One of the things that strikes me throughout the period that Bramley-Moore has been our proposed new home is the language various officers within the club have used to describe the process of raising finance for the stadium. Our past CEO often used the words difficult, challenging and uncertain. In his much welcomed first public comments, Colin Chong used the word “complex”, whilst Denise Barrett Baxendale similarly has referred to the “complexity around the funding models”.
So just how complex is it, and is it different for Everton than any other club?
Compared to many businesses football is a relatively simple business. There is the primary business of being a successful professional sports team and then the business of providing the facilities and resources required to match the demands of the principal product, the football team, plus the facilities for fans (customers) to watch the product perform.
Unlike most businesses, much of the income a football club receives is gifted (in the form of Premier League broadcasting deals plus prize monies) and by and large there is an extremely loyal and captive customer base in and around the principal area of business.
The key differentiators between the successful and not so successful teams are, to an extent, the skills of the directors and management teams including playing staff, but more importantly the resources available in terms of capital and additional income over and above that which is gifted.
Whilst performance on the pitch is obviously critical to the amount of revenues that can be generated, it’s also true that once among the bracket of successful clubs, there’s a clear correlation between match-day revenues and overall revenues. Deloitte shows in a 2015 study the clear correlation that exists.
Thus, the case for having a stadium generating and maximising significant match-day revenues is clear. For Everton that means building a new stadium and in our case on a site that brings many future commercial advantages. Which then turns to the question of funding it.
Funding generally is provided by some, or all, of the following sources: borrowings, capital contribution by the shareholders/owner of the club, and the monetarisation of the asset itself in the way of naming rights and commercial tie ins.
In the case of Everton, I am guessing that “the complexities” referred to relate to the borrowing element within the funding package.
This causes me some genuine concern. Why should it be any more complex for Everton than anyone else?
Any lending institution or investor will have a list of key requirements in order to satisfy itself that providing funding makes sense with the minimum risk.
Firstly, it will require confidence in the owners and management team, in terms of their commitment to the project (how much are they investing and risking themselves) and their skills and experiences in similar projects plus their vision going forward.
It will want to see a business plan that demonstrates the investment into a new stadium generates sufficient income to meet both the borrowing costs but also provide additional revenues to develop the club and enhance the prospects of success. Without this second element there’s no point in building the stadium if all it does is meet the repayment costs going forward.
Finally, it will need to satisfy itself that there is sufficient security both in terms of the stadium itself but also future revenues generated by the borrower to protect the institution’s shareholders against potential losses in a default situation.
Let’s start with the personnel likely to be most involved in the funding.
Firstly, Farhad Moshiri; as a well-established successful billionaire investor and operator used to running and part owning multi-billion pound/dollar businesses many of which are extremely capital intensive, a capital project the size of a new stadium costing £0.5 billion should not be beyond his experience and expertise.
The Deputy Chairman, Keith Harris is a former CEO of the investment banking division of one of the world’s largest banks (HSBC), and has a long career in finance and football, managing and directing businesses in the sector. In addition, he had a long association with the financing and building of the new Wembley stadium through his directorship of Wembley National Stadium Limited.
Finally, Everton’s Chief Finance and Commercial Officer, Sasha Ryazantsev has spent a successful career in corporate finance and investment banking specialising in capital structures, corporate financing and more recently bond issuance & M&A activities.
Therefore, on the face of it, this is a highly experienced team for whom the challenges of stadium financing ought to be well within their capabilities and should provide institutions with more than enough confidence to proceed.
The business case
The second element would be the business plan which has to ensure a significant uplift in revenues as explained above. Again, as with the first criteria, the individuals, I do not see how we can fail to provide a robust enough business plan to satisfy the requirements of lenders. Given the abilities of other clubs to raise revenues, often without the development potential that exists with Everton, it would be odd in the extreme if we fell short on this point. I accept entirely that the club has a poor commercial record in the past and has not proven itself particularly capable of promoting itself, but in a booming industry and in the world’s most popular sporting league, it’s difficult not to make a bullish business case moving forwards.
That leaves us with the security requirements of the banks/financial institutions, and Liverpool City Council if they are to be the primary lenders.
Let’s start with Liverpool City Council. In the Heads of Terms document produced in March 2017 there was an acceptance that security terms were acceptable and had largely been agreed, albeit subject to further due diligence and legal opinion. Given the risk profile between being guarantor and provider (as per the January 2018 post AGM comments by Joe Anderson) are no different from each other is it reasonable to assume that this is still the case?
With the banks and/or financial institutions lending and then using the asset when built as security plus securing future income streams in the case of default is pretty standard financing practice.
Tottenham Hotspur created a £750 million funding plan for their stadium and Northumberland development project with three major banks, HSBC, Goldman Sachs and Bank of America. In return, as security, the stadium and associated real estate was secured as were several revenue accounts including (but not limited to) operating bank accounts, various reserve accounts, the NFL agreement, the Nike agreement, all contracts with a value greater than £5 million, advance ticket sales and all of Tottenham’s extensive intellectual property and trademarks.
My point is that whilst Everton may offer different income streams from differing partners, the precedent set by Tottenham and many other clubs before them is there and works in practice.
So, assuming the financing arrangements are similar to other clubs, offering similar security, a business plan and run by competent people, we return to the issue of “complexity”.
Perhaps, and this is only conjecture, we are looking at financing from not just Liverpool City Council but also making up some of the perhaps £220 million shortfall from other lenders? ie, Moshiri is not providing all of the additional financing by way of capital (rights issue) but additional lending.
That I can see as potentially problematic, as perhaps is the existing 3 year rolling credit facility with ICBC in that we have already assigned some of our future income, but also different and separate entities will be potentially fighting over seniority in relation to assets and income streams in the case of any default in the future. To me, unless the stadium is prohibitively expensive, or the business case is weaker than thought, it can be the only reason for the suggested complexity and drawn out process.
This brings us full circle, back to the comments I made earlier in the week when Moshiri acquired his majority stake, it would be hugely useful and beneficial if an explanation of the proposed financing was made. Greater understanding of the issues stops speculation and indeed provides support to the people charged with finding the answers and ultimately the cash required.
Hope the above has been useful and perhaps even interesting.