Two comments, one from the new Director of Football Marcel Brands, the other from Mayor Joe Anderson have given those with an interest in Everton’s finance plenty to talk about since June 1st.

Marcel Brands

When asked about the prospect of Moshiri making significant funds available, Brands answered “No. First of all, we need to offload players to raise money [to spend], and also salary-wise. But it’s not only a money thing”.

It’s clear the club has spent heavily in the last 12 months. Wages are estimated to have risen from £106 million to £139 million (source Elstone Jan 2018), we’ve spent further sums on releasing Allardyce, and have continued to make significant payments in preparation for Bramley Moore including an estimated £22 million put aside when we exchanged contracts with Peel Holdings in late 2017.

Serious negative cashflow

All of which leads to the position that the club has had serious negative cash flow (in excess of – £50 million) this year and has an unsustainable wage bill which requires a significant reduction perhaps to the levels closer to 2016/17 (£106 million).

Further evidence of the need to support cash flow was the new £37.5 million advance on the remaining Lukaku monies from Manchester United, an extension of the existing £32.5 million loan which is repaid from Stones and Lukaku payments due in August. The new facility, completed on the 1^st day of Everton’s new financial year, gives us flexibility to perhaps enter the transfer market earlier, but the emphasis as described by Brands is very clear, it’s about reducing wages in particular before buying.

Whilst this might be alarming, especially in the context of Moshiri’s promises re funding what’s required, it doesn’t mean Everton are in financial difficulties. It is a sensible step to scale back the excesses of last year’s spending which has produced little of benefit to the club. What exactly the board were doing last summer in allowing this situation to arise is an interesting question. It appears clear that Moshiri will not allow the same to happen.

It is even more baffling in the context of the biggest financial matter, the funding of Bramley Moore.

Joe Anderson

In an admission which surprised many, Joe Anderson conceded this week that the Bramley-Moore financing deal on the table from Liverpool City Council was perhaps not the only deal in town.

It’s worth examining the positives and the negatives of the proposed deal from the Council versus perhaps what might be considered more conventional forms of financing.

The positives are all the cash up front, a fixed rate of borrowing, the benefits of a close association with the Council, and yes, the softer benefits of knowing the club is contributing to the provision of essential services rather than adding to the profits of a financial institution owned by faceless shareholders.

The negatives are the relative inflexibility, the cash is delivered up front, the club starts paying for it immediately regardless of whether it needs all the cash or not (impacting short term cashflow), the fixed term of 25 years with significant penalties for early redemption, the potential political opposition, and for the more technical the likely restrictive covenants impacting the future behaviour of the club for the next 25 years.

I’ve not mentioned the interest rate charged, I’m assuming that the rate will be broadly competitive with market rates. Based on Joe Anderson’s comments it’s likely to be in the order of 5.2-5.5%

The key aspect of the Council proposal is that it leaves a significant proportion of the funds to be found elsewhere. That figure is likely to be £200-220 million with the potential to go higher should costs overrun or there be future problems not accounted for.

Assuming the Council funding is the option we go for where do the other funds come from? I’ve discussed in great detail how Moshiri and possibly others could finance the difference through an issue of new shares, but there are other options albeit not without their own sets of problems.

Theoretically it is possible we will borrow some of the remaining cash from a financial institution. However, this is not necessarily straightforward. It would impact the club in a number of ways. It would affect cash flow, because just as the Council provided loan requires annual repayments of capital and interest so would the additional lending thereby reducing the immediate excess cash the club would generate from the stadium. Additional security would be required and yes, covenants which would likely impact what the club can spend on transfers and wages (in a similar manner to Arsenal in their early days at the Emirates).

It is clear from Joe’s comments that the club continues to seek an alternative to the Council from traditional sources such as banks and other financial institutions. Given the commercial confidentiality surrounding deals of this size, nothing is known about who the potential lenders may be, but there is interest from other parties, just as there was over a year ago. It might be that the relationship with ICBC could lead to an offer of financing, but that would fly in the face of the Chinese Government’s current attitude. Whilst ICBC is obviously a bank and its principal business is lending it might be odd at a time when the Government are keen for Chinese businesses to repatriate capital.

It is unlikely that funding from a financial institution would cover all the costs (£500 million) so the club is still faced with the sourcing of the remaining funding.

Additional, alternative funding might come from naming rights, but as witnessed by both West Ham and Spurs there appears not to be a vibrant market for this form of sponsorship in the UK, or at least at the financial levels that make it worthwhile.

Thus, if chosen the Council funded option in all likelihood, may be supported by some additional borrowings but is most likely to be accompanied by an issue of shares to make up the bulk of the difference.

How have Spurs funded their stadium?

Spurs is an interesting case. They are financially a significantly bigger club than we are with turnover at £309m in the last complete financial year. However, their stadium costs significantly more also with most estimates conveniently settling on a price of £1bn.

They’ve sought a series of funding arrangements as the scale of their new stadium development and cost increased. Initially (from December 2015) they had a £200 million facility called the “interim financing” facility. Despite spending £340 million by May 2017 Spurs only drew down £100 million (the rest came from club sources) before agreeing to a new funding arrangement of £400 million with Bank of America Merrill Lynch, Goldman Sachs and HSBC. The facility is very flexible, has a term of 5 years with no early repayment charges and the interest rate is not fixed but is priced at Libor plus 3%-2.25%. In plain language at current rates that’s a maximum of just under 4%.

This facility was extended at the end of 2017 and is believed to be at or around £570 million. The additional financing required is provided by a £50 million letter of credit from ENIC (owned by Joe Lewis and Daniel Levy) and additional guarantees (unspecified) by Joe Lewis.

So, Spurs have gone for a much more flexible form of financing, cheaper than Everton, can be repaid early at no cost (unlikely though) but must be renegotiated within 5 years. I’d imagine they’ll follow the Arsenal route of issuing long term bonds at a fixed rate of interest when the current facility ends or market conditions permit.

Interesting times

We are living in interesting times. The Council backed funding is innovative and very beneficial to the City, and it provides a long term solution to part of the financing. I view it as a positive though that the club is looking elsewhere. It may however be a difficult decision to explain if we go elsewhere given the political capital expended by Joe Anderson, and it being one of the stadium Key Principles earlier in the year.

In terms of transfers and our cash flow, we are selling to reduce wage costs but it has to be recognised that in the absence of further funding by Moshiri we will not have a huge transfer budget this summer. The arrival of Brands therefore is both timely and critical.

Finally I still stand by my assertion that the club remains under-capitalised despite Moshiri’s injection of £150 million, and that this will be addressed by an issue of shares later in the summer.

Thanks for reading, comments welcome.