This THST analysis of our current and projected finances. Selling Kane and Dele would fix the problem.....
this report is contained in the THST minutes for November.
FINANCIAL UPDATE The Club continues to operate on a sensible financial basis in order to take a long-term view for the benefit of current as well as future generations of Tottenham Hotspur fans. The Club’s investment over recent years in facilities has resulted in total gross tangible assets at 30 June, 2018, in excess of £1bn - facilities which include the Training Centre, the new Players’ Lodge, Percy House, home of the Tottenham Hotspur Foundation, Lilywhite House Club offices, new retail warehouse, new Paxton House Ticket Office and now the new stadium along with the newly-opened Spurs Shop – the largest football club store in Europe - plus other property assets. The Club does not define ‘total gross intangible assets’ but it is reasonable to assume that this is the sum of all assets on the balance sheet less intangible assets which, for a football club, primarily consists of the players. As at the last balance sheet statement (June 2017) this number totalled c. £490m, so has risen sharply as the stadium nears completion. The comparable figure for Manchester United is c. £750m. While the book value of MUFC’s assets have likely been substantially eroded by depreciation, it does help provide a sense of the scale of investment that has been undertaken by THFC. The additional, unstated costs of the project delays are also likely to have had to be expensed rather than added to the capital value of the stadium – which means that the Club’s profits are likely to take a substantial hit at the next June 2019 year end.
These investments have been financed by funds from the Club and bank finance, principally from Bank of America Merrill Lynch International, Goldman Sachs Bank USA and HSBC Bank plc (“Banking Partners”) who have provided a development facility of up to £637m. At 30 June, 2018, the Club had net debt of £366m. The Club has previously reported that it had obtained a £400m loan from BML, GS & HSBC to fund the stadium but at our
Board to Board (B2B) meeting in February it was acknowledged that this would need to rise upon refinancing to meet increased stadium costs. These were reported at the time at c. £800-850m. Even if we conservatively assume that such additional costs would increase the existing debt facility from £400m to £450m, it suggests that the unforeseen delay in opening the stadium has increased project costs by up to £187m (i.e. £637m minus £450m),taking the total cost over £1bn. Failing to hit the September opening date is not the sole cause of increased costs but is likely to cover a combination of factors including increased costs incurred to (not) meet the deadline for opening e.g. paying a premium to get more construction workers on site and opportunities for deferred works and upgrades to be brought forward due to more time now being available.
Net debt is total debt less cash balances. As at June 2017 this was negative £24m or, in plain English, the Club had £24m more in cash in its bank accounts than it had in outstanding loans to banks. With net debt at £366m at June 2018, this suggests the Club spent at least £390m in that 12 month period, or £32m per month. That rate of spend is likely to have started to wind down in the months since June.
It is of some note that BML, GS & HSBC have provided increased support. This can be seen as vote of confidence but this is not the refinancing trailed at recent B2B meetings. This appears to be a simple extension of the existing loan with final repayment in 2022, but negotiating the extension will have given banks the opportunity to revisit pricing in view of the changed (increased) risk profile of the borrower. We believe the previous interest rate to be c. 3.3%; this has not been confirmed and has likely increased following increases in the Bank of England base rate since June 2017.
This level of investment by the Club has been made possible by record revenues of £381m and profit from operations before football trading, depreciation, interest, tax and exceptional items of £163m for the year to 30 June, 2018. Trading for the current year will, however, be impacted by the additional costs of Wembley and the delay to the opening of the new stadium. The comparable figures for 2017 were £306m and £118m. The substantial increase in 2018 can likely be put down to increased attendances at Wembley and further progress in the Champions League compared with 2016-17. By way of comparison, the comparative figures for MUFC are £590m and £62m. THFC’s gross profit margin can consequently be considered very healthy and it is these profits that are contributing the ‘equity’ into the stadium project. Once the stadium is complete, they will be required to service debt. It goes without saying that maintaining profits at the level seen in 2017-18 will be dependent on continued Champions League qualification.
Working with our Banking Partners and our financial advisor, Rothschild & Co, we shall be converting this development facility, which currently expires in April 2022, into notes with a mixture of debt maturities. This suggests that the Club will enter into a flexible notes programme. This is a debt instrument which is, to the best of our knowledge, unusual in football finance but may be appropriate to the Club’s circumstances. By issuing these in a variety of maturities and, presumably with different repayment structures, the Club can try to match future cash flows with debt service on a bespoke basis e.g. a note could be issued with repayments that match the payments received from the new Nike contract (see below).
Our suspicion has been that the presence of US investment banks in the stadium bridge financing and the association with the NFL has provided a clue as to the geographical source of permanent long term financing. If we are correct, the Club will need to ensure appropriate mechanisms are in place to mitigate GBP/USD currency risks. It is also the case that as the debt rises, the Club’s negotiating position weakens.
The residual amount of gross debt to be converted or extinguished will depend on a number of factors including several commercial discussions. Or, in other words, any upfront payments received from stadium naming rights and/or a new shirt sponsor deal will likely to be used to reduce the amount of debt raised in any refinancing.
In recent months we have secured an extended agreement with Nike up to 2033, one of the longest football club deals in Nike’s history. We have also announced a number of new brand partners including, amongst several others, Audi, IWC Schaffhausen, HPE and EA SPORTS. The original deal with Nike was reported to be at £25m per season and newspapers have suggested the new contract amounts to £30m per season. The Club advises that the deal is commensurate with those of its top 4 peers despite reported numbers suggesting the contrary. The length of the Club’s new contract however does provide certainty of cash flow; a sensible objective if it matches debt service cash outflows, but comes at the cost of locking the Club into a contract that could over time fall behind those of peers. There may be break clauses in the contract to mitigate this risk.
Too Much Debt? Tottenham fans will very aware of the precedent of football clubs overstretching themselves with debt and subsequently paying a heavy price. Given the rapid increase in THFC’s debt position during 2017-18 is this something we should be worried about?
The increase in debt in absolute terms increases the risk but THFC’s capacity to service debt has also increased due to improved profitability. Has the latter improved enough and can it be maintained? Only access to the Club’s modelling can answer these questions (even then this is a detailed forecast rather than cast-iron certainty) but unsurprisingly this information is not made public. What we can do however is consider performance in three quite different real-life scenarios over the last three seasons and then calculate debt repayment scenarios based on the increased £637m debt figure. We shall focus on the Operating Profit before Exceptional Items and Depreciation figure, which has been reported by the Club for each of the past three seasons. This figure reflects the true operating performance of the Club as it doesn’t include the results of transfer market activity, the depreciation of player contracts and the depreciation of the Club’s fixed assets. This number gives a good indication of the Cash Flow Available for Debt Service (CFADS). It should be noted that this is not the true CFADS figure that would ordinarily be used in the banking industry; this is normally derived from the Cash Flow Statement; in the absence of such for 2017-18 we are going to have to use operating profit as a proxy.
Our
analysis of the Club’s financial performance in 2016-17 earlier this year considered the actual results for 2015-17 and also used them to arrive at a projected figure for NWHL based purely on its increased capacity at NWHL (which also meant keeping the old WHL ticket pricing structure). To this we now add what we know of 2017-18. Consequently, we now have three real-life scenarios plus one limited forecast that we can use to give us an indication, nothing more, of the cash generation possibilities for the Club:
Scenario 1: 2015-16 – the old WHL with a 36k capacity with the team performing in the Europa League and under the old Sky/BT deal;
Scenario 2: 2016-17 – the old WHL with a 32k capacity with the team performing in the Champions League at Wembley under the new Sky/BT deal;
Scenario 3: 2017-18 – the Club renting Wembley with the team performing in the Champions League under the new Sky/BT deal;
Scenario 4: taking Scenario 2 and simply doubling the match receipts from PL games as a conservative approximation of revenues at NWHL.
We have no additional data with which to make a meaningful forecast of future performance so our approach is to use what we do know simply to frame the possibilities; operating profit for 2015-16 provides a probably unrealistically low worse case and 2017-18 a reasonable proxy for the upper bound (the increased capacity of Wembley should be counterbalanced by the multiplicity of premium pricing points at NWHL and the new commercial partnerships noted in the Club’s statement). One thing we can do however is factor in an estimate for increased player wages following new contracts toward the end of 2017-18 or subsequent to the June 30 reporting date.
We now need to consider possible debt repayment structures for the reported new debt level of £637m, modelling six different repayment structures with a revised interest rate of 3.84% to reflect the increase in Bank of England base rates since our last calculation. The first three incorporate a typical corporate loan structure which repays interest and principal over 7, 10 and 15 year maturities (the shorter the tenor, the higher the debt service requirement). Scenario 4 takes the £30m annual cash flows arising from the new Nike contracts and asks what would be the amount of debt that could be paid off over the 15 year life of that contract if those revenues were only used for debt service, producing the answer £337m. Scenario 5 asks what would be the annual revenues from a similar contract (e.g. stadium naming rights) that would be required over a ten year period to service the remaining debt of £300m after the Nike revenues have been applied to debt service. Finally, Scenario 6 looks at the debt service requirement for a 10 year bullet, whereby, as with the Club’s current debt, interest only is paid up until final maturity when the full principal amount falls due. This produces the following results.
Based on previous results and our average scenario meeting annual debt service payments of £93m to £114m in Scenario 1 and £65m to £87m in Scenario 2 would be difficult to impossible in each of the 2015-16, 2016-17 and Average scenarios. Only when the tenor is stretched to 15 years and debt service falls to between £43m and £66m a year does the 2016-17 and Average scenarios start to come in to play.
Scenarios 4 and 5 should be taken together as they consider the amount of debt that can be serviced from the (reported) cash flows from the Nike contract over 15 years and another similar contract over 10 years. The latter could be a combination of cash flows from naming rights, shirt sponsorship and/or the NFL contract for instance. Note that these revenues are not included in our future cash flow projection and would therefore boost CFADS. Commentators however have suggested that naming rights for NWHL could be worth between £15-20m per annum so getting to £37m for the residual debt service looks a challenge based on naming rights alone. Moreover Scenarios 4 and 5 combined require debt service of £67m over the first 10 years, falling to £30m for the following five. This is similar to the requirement in the earlier years at least of Scenario 3 and therefore the benefits of using this approach is not immediately obvious.
Scenario 6 uses the same approach as the current debt financing with debt serviced on an interest only basis. Final maturity is at 10 years when the principal become payable. This produces much lower annual debt service requirements but does create a very significant refinancing risk in year 10 as the Club would be unlikely to have £662m in cash on its balance sheet to repay the principal and interest outstanding. It would therefore be required to refinance the debt with a new debt instrument but would be risking insolvency if the financial markets were in a 2008-style meltdown.
Scenario 7 provides a comparison by looking at the debt servicing costs of a 10 year corporate loan for the £450m previously assumed to be the external financing need prior to the Club’s recent announcement. This shows that other than under the 2015-16 scenario (a scenario which looks unreliable as a future forecast) debt service could have been maintained albeit with reduced flexibility for additional investment. The spiralling debt has eliminated this option.
The Club’s statement noted that
“we shall be converting this development facility, which currently expires in April 2022, into notes with a mixture of debt maturities.” If we look at combining Scenario 6 with, say, Scenario 4 we can see the financial strategy the club appears to be pursuing. The annual £30m from Nike takes care of servicing £337m of the overall debt amount. If the residual £300m is financed by a facility with a bullet repayment structure the additional annual debt service requirement (until final maturity) is £11.5m per annum giving a combined debt service requirement of £41.5m. This amount still allows flexibility under all scenarios and while refinancing risk is not eliminated, finding £300m for a presumably successful cash generative business looks much more manageable than refinancing the whole amount.
It also follows that should the Club be able to stretch the tenor beyond 15 years the annual debt service requirement would fall further (but at the cost of increased cumulative interest expenses). For instance, if a 20 year tenor could be achieved on the full £637m, on a repayment basis annual debt service would fall to between c. £55m and £32m. This would be a long tenor by project finance standards and probably out of reach for the full amount. A smaller slug may be possible however and combined with one or more of the scenarios above could reduce pressure further.
In conclusion, the sharp increase in debt has taken some financing options off the table but there is still a path to service the increased debt without endangering the football operations. The Club’s statement suggests they are taking that path.
Michael Green
THST Board
