior to main stadium financing
Debt can be for many purposes of course. Manchester United for example is a business that is hugely cash generative, yet carries the largest amount of debt due to the Glazer’s acquisition cost being transferred to the club’s balance sheet.
Arsenal on the other hand carry their debt due to the construction of their stadium, but also carry significant amounts of cash making their net debt position negligible. It is likely that the penalties for reducing the debt are too onerous, hence the high gross debt but low net debt position.
Debt provided by club owners
Some clubs are in the fortunate position of having either 100% or majority owners who fund some or all of their capital requirements through the provision of debt.
Chelsea through their ultimate ownership by Abramovich, have been totally funded by loans that sit in the holding company above. As at the last accounts (June 2016) that amount stood at £1,140 million. This is of course, prior to any major expenditure on their proposed new stadium, itself likely to cost over £1 billion. It is perhaps no surprise that Chelsea are seeking external lenders for a considerable element of the stadium build costs.
Liverpool, wholly owned by Fenway Sports Group have two sources of debt, a short-term loan of £110 million from within the FSG group relating to the new main stand and more traditional banking lending of £45.1 million provided by Royal Bank of Scotland.
Elsewhere Stoke City’s debts of £76 million are funded by their owner, Peter Coates, owner of Bet365.
Sunderland through years of mismanagement, poor recruitment and performance have already seen £100 million of loans capitalized by their owner Ellis Short whilst still having a further £60 million outstanding to him plus close to £80 million (secured against the stadium and club assets) to a US organization called Security Benefits Corporation.
Reliance on non-mainstream lenders
West Ham have gross debts of £94 million, and unlike other Premier League clubs have not had the use of mainstream lenders, still having loan arrangements with Rights & Media Funding of £30 million (interest cost estimated at more than 5%) and shareholder loans of £49 million netting the shareholders a £3 million annual interest payment.
Spurs are 85.55% owned by a company called Enic International Limited which is owned by the billionaire Joe Lewis (70.6%) and Daniel Levy and family (29.4%). The remaining shares are split among 30,000 shareholders, 15,000 of which own 1 ordinary share each.
In order to fund their new White Hart Lane stadium they’ve arranged a £400m facility with Bank of America Merrill Lynch International Limited, Goldman Sachs Bank USA and HSBC. This is priced at Libor plus 3 to 2.25% over the term – an interesting point to compare when Everton announce their stadium funding arrangements. In addition, Enic have provided £50 million and the ultimate investment vehicle of Joe Lewis, Tavistock have provided assurance to the banks to provide funding of any additional shortfall up to £500 million.
Back to Everton
Since the publication of the last accounts a great deal has happened financially at Everton. Although only currently the owner of 49.9% of the club, Farhad Moshiri repaid the club’s existing debts with an interest free unsecured loan of £80 million with no repayment schedule. As I first tweeted in March of this year, it is believed that the loan amount has increased since then with additional funds made available in January 2017 – the soon to be published accounts will confirm this and the amount assuming the above is accurate.
The repair of the balance sheet was wholly necessary, and as Moshiri said at the last AGM “We needed a strong balance sheet, so I paid off the debts. We are now very flexible financially”.
How has that benefited the club? Well, it allowed meaningful progress to be made on the stadium culminating in the announcement of the contract exchange on the 200 year lease at Bramley Moore Dock. This would not have been possible without the capital injection by Moshiri.
It also allowed Everton to explore other opportunities to finance the development and expansion of the club both on and off the field.
Since the last accounts two significant financing deals have come to light.
Firstly, Everton announced a 3 year £60 million credit facility with ICBC, the world’s largest bank by assets, wholly owned by the Chinese Government. This was a significant first for the club. Not only did it represent a return to main stream borrowing but the identity of the lender is I believe very important. It was the first such deal by a Chinese bank with a Premier League club and it is believed to be the fore runner of further financial and commercial relationships in the future.
Additionally, at Companies House on 7th December, Everton reported a charge in favour of Santander, a Spanish banking giant. As part of the terms of the Stones’ sale to Manchester City, the last installment of £13.75 million is due in August 2018. Using this as security, Everton have received an advance of this amount from Santander. It is believed that the significance of this deal is the development of further banking relationships rather than the requirement to borrow further sums. It does demonstrate though how far Everton have moved from the very recent past.
There are two large outstanding issues financially for Everton. Firstly, the funding of the stadium. The terms and amount required are not yet known but as I wrote here and here it is my opinion that costs will be in the region of £500 million and that ICBC may form a significant part in the future financing.
Secondly there is the issue of ownership. It is known that Farhad Moshiri has options agreements with Bill Kenwright, Jon Woods and Arthur Abercrombie. The precise terms are not in the public domain but assuming he acquires all their shares his holding in Everton rises to just under 74%. As reported above, Moshiri has already acted as a significant benefactor to the club albeit from his current ownership position. It is an unusual position for a non-majority holder to finance the club from his or her own pockets, yet was necessary to kick start the stadium project. The question for shareholders will be whether the debt owed to him remains as debt or is converted to more permanent capital (equity) in the future?
Regardless of the plans ahead, hopefully some of which will be disclosed in the forthcoming 2016/17 Report and Accounts plus the AGM on 9th January, the club’s capital position has changed dramatically for the better. Credibility with the banking sector, no doubt due to the work of Sasha Ryazantsev, and an owner prepared to invest in the club for the long term, has radically altered our ability to attract capital, and the future financially is looking exceptionally secure indeed.
I like many others have been at times frustrated by the pace of apparent change within the club. On reflection, there’s still much to be done with bringing the right expertise to take advantage of our stronger position on and off the pitch, but the sorting of the finances was perhaps the most necessary and most immediate priority.
As a passionate Evertonian I can only hope the rate of change accelerates with the stadium news, plans and financing plus further funding for the development of the team. I am confident this will be the case and eagerly anticipate the forthcoming accounts.