At the last General Meeting, Everton’s finance director, Sasha Ryazantsev outlined how the stadium at Bramley-Moore is likely to be financed. (Please stick with this article as apart from some knowledge stuff at the beginning there’s a couple of interesting stories at the end)
He said that the likely cost of £500 million would be financed through some equity investment from Farhad Moshiri but the bulk (60 to 70%) would be financed by senior debt. To structure and finance the debt, Everton have enlisted two banks with a track record in finding investors for private placements, JP Morgan and MUFG (Mitsubishi UFJ Financial Group).
Although it has not been reported as such, it is not the first time Everton have used a private placement. The long term Bear Stearns/Prudential loan which originated in 2002 is an example of such.
In addition the £30 million provided by USM’s purchase of the naming rights option goes directly towards the stadium costs. In time when the naming rights are announced those proceeds will also assist funding the stadium.
Before we get into some interesting history re private placements and football clubs what are they?
Private placements are popular with private companies seeking to raise long term finance at a fixed rate from investors who have a preference for whatever sector the borrower is in, the risk profile of the borrower, and those who are prepared to lend over long periods – anything up to 30 years.
Because this arrangement is not a public arrangement, it’s between a private company and willing professional investors or institutions the process in borrowing the capital is usually relatively quick (especially compared to a public offering open to individuals), relatively inexpensive and requires a lower level of disclosure than other forms of borrowing.
The borrower pays a fixed rate of interest which is priced by looking at long term interest rates and the degree of risk the investors are taking. To negate the risk the investor will look for security either over a fixed asset (the stadium for example) or a very secure long-term income stream (season ticket revenues or broadcasting revenues for example).
In addition, the lenders will require some conditions to be placed upon the borrower. These conditions will include the seniority of the debt in default, negative pledges (stopping the club from raising further funds without their approval), and ratios regarding interest cover and levels of gearing.
Interestingly the lenders might apply limits to the purchase or sale of assets (players) and for football clubs, what happens in the event of relegation?
However, most of these conditions would apply to almost any form of borrowing, so they ought not be seen as a negative, just conditions which understandably the lenders wish to impose to protect their asset.
One of the positives about private placements is that the financial instrument that is created is not usually traded (ie sold between different parties) – the investors in this market tend to be long term holders.
The use of private placements in football
In September of last year, Tottenham Hotspur used the private placement market very successfully to raise £525 million. Indeed such was the popularity of their issue that the amount raised was increased from an initial £350 million to the final figure of £525 million. The debt was broken down into different maturities of 15, 20, 25 and 30 years. The interest rates charged (fixed for the duration) ranged between 2.6% and 2.9%. Arranged by Bank of America, HSBC and Goldman Sachs it was a spectacular success.
Private placements though have been used for some years by football clubs stretching back to the 1990’s. It has to be said not all have ended successfully.
Norwich City, Leicester City, Leeds United and later Arsenal and Manchester United have used the private placement markets with varying degrees of success for investors.
Leicester City raised £38 million to help build the Walker Stadium, went into administration (albeit briefly) following relegation. As a result the US institution who owned the debt ended up owning the stadium for a period of time.
Leeds United used the private placement market to help fund their European ambitions in the early 2000’s. However following falling into administration their investors received less than 20% of their original investment.
Arsenal and Manchester United of course have an impeccable record of servicing their debt.
The most interesting story is that of Newcastle United.
When Sir John Hall owned Newcastle and they redeveloped St James’ Park, Newcastle United used the private placement market to raise around £42 million of debt. In May 2007 Ashley made Hall an offer for his majority shareholding.
Ashley was in a rush to get the deal done and as a result did little due diligence – something which was to prove costly. I mentioned earlier that private placement deals (like others) can contain various clauses, including frequently a change of ownership clause.
Simply a change of ownership clause allows the investors to demand the new owner to repurchase the debt and often with a penalty attached for the early repayment. (Everton’s Prudential/ Bear Stearn’s long term borrowing had a similar clause which cost £7 million when Moshiri settled that debt early).
Because Ashley and his people had not done sufficient due diligence he was not aware of the change of ownership clause. The owners of Newcastle’s debt (perhaps spooked by what had happened at Leeds United) demanded repayment plus the penalty (known as “made whole”) once Ashley acquired Newcastle.
As a result he had to find a further £47 million to add to the £131 million he paid for the equity, something which when told caused an expletive ridden response from Ashley as perhaps can be imagined.
Back to Everton.
The private placement market offers a great deal of attraction to Moshiri as a means of funding the stadium. It won’t fund the whole amount, £300 to £350 million will still leave up to £200 million to be found from Moshiri, other investors and whatever sponsorship arrangements are made.
It will however provide stable long term finance, perhaps not quite as cheaply as that of Tottenham Hotspur, but nevertheless more affordable and secure than bank debt. It also throws up an interesting thought in terms of Moshiri’s long term plans and commitment to Everton.
A change of ownership clause would make any new purchaser of Everton after the stadium is build, likely to have to find new funding. So perhaps the view that Moshiri cashes in once Bramley-Moore is built is not quite correct – he could be here for the long term after all……