In Greek mythology, Tantalus, son of Zeus, once stole ambrosia and nectar from the gods in Olympus to allow his people to benefit from the supposed gift of immortality and to have the divine secrets revealed. By means of penance, some time later, he decided to sacrifice his son Pelops and feed his body to the gods. Unfortunately for Tantalus, all but one god realised what they had been served, not eating the meal put before them.,
The gods reserved their punishment for after Tantalus had died When Tantalus died he was punished by the gods for eternity, standing in a pool of water beneath the boughs of a beautiful fruit tree. When he reached for the refreshing fruit the boughs lifted themselves out of reach and when thirsty, he stooped to drink the cool, clear water but each time the waters receded.
According to the myth, what he most longed for remained tantalisingly out of reach for ever.
Evertonians, in their quest for a successful club and perhaps a stadium fit for what will soon be the second quarter of the 21st Century might have some sympathy with Tantalus’ feelings.
However, whilst the wait for success on the pitch may still be extended beyond what will be 28 years next season, unlike for Tantalus, the Bramley-Moore stadium appears almost within reach.
Walls of worry….
There’s an expression often used in stock market investing that “markets climb walls of worry”. Essentially it describes a bull market’s ability to see through near term problems to extend gains further. In a sense, the building of Bramley-Moore is an example of such – despite the appalling performance on and off the pitch, despite a pandemic, despite the loss of commercial partners, despite the huge financial losses of recent years we can see the physical structures growing out of the infilled dock.
Finding the financing has been a long trip..
Farhad Moshiri has always promised to meet the funding costs of the stadium over and above what was borrowed and what is contributed by a commercial partner. Long assumed (and indeed part paid for) to be USM that commercial partner route is no longer available to the club and no doubt alternatives are being sought after.
Moshiri himself, has contributed in excess of £100 million for the enabling works (the dock infill and preparatory work) and quite probably more this year as the development continues. However it was always intended that the majority would come from an external source, most likely a senior debt provider.
In 2017, Liverpool City Council offered to act as guarantors for £280 million of the (at the time) expected £500 million cost to the stadium. In January of 2018, Mayor Joe Anderson stunned the Everton AGM with a proposal to borrow £280 million from the Public Loans Work Board, lend it to Everton, thereby enabling the City of Liverpool to earn approximately £7 million a year in interest. Ultimately this proved unworkable and undesirable for both parties (the council and Everton) and despite considerable due diligence which had started in 2017 (including the failed 2022 Commonwealth Games bid) it was quietly dropped.
It has been an open secret since 2018, that the bulk of Everton’s funding for Bramley-Moore was expected to come from the US private placement market – the market that Tottenham Hotspur tapped so spectacularly in 2019 raising £525 million of long term debt at between 2.6 and 2.9% for stadium financing and again in May 2021 a further £250 million, average maturity of 20 years, at 2.8% to repay their £175 million CCFF funding from the Bank of England.
In January of 2019, the then Director of Finance, Sasha Ryazantsev told the Everton AGM “We are having very advanced discussions now with financial institutions which are encouraging. The money will be available.”
A year later, January 2020, Farhad Moshiri was unable to attend the AGM due to being in “deep discussions with a potential investor over the club’s proposed new home at Bramley-Moore Dock.”
By January 2021, the AGM was told by Denise Barrett Baxendale “While the club waits for the determination of the planning application we continue to pursue a range of funding opportunities including senior debt”. In a major update in October 2021 the CEO failed to mention the financing of the stadium.
Just prior to Easter 2022 (a week ago) the club released details of signing contracts with Lang O’Rourke committing both parties to the completion of the stadium. In a statement short on specific detail Barrett-Baxendale said the contract signings “brings clarity on the overall costs of our new stadium.”
I have to challenge this on a number of points – does this mean the costs are fixed?; what is the expected completion date?; and how is it to be financed? Whilst construction costs are the most significant part of the build costs, in terms of the life long cost of the asset, financing costs are considerable. Equally delays in completion create an effective cost in terms of missing income streams.
In the absence of AGMs, in the absence of any formal or informal communication with board members, then fans such as myself and others are left asking questions for which it is unlikely that answers will be forthcoming.
The conditions for corporate lending in the last few years have been the most benign ever. Record low interest rates and constant pumping of money into financial systems across all major economies have reduced the cost of borrowing significantly and caused yield hungry investors to buy corporate debt at levels never seen before.
In such an environment, how is it that the club and Farhad Moshiri have been unable to secure the primary source of financing the stadium? Is it a result of poor financial performance? Is it a result of a lack of governance or an absence of a suitable board or does the business case not meet the requirements of the lenders?
As shown by Tottenham’s success in using the private placement market, there is an appetite for long-term fixed cost lending to Premier League clubs. How can Tottenham raise funds on two occasions and we seemingly despite being in the market since 2018, only have a non-prime lender in Rights and Media Funding?
I want to show the costs of funding corporate debt over the last 30 months or so – one for the lowest investment grade of BBB and the other for more risky high yield (junk) lending. I want to show the yields (interest costs in plain language) and the cost of borrowing £350 million on an annual basis:
|“high yield index” yield||Cost in £m||Date||BBB yield||Cost in £m|
High yield = ICE BofA US High Yield Index Effective Yield, BBB = ICE BofA BBB US Corporate Index Effective Yield
I’m aware that the club was seeking the equivalent of a BBB rating which in rating agency terms means the company (Everton) has adequate capacity to meet financial commitments, but is more subject (than higher grade companies) to adverse economic conditions. Below BBB indicates a more speculative investment with higher default risk and therefore less security for lenders. Given the absence of a lending deal one has to assume this (the BBB rating) has not yet been achieved.
So what does this mean?
Let’s say we had secured a BBB rating and on the 1st January 2021 we raised £350 million of funding. Based on the index, that funding would cost us £7.56 million a year in interest payments. Had we not achieved BBB and were more typical of a high yielding investment opportunity then on the same date, a £350 million loan would typically cost £15.4 million in annual interest payments. Quite a difference based on perceived credit risk.
However bond yields in recent months have started climbing as inflationary concerns (pre the Ukraine invasion) and even more so now, have required investors to demand higher fixed returns for their cash.
A loan to a BBB rated company on 14th April 2022 would now yield 4.29% – a £350 million loan would now cost £15.02 million in annual interest payments.
A loan to a less creditworthy company (“high yield”) on 15th April 2022 would now yield 6.36% – a £350 million loan would now cost £22.26 million in annual interest payments.
Put it another way, a loan agreed on 1 January 2021 would on a per seat basis cost £142 a year for the stronger BBB grade and £291 for the higher yield. Let’s remember that these costs are fixed for the period of the loan – 20 and up to 30 years in some cases.
On the 14th April 2022, on a per seat basis the cost of the same loan increases to £283 per annum for BBB, and a huge £421 if considered higher yielding.
Given that one of the primary reasons for moving stadium is income generation, making us more competitive against a growing number of challengers, the increase in funding costs is significant and impacts either the price of seats, the amount spent on the stadium (possibly more value engineering?) or the marginal income gains from the stadium.
Based on those figures and assuming an average maturity of 20 years, the cost of financing increases by between £137 million and £149 million if closed today rather than 15 months ago.
These figures matter. As mentioned earlier the purpose of building the stadium is to generate more revenue, making the club more profitable and thus more competitive in the future. Tottenham carry an interest cost of approximately £21.7 million on their private placement debt. The new stadium increases Tottenham’s income (from the old White Hart Lane) by much more than £65 million (ignoring naming rights) – so the stadium after financing costs is hugely cash generative compared to the old stadium.
Everton hope to go from £15-£17 million (estimated after future ticket price increases) per season at Goodison to something approaching £50 million per annum generated from Bramley-Moore. However if, assuming the debt funded model goes ahead) interest costs are £15-22 million based on the figures above, the marginal income gain is significantly smaller – estimated then at £13 – 20 million. Useful, of course, but not the game changer, the investment deserves or indeed from the considerably higher ticket prices paid for by fans. It also ignores potential relegation and/or the prospect of even higher interest costs from corporate debt providers.
Timing of the opening also matters. Employees of the club informed shareholders in a recent site inspection that the start of the 2024 season was a viable opening date. Others, including well informed media observors point to a start possibly 12 months later.
The point of this article is to inform, create discussion points, and hopefully draw information from the owner and/or club in terms of how the stadium is financed. Last year it was suggested by the club that the first premium packages would be first sold in the summer of 2022. A few months from that and there’s still huge questions that require answers. Answers that the fans and other stakeholders require and deserve.