ShareLiverpoolFC
Commentary on Liverpool FC’s financial position
Background
Like all informed fans of Liverpool FC (The Liverpool Football Club and Athletic Grounds Limited (“LFC”)) ShareLiverpoolFC (“SLFC”), the fan organisation committed to acquiring an equity stake in LFC, has major concerns over the current financial position of LFC. To help understand the current position SLFC has undertaken a review of LFC’s finances using financial modelling widely used in the football industry. Basically we have used the latest published audited accounts (31st July 2007) of LFC and Kop Football Limited (LFC’s immediate parent company (“Kop Football”) and together with LFC and LFC’s subsidiary companies herinafter referred to as the “LFC Group”) as a starting point and in light of information in the public domain we ran the figures in such accounts forward to establish an estimate of the current financial position and projections of future trading results and cash flows. The software we have used is widely used by clubs in the Premier and Football Leagues to run their own in house profit and loss and cash flow projections, so SLFC is confident that the results of the exercise give a fair estimate of LFC’s current and likely future financial position under the current ownership, capital structure and cost base of the club. The software also enables us to run multiple projections based on different levels of performance on the field
Structure
LFC is currently owned by Messrs Hicks and Gillett (the “Owners”) through a chain of onshore and offshore holding companies. Earlier this year the Owners negotiated a re-financing package for the LFC Group that resulted in bank facilities being put in place totalling some £350.5m. £245m of this facility was placed with Kop Football and £105.5m with LFC. As far as SLFC is aware, Kop Football owns no other sources of income other than LFC and its subsidiaries. Accordingly, the Owners will have to either look to cash flows generated by LFC or inject additional capital to fund the interest cost (and ultimately repayment) of this debt. SLFC estimates that the LFC Group’s cost of borrowing is approximately 9% at the moment; which, on the level of the facilities we estimate is drawn down, equates to a total interest cost of some £25m pa for the LFC Group. This debt has to be refinanced in either January or July 2009. Given the current lack of liquidity in the credit markets and the move by banks to higher quality security, this refinancing is going to be at best difficult for the LFC Group. Not only is there little in the way of tangible assets within the LFC Group to act as security, but also our projections show that the club is now not generating sufficient profits to cover the interest cost at this level.
Trading results / projections
We estimate the club made a profit last year (to July 2008). However, financially 2007/8 was an unusually good year for LFC due to unusually high profits earned on the sale of players, increased Premier League revenues that the players’ contracts have not yet caught up with and qualification / a good run in the Champions League. Our projections show that financial performance is deteriorating in this current year and worsening significantly over the next few years even with continued participation in the Champions League. Over the next five years we anticipate losses to range between £30m to £70m pa. These projected losses are largely due to the club not having a big enough stadium or commercial income to support its current player and debt costs.
As mentioned earlier, the LFC Group have to re-finance their bank facilities by next July. Our projections show that the current level of facilities (which includes the £60m ring fenced for the new Stadium) would be fully utilised during the 2009/10 year with cash needs still increasing due to continued losses. Therefore, unless the Owners inject more equity capital in the meantime, the LFC Group could be facing even higher levels of indebtedness and related interest costs.
Why is the debt so high?
The last audited accounts produced when the club was under the control of its previous owners showed net bank debt of only some £25m. Also, at that time there was no shareholder debt at all secured on the club’s assets. Since then additional bank facilities of some £325.5m have been put in place by Kop Football and LFC with very little increase in tangible assets to show for it. It is true that some considerable amounts have been spent on new players in this period but our estimates show that net cash expenditure, after allowing for the sale of players, since the change in ownership only amounts to about a net £53m
Of the current total bank facilities of £350.5m, £245m is held at the Kop Football level and £105.5m at the club level. In round figures, of the £245 borrowed by Kop Football £180m was paid to the previous shareholders and £64m has been lent to the club. At the club level £45.5m of the £105.5m facility is in respect of day-to-day working capital needs, including the purchase of new players. The remaining £60m was meant to be allocated to getting the new stadium under way. Given that the new stadium has been shelved for now apparently due to lack of funds we are not sure how this £60m facility is currently being used.
As part of the security for the LFC Group’s borrowings, LFC has given RBS (and the other secured creditors) a charge over the share capital of LFC and LFC has provided RBS (and the other secured creditors) with security over all of its assets in respect of up to approximately £165m of the bank facilities. This £165m exceeds the book value of the assets currently on the club’s balance sheet.
The main reasons why the LFC Group debt is high, and will continue increasing, without new capital being injected are:
1) the Owners used borrowings rather than their own capital to cover the initial cost of buying the equity in the club;
2) the club is moving in to a loss making situation due to too high a cost base for a) the current size of its stadium and b) the current level of contribution from its commercial activities; and
3) interest costs will continue to contribute significantly to future trading losses which, without the injection of new capital by the owners, will need to be financed by further borrowing.
The key issues that arise from the above are: -
1) Interest cost. The club has been burdened with an unacceptable level of bank borrowing. Assuming total facilities are used this would amount to an interest cost of £15m pa at club level. (£9.5m to the bank and £5.5m to Kop Football) On top of this Kop Football is incurring additional net interest cost of some £16m pa. We worry that the Owners may look to fund this additional interest out of cash flows generated by the club. Our profit and loss account and cash flow projections show that the club cannot afford this.
2) Refinancing problems. All this debt has to be refinanced in 2009. As mentioned above, the lack of liquidity in the credit markets and the move by banks to higher grade security makes us believe that the Owners are likely to have great difficulty in refinancing this debt due to their apparent lack of cash / free collateral and the apparent lack of future profitability to service the cost of the debt. This could result in major operational problems for the club.
3) Credit risk of owners. As mentioned earlier, the club has provided RBS (and the other secured creditors) with security for up to £165m of the bank facilities whereas its total bank facility is £105.5m. So the club is in effect also securing that part of Kop Football’s debt that it lent on to the club. This level of security exceeds the book value of the assets on the club’s balance sheet. If the “football bubble” was to burst, the “goodwill” which is currently inflating the values of football clubs would evaporate, therefore, reducing the value of the security held by RBS (and the other secured creditors). In such a scenario, if Kop Football was to default on its bank borrowings it may not be possible for RBS (and the other secured creditors) to simply take control of LFC and sell it, as there may not be the buyers prepared to take on LFC’s debt obligations. In such circumstances, there would be the risk of the club being put into administration by RBS (and the other secured creditors) to enable them to realise their security over the club’s assets, basically player’s contracts. We have no way of knowing about the wider financial security of the owners, but given the current market conditions, the calls for restrictions on the ownership of Premier League clubs and the level of borrowing there may be risk here for the club.
Champions League
Our projections show that even with continued participation in the Champions League the club will not continue to trade profitably from 2009 onwards with its current cost base and debt levels. Were the club not to qualify for the Champions League next season it could lose up to a further £30m pa.
Stadium
Another major factor regarding the future profitability of the club is the stadium capacity.
Increasing the capacity is essential. We have an open mind as to whether in the present circumstances this is best achieved by building a new stadium or enlarging Anfield. Our projections don’t include any provision for increased income from a larger stadium, as we do not see how the Owners can raise the necessary finance given the existing debt levels already associated with the club. Our calculations indicate that the funding of a new / larger stadium wouldn’t be a problem if the club was largely debt free before commencing the project. We estimate that additional revenues from a larger stadium could equate to about £20m pa. Amongst other things, this could give the club some protection from a down turn in revenues in any years that the club didn’t qualify for the Champions League. Like most observers, we believe that a new larger capacity stadium is essential if the club is to remain competitive at the highest level. The longer this project is delayed the more difficult it will be for the club to maintain its competitive position.
The Future
The conclusion we draw from the last eighteen months is that the Owners are struggling to provide the financial resources necessary to take the club forward. They have burdened the club with the economic consequences of an unacceptable level of debt, as they have been either unable or unwilling to use their own funds to invest in the club.
The Owners should recognise that their tenure is damaging the club, especially as regards the delay in the start of the new stadium, the debt they have saddled the club with and the fact that they have lost the trust of the supporters. We would urge the Owners to open discussions to sell the club to potential new owners who can demonstrate themselves to be better placed to serve the club.
SLFC would want to participate with a suitable new owner in any purchase. SLFC’s long-term objective is to own LFC for the benefit of its fans. However, in the medium term our strategy is to work with potential new investors to help achieve a change of ownership and represent the fans interests by acquiring a stake in the club. After the experience of the current owners it will be important for any new owner to ensure that they have the confidence of the fans. We believe that the participation of SLFC will assist with this.
Lastly, in the short term, before any change in ownership is achieved, we would urge the Owners to convert the £64m loan due from LFC to Kop Football in to share capital. Doing this will not only reduce the club’s interest cost and improve the club’s balance sheet gearing, but also ensure that none of these funds are withdrawn from the club to help Kop Football fund it’s own interest cost. Around £180m of the debt at the Kop Football level represents the cost of buying the equity in the club. The cost of this should be met from the Owner’s own resources not the club’s.