The complacency around Everton’s debt position is staggering and worrying in equal measures. 

Commentators, even many fans and smaller shareholders with some interest in the club’s finances almost glibly talk of external debt as not an issue of immediate concern despite it totalling more than 3.5 times current turnover. It is of course, tied up with the ownership and leadership crisis around Everton which whilst requiring the correct outcome, needs sorting with absolute urgency. Let’s not forget selection, due diligence, acceptance and then Premier League approval will even in a best case scenario take 3 months to complete. Our debt position cannot be rectified prior to new ownership, which from a footballing perspective renders us vulnerable this transfer window. 

Subprime

Debt is not a recent phenomena. Arguably, Everton have been subprime borrowers (i.e. not having access to main banking markets for the majority of their non-shareholder provided financing requirements) for almost all of the last 20 years. There was a brief interlude immediately after Moshiri’s arrival when under Ryazanstev’s financial management  and ability to form banking relationships, Everton enjoyed the support of Santander and ICBC of China – however this was short lived. When ICBC withdrew from the UK corporate lending market, Everton could have switched facilities to Santander, but the board under the direction of Kenwright chose to return to “friends of the club”, Rights and Media Funding despite the higher associated costs.

Perhaps, because of the nature of the football industry or issues relating to how a company is managed and run, when traditional lenders are inaccessible or not wholly committed, companies such as Everton tend to look to specialist, sector specific lenders often funded by wealthy, secretive private owners, almost always having their source of funding domiciled in offshore tax havens with minimal scrutiny, little or no requirement for disclosure and little or no tax liabilities for their funders.

As is the case with Everton’s relationship with Rights and Media Funding. Rights and Media’s website can be found here. Whilst Rights and Media Funding Limited is a UK registered company, its lenders (ie where it sources its funds from) are not. Rights and Media Funding Limited (as of its last accounts 30 June 2023) owed its creditors £321.7 million. Three companies held charges against the assets of the company. Those three companies were Carroch domiciled in the Bahamas, Galloway in Cyprus and Mh Finance in Bermuda. It is well documented within the media that the ultimate beneficial owner is Michael Tabor.   In total, they claim to have lent more than $2.5bn over the last 5 years. 

In their last accounts £321.25 million was lent out to a number of football clubs including Everton. West Ham, Nottingham Forest and I believe, Wolves have also previously used R&MF plus several European clubs & indeed, eleven clubs in the Spanish League, La Liga in 2020. 

Everton as of 30 June 2023 had the following facilities available to them via R&MF: £150 million facility repayable before 30 June 2028, £52.8 million repayable before 30 June 2026 and a €28 million facility repayable before 30 April 2026. These facilities when drawn down attract interest rates of 5% above the base rate, so currently are costing Everton 10% per annum.

The debt is secured against the Everton company bank accounts, property assets (not Bramley-Moore) and future player receivables (i.e. outstanding transfers)

Distressed

Following the Russian invasion of Ukraine in early 2022, as Everton’s financial position deteriorated subprime lending has increasingly become distressed. 

Whatever the sources of Moshiri’s funding had been to that point, to all intents and purposes the tap (bar one small, now repaid loan tied up with the MSP Sports Capital lending) was turned off. Furthermore, lucrative, sponsorship deals with USM owned businesses were immediately canceled as the West turned on the sanctions regime not only to the Russian State but many of its oligarchs (I have some sympathy with the thought that they, under Putin’s control, are one and the same).

So typically, what does a cash strapped, and capital strapped business, already reliant on subprime lending do when its commercial funders and shareholder(s) can no longer support the business operationally, and in the case of Everton, during a hugely expensive, capital intensive infrastructure build?

When their track record doesn’t warrant it or the deal isn’t without considerable risk, companies have to turn to more esoteric and expensive debt. For those with a long memory, you may recall perhaps the world’s most famous leveraged buyout – KKR & Co.’s takeover of RJR Nabisco in 1988 which was funded in this manner.

We are talking of a form of debt known as PIK debt. PIK stands for payment in kind. It is a form of junior debt on which the borrower  pays no cash interest (or yield) until the principal amount is repaid (or redeemed). PIK debt can be structured in a variety of ways, including as a subordinated loan, a deep discount bond, loan notes or even in some cases an issue of bonds in the public debt markets. Depending on how the PIK debt is structured, on each interest payment date the accrued interest is either added to the principal and is paid when the debt matures or is “paid” by the issue of further loan notes or bonds. Typically, but not always, the debt is not secured – generally because all the debtor company’s assets are already encumbered.

777 Partners

It is almost certainly the case that the debt originated from 777 Partners during their unsuccessful ownership bid, and now an asset of A-Cap’s is in this form. It provides the borrower (Everton) with some breathing space in terms of having to meet interest costs from cash flow, but it usually comes at a heavy price. There is considerable risk for both the issuer (the lender) and the borrower. The due date for the 777 initiated debt (principal amount in excess of £200 million before accumulated interest) is sometime in 2026 – as is the Rights and Media Funding facility.

This debt was secured by the security arrangements for the Rights and Media Funding facilities (mainly for administrative reasons) although it is junior to all the outstanding debt due to them – i.e. Rights and Media would either have to be repaid first or give approval for the 777 debt to be repaid by Everton or a new investor or owner. 

An analysis of 777 Re’s (the Bermudian reinsurance business) accounts and the financial statements of A-Cap suggest that much of their corporate lending was structured in this (PIK) way. As was the case within their airline and aircraft leasing businesses there is documentary evidence of such loans with interest rates of 18% or more per annum (although in the case of Bonza no loan documentation was discovered). It is a reasonable assumption to believe that the loans made to Everton were at, and continue to be, at similar rates. (There is an argument that the cost may be greater when one considers the increased costs for 777 Partners to borrow the money to lend to Everton, as their finances deteriorated – there are other much more expensive loans within the 777 and associated companies’ debt portfolios).

Nevertheless the cost will be considerable and if the future owners of Everton have to pay the full principal and associated borrowing costs, this will be, as was witnessed when Friedkin appeared willing to buy Everton, expensive and potentially prohibitive. For the purposes of this discussion I have ignored the previously expressed, other potential legal issues.

If this seems unnecessarily negative or doom laden and unlikely or non-evidence based, then consider the situation at Manchester United when the Glazers acquired their club through the extensive use of debt back in 2005. That included more than £200 million ($258 million) worth of  extremely expensive PIK notes that ballooned in cost. Those old enough will remember that United fans formed significant protests against this type of funding due to the impact it was having on player recruitment and squad wage levels – a measure of on-field competitiveness.  Had the PIK debt not eventually been paid down and was held to maturity, the final settlement figure was close to £600 million.

Friedkin

The situation with the Friedkin debt (another £200 million minimum) is less clear with little or no information in the public domain other than the security arrangements protecting their debt. Friedkin’s debt is secured against the equity of the Everton Stadium Development Company and Moshiri’s 94.1 % Everton shareholding – held in Blue Heaven Holdings. 

This means that Friedkin has security against assets owned by Everton (the stadium and Bramley-Moore leases) and assets owned by Moshiri (Blue Heaven Holdings). Any future sale of Moshiri’s shares would necessitate the repayment of the Friedkin debt by the new owner or alternative funder – more on that in a minute. It is not known what the interest costs of the debt are but it has to be a cost commensurate  with the degree of risk in the lending. Nor is the precise structure known but a deferred interest form of debt is likely. I believe the repayment date is mid 2025.

At best PIK type lending is last resort and buys the current owner some time – nothing more though. PIK can only do so much for a company that’s already struggling. Everton may argue that the new stadium and its enhanced commercial income capabilities mean that by 2026 – the maturity date of much of this debt we will be in a far better position to restructure debt. A new owner, a stronger balance sheet, higher revenues should make us more attractive. But it is a dangerous game to automatically assume that Everton can attract new owners with a substantially superior credit profile and/or ability to pay off or refinance debt. As written about previously, bottom fishers or vultures will seek substantial writedowns, not only of Moshiri’s debt but anywhere else it can be achieved. That is problematic when individual creditors believe they hold sufficient security to achieve a full repayment. 

Typically, there’s always a point, especially in a prolonged takeover, genuine or not, predictable names enter the frame whether media or client driven public relations led.

John Textor

Enter stage left – for a second time, John Textor. Already championed, not least by his own words, as a potential buyer of Everton – hitting all the buttons with his description of the attributes and potential for Everton, his media people (and Moshiri’s who have also been presenting his case). Yet he remains a significant “owner” of Crystal Palace. An immediate red flag for the Premier League

In an extremely complicated ownership structure, Crystal Palace has the following beneficial ownership structure – Textor (29.4%), Harris (18.8%), Blitzer (18.8%), the well known Steve Parish (9.7%) and others (23.3%) including Iconic (approximately 7%). The Textor shareholding is  widely recognised as 45% but that relates to Eagle Football Holdings. However, it is significant as far as the Premier League is concerned – above 9.9% which then forbids the ownership of a single share of any other club.

Iconic Sports Acquisition Corp was a NYSE listed SPAC which delisted and returned funds to investors in September 2023 after failing to conclude sports acquisition deals within its regulatory time frame. Iconic was advised by, and had shared management links with Tifosy. Tifosy, for the keenest of those amongst us, had very close associations with 777 Partners – trying to raise significant capital for their football acquisition company, Nutmeg, without any success – please search this website for further details. Tifosy did raise a very small €5m, fan generated bond for Genoa last year, but were significantly involved in Iconic Sports Acquisition Corp – google Fausto Zanetton for more details.

Textor, owns his holdings in Crystal Palace through a structure which is partially funded by PIKs at 16.0% and 13.% to December 2028. Those funding vehicles are provided by Ares Capital. Ares Capital provided Boehly and Chelsea with $500m of fresh capital in September 2023. In addition Textor’s shareholding of Olympique Lyonnais was bought on credit – secured by  (in part) – you’ve guessed it – his Crystal Palace Holdings.

So we have a man purported to be able to meet Everton’s considerable cash and capital requirements, pay Moshiri, and fund future debt repayments, yet much of his existing portfolio is funded by expensive debt or the securitisation of existing holdings. Liquidity or access to fresh unleveraged capital must be a significant barrier to him acquiring Everton Even before we get to is there a buyer for a significant minority stake in Crystal Palace – a precursor to the Premier League giving a green light to the acquisition of another Premier League club.

As always, with the Moshiri-led Everton, one has to look beyond the PR and the narrative pushed by Moshiri.

The level of debt, let alone the nature of it, and the future debt repayment schedule, plus capex requirements, necessitates a speedy conclusion to Everton’s ownership issues. It also requires a highly liquid new owner, not an already leveraged individual or company.

It’s time for Moshiri to be honest, and provide real solutions, and to stop providing worthless PR driven narratives aimed just at kicking the can down the road.