Season 2011-12 Fan Articles
Black Wednesday - A view from The City
By Richard Larnder :: 01/09/2011
44 Comments (»Last)
My take on the financial reasons behind what we've seen this summer and the events leading up to yesterday (31 Aug 2011 deadline day). Plus an alternative look at the motivation for reducing the debt.
First off, all of the numbers I'm quoting here are taken from the 31 May 2010 accounts (the latest we've got) so they're already out of date but I think it's enough to tell us what we need to know.
The good debt
Everton's debt is £47.6m but this doesn't tell the whole story. What's important when you're looking at debt is how much it costs, when it becomes due, not only interest repayments but if a capital refinancing is needed eg, in the case of a bond which has a 'bullet' payment at the end.
£25.6m of Everton's debt relates to the securitisation in 2002. This is repayable over 25 years at £2.8m a year (capital and interest) so the debt will amortise down to £nil in 2027. It has a fixed interest rate of 7.8% which means repayment amounts are known (as opposed to being exposed to interest rate rises) and with UK 10 yr gilts at 3.75% (the amount the UK borrows at) you'd have to say this isn't a bad deal.
In short, this debt is secure and serviceable. This leaves £22m of other debt, and this is where it gets a bit messy.
The bad debt
Next is a CFO's worst nightmare, a spiralling overdraft (£3.9m in FY09 vs £5.1m in FY10).
Overdrafts are essential for businesses such as Everton with a high amount of fixed regular costs (wages) and largely seasonal variable cash inflows (broadcasting and ticket revenue). However, they are dangerous because they're repayable on demand, meaning the bank could ask for its money back at any point.
Current trends would suggest that the bank may be asking Everton to reduce it's exposure to this kind of debt.
The ugly debt
£17m of total debt is a 'bank loan' which is secured against Goodison Park and broadcast revenues. Most importantly, some of it matures NOW and up to May 2013 meaning that it would need to be repaid in full at this date OR be refinanced ie, borrow £17m from somewhere else and use it to pay off the bank OR extend the facility with the bank (called 'rolling' your financing and highly unlikely in this climate).
The above presents a huge risk to Everton since they need to prove they can meet their obligation up to 2013 otherwise the bank could pull the plug. In my view, this is the reason for some of the asset sales we've seen (Bellefield) and the now infamous 'mortgage no.48' we saw registered at Companies House earlier in the summer. It proves that Everton can arrange a refi on the existing debt if required.
The uglier (hidden) debt
It's my understanding that we pay £1.1m a year for leasing Finch Farm. This obligation does not appear on our balance sheet ('off balance sheet finance'). As a general guide, banks hate this kind of deal because it ties up cash flow and also takes further assets as security ie, the asset being leased (which they can't take for themselves).
A banker would effectively apply an interest rate to the annual charge and come up with a theoretical debt number that would be on Everton's balance sheet if it were not for those troublesome accountants and their rules.
In Everton's case, applying 7% interest (my guess at Everton's cost of borrowing) would suggest an effective debt balance of £15.7m in relation to Finch Farm.
How does Everton pay for this (or not as the case may be)?
Stop reading here if you're of a nervous disposition.
When considering your financing options, the key thing to consider is how much cash you've got to play with in order to meet debt demands. And this is the key for Everton.
Everton's cash that they make from normal business or earnings before interest, tax, depreciation and amortisation (EBITDA ? not including player sales/purchases) in 2009 was £8.1m. Quite healthy but not great when you consider that interest is paid out of this (about £4-5m a year) and any residual would be the transfer budget.
Over stretching
The problems come in 2010 when EBITDA dropped to <£1m. The main driver of this is was an increase in wages of £5.3m and most likely Everton's undoing (wages to turnover now being at 68.7%). ie, at this point (31 May 2010), Everton need to either raise cash from selling assets (Bellefield and/or players) in order to reduce/pay debt. This is most likely in conjunction with a cost reduction exercise (reducing wages) in order to free up more cash to meet debt needs.
In my opinion, this is what we've seen over the last 18 months and came to a head yesterday. Everton have now sold Bellefield, Pienaar, Yak, Beckford and Arteta to help meet bank obligations and has effectively reduced operating expenses by (guess) £9m+ a year, not including wage increases for other players.
In conclusion, the warning signs have been there that this sort of event was likely to happen. However, as fans, we can take comfort that Everton's financial position is not perilous (it's not great, I admit, and not conducive to building a successful team) but suggestions of melt-down or administration are wide of the mark. There are a lot of 'levers to pull' in the event that further repayments are required.
Why else repay debt now?
There have been a few wild internet rumours of late regarding a potential takeover. Whilst none of these seem to have any substance, it's interesting to note the effect that debt has on the amount that shareholders receive for their shares in the event of sale.
Typically, in the sale of a private company, debt is knocked off the business's enterprise value (EV) in order to arrive at purchase consideration (cash that shareholders get). EV is estimated based on the amount of cash a business generates and is expected to generate in the future.
You could argue that a decent way to maximise shareholder value prior to a takeover would be to sell off some 'non-core' assets (they won't reduce EV too much ? in fact they might increase it if you include the wage reduction!), use the cash proceeds to reduce debt, and effectively pocket some extra cash when you sell up.
Food for thought and certainly enough to keep the conspiracists happy.
Reader Comments (44)
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2 Posted 01/09/2011 at 14:22:55
A business lives and dies by its EBITDA. If it wants any money to buy assets, give back to shareholders or even as a buffer for bleak times ahead, it needs to generate cash.
However, perhaps more seriously, some bank covenants are based on total debt to EBITDA ratios eg, debt cannot exceed 2.5x EBITDA.
3 Posted 01/09/2011 at 14:15:38
4 Posted 01/09/2011 at 14:34:15
5 Posted 01/09/2011 at 14:20:23
6 Posted 01/09/2011 at 14:34:11
7 Posted 01/09/2011 at 14:38:26
Do you have any thoughts on the £24.0 MM "Other Operating Costs" that people talk about as unexplainable?
8 Posted 01/09/2011 at 14:56:41
9 Posted 01/09/2011 at 15:07:07
As ever mate a well reasoned read. We do indeed live and die by our EBITDA; in 2009 it was indeed £8.1m, in the last published accounts, 2010, this figure had reduced to just £1m and I'm very reliably informed that in the next accounts the figure will have reduced to less than £500k primarily due to the fact that they have been unable to reduce the wage burden, I understand that even with a small increase in turnover the wage ratio has increased to 71%.
I?m glad you?ve mentioned where the money currently going to the bank will eventually end up!
Is debt a bad thing? Well I suppose that matters how you view debt; Utd just posted profits of £111m, they have plenty of debt but plenty of everything to manage it; both off the field and on the field they?re not doing too bad at all! I?m getting myself depressed now.
I despair reading posts pointing out the club are doing the sensible thing; their policies have put us in a position where we?re unable to operate as a competitive force in the Premier League; I?m convinced more than ever that it?s time for a change.
10 Posted 01/09/2011 at 15:26:26
#4&8 - Kevin/Peter, it's really difficult to estimate Everton's value as you would do for a normal company because football clubs are anything but normal. I have previously said something like £100m before taking debt into account is fair ie, shareholders would get £60m if net debt was £40m at point of sale.
#3 - Paul, this is the 'mortgage no.48' I refer to. My understand is that the numbers you've quoted there are the result of a bit of guesswork based on the mortgage doc. I'm not convinced that they're entirely accurate.
#7 - Martin, unfortunately without a breakdown everyone is guessing. Clearly there are some operating costs other than wages and debt at a football club but we'll never know.
11 Posted 01/09/2011 at 15:27:37
Some may think because we're not close to administration, the club is being prudently run. From a business point of view, in the short term, that may be correct because the debt is manageable (from what Richard says). But in the long term it means we're nothing more than a feeder club. The value of the club will drop and the potential to generate money in the future is far less.
What happens when our players come good and demand higher wages? We're not able to keep up because we can't afford to pay them anymore. Hence we'll see all our better players sold. Fellaini, Jagielka, Baines, Barkley will all be sold. How fucking depressing. And we know when they leave, they'll all be labelled as greedy Judas' by the club's PR spin machine.
The transformation is now complete - we have become nothing more than Wigan and look at how they operate. A high turnover of players and eternal fights against relegation.
A high turnover of playing staff means we're playing youth products and cheap buys in the hope they come good all the time. Don't get too attached to them because if or when they come good, they'll be sold. A high turnover of playing staff also means no manager can a lack build a team. All we've to look forward to are fights against relegation or even relegation. There's no future. There's no hope under Kenwright that we'll ever even get close to winning anything.
The only way to break the cycle is for Kenwright to go. We might get lucky with a billionaire but we should at least demand someone to lead our club with some kind of strategy to generate more income and maximise the potential of the club. Man Utd have just recorded profits of £100 million whilst we have £8 million.
12 Posted 01/09/2011 at 16:02:13
My reading of transcript of the Bill Kenwright meeting with the Blue Union that Barclays wanted the club's overdraft and borrowing reduced to £25 million. I think this means that we had to pay them around £20m because I recall that our previous debt figure was c. £45 million.
Including the fee for Pienaar, which Bill said went to the bank, we have raised about £20 million in transfer fees in 2011. We have also taken, I would guess, a net total of around £150k a week off the wage bill (Arteta: £75k p/w, Pienaar: £45k p/w, Yakubu: £45k p/w, Beckford £20k p/w plus their bonuses, minus whatever Drenthe and the new striker are on); which reduces the club's running costs by almost £8 million a year.
It's a safe bet that the Arteta, Yakubu and Beckford money has also gone to Barclays and won't be available for Moyes in January. But my back-of-a-fag-packet maths suggests that we've now reduced the overdraft to around the level demanded by Barclays and so new income ? limited as it is ? will be available for the club to spend.
I suspect this is over optimistic but I'd be interested in the football finance experts' views.
COYB.
13 Posted 01/09/2011 at 16:12:23
The spirit that revolved around this once great club has died. "The People's Club" no more, it is now to be referred to as "The Bank's Club".
It?s not that we have just sold a great servant of Everton in Mikel Arteta; it?s that he realised the club is sinking fast and decided he doesn?t want to play his football in the Championship next season (which is where we will be). Just watch the other players who will leave in the January transfer window.
The days of `The Golden Vision`, The last of the Corinthians in Labby, and the majestic trio of Harvey, Kendall and Ball, are no more ? nor will we have their like again in the current regime. We have sold our souls to the bank.
BK has his heart in the right place, I am told. Pity his brains aren?t in the same place. The Business excellence offered to him by his illustrious advisors that he has chosen on the board have unfortunately given him nothing but a barrel of rotten apples.
I have enjoyed wonderful times, the greatest ever Cup Final comeback in 1966, Trebilcock and Temple scoring the decisive goals with admirable spirit. The Cup Winners Cup semi-final second leg at Goodison in 1985 and the refusal to be beaten. The tears of relief after the Wimbledon game... truly wonderful memories.
And now, that?s all they are... `memories`? as I believe we are on the verge of sinking into oblivion. the once great Mersey Millionaires relegated to the paupers of the Football League.
Harry Redknapp will in the not to distant future take on the mantle of England Manager and our Dave will be off to the more prosperous lands at White Hart Lane and we will no doubt be left with a hand-me-down Manager who will be unable to reproduce the magical achievements of DM.
Good luck to you Dave, you have served us well.
Everton FC ? RIP.
14 Posted 01/09/2011 at 16:15:36
To cut a long story short, he indicated that it's 'simply unfeasible' that a club like Everton have not had any credible offers from potential investors or buyers. The Deloitte chappy inferred that Everton situation just 'doesn't make sense!' On this opinion somebody isn't telling the truth. Kenwright says the club has been up for sale for 3 years ? I wonder!
?Deloitte? is the brand under which tens of thousands of dedicated professionals in independent firms throughout the world collaborate to provide audit, consulting, financial advisory, risk management, and tax services to selected clients. (Source: Deloitte?s official website)
15 Posted 01/09/2011 at 16:18:58
Kenwright and co can't deliver and should fuck off.
16 Posted 01/09/2011 at 16:02:07
Seems BK needs to find a buyer whilst we've still got our greatest asset then - Premiership status. Otherwise he, and we, are fucked.
17 Posted 01/09/2011 at 16:04:47
Another reason for a business's bank to restrict borrowing would be that they have ceased to have confidence in the security that the original finance was based on (ie. Goodison is worth substantially less than it was in 2002) or that the bank no longer have confidence in the management to run the business on an ongoing basis in a manner that is likely to produce sufficient funds to service the debt.
Surely the terms of the most recent loan from Robert Earle? must set alarm bells ringing at Barclays and give them exceptionally cold feet in an already gittery market.
The lack of commitment of the board to the business would seem to border on a breach of the Companies Act and it is that lack of confidence more than anything that sees us where we are today.
18 Posted 01/09/2011 at 15:33:04
19 Posted 01/09/2011 at 17:24:33
keep it up..
20 Posted 01/09/2011 at 16:49:27
I work as a lawyer in London. I went for a job interview today. For obvious reasons, I won't say which firm, but they are a firm that advise a fair bit on football club buyouts.
I jokingly asked the partners interviewing me if they couldn't introduce one of their buyout clients to BK. They told me that they have previously had preliminary discussions (they didn't say when) with two parties who approached them about buying Everton.
In each case apparently, things never got off the ground for two reasons: 1) the stadium and 2) the club's worrying corporate debt structure.
In one sense, this tells us nothing new as we know investors / buyers are likely scared off by the ageing hulk that is Goodison, and we know that the club carries excessive debt and has borrowed, for example, against uncertain Sky TV revenues for the season after this.
It does, however, show that the Deloitte guy was half right (and even, dare I say it, that BK isn't entirely bullshitting when he tells us there has been interest in the past). There are buyers out there and we are a target. The question is, will any of them ever be able to see past Goodison and our debt structure...?!
21 Posted 01/09/2011 at 17:50:31
"It?s not that we have just sold a great servant of Everton in Mikel Arteta; it?s that he realised the club is sinking fast and decided he doesn?t want to play his football in the Championship next season (which is where we will be)"
I bet you we wont be. Fuck me there is some over the top bile spouted on here sometimes.
Arteta was a great servant to the club, i was sad to see him leave. However it was decent business for all parties involved. I believe that he wanted to leave...And you could hardly blame the lad, last chance of CL football realistically. Sadly we couldnt offer him that. I actually think we have done ok out of this window. Losing some of the highest earners from the club, when if we are all honest have been performing well below their best for some time. Bringing in Drenthe for me is more important, because we needed someone to step in and replace Pienaar on the left, this lad will do well for us.
Im sure 80% of match goers wont be too sad to see Beckford leave. Denis will hopefully slip in nicely. Lets see where we are come January before jumping on this negative bandwagon.
22 Posted 01/09/2011 at 19:40:01
As it seems to me, Everton's finances are relatively stagnant, and in a slow decline. Not a case of fearing immediate administration but, as you point out, not conducive at all to team building.
What, in your opinion, would be our options to improve the situation outside of an actual sale? To what extent would our player sales, and subsequent removal of debt and therefore debt-related yearly expenditure, free up our finances?
This is an issue that I'm really curious about. It seems that we've got ourselves into financial handcuffs because of long term general business incompetence, rather than massive recklessness. If we generally cleared the debt, what could we do to improve matters (e.g. in 2009/10 our commercial revenue was about £9m. Why is that so low compared to even a relative equivalent like Aston Villa, who had £13.1 million commercial revenue despite the fact that they promoted a local charity on their shirt rather than gained revenue from a shirt sponsor.
23 Posted 01/09/2011 at 20:07:25
24 Posted 01/09/2011 at 19:58:17
A crystal-clear account.
While others are gnashing their teeth about 'Black Wednesday', I find myself quietly relieved that the Club seem to be succeeding in meeting their debt obligations without decimating the team. Ten mill for a player on the wane is a great deal.
25 Posted 01/09/2011 at 21:46:23
26 Posted 01/09/2011 at 21:47:19
Our only assets are the players we currently have signed & surely if we are to maximise the amount we can get from them they need to be sold early in their contracts. Otherwise they will go on the cheap as contracts run down & they refuse to extend their deals.
Surely most of this money will go to the banks, to keep the Goodison lights on, or to improve the balance sheet to increase Bill & his cronies profit in the event of a sale.
With no chance of Europe, lower league position, lower profile & gates etc some will also have to plug this shortfall.
27 Posted 01/09/2011 at 22:23:53
28 Posted 01/09/2011 at 23:19:33
That leaves about 22mill ' bad debt '
We must have cleared 20mill in fees coming in in the last year.
But all this is based on the LAST set of accounts.
When is the next set of accounts due and more to the point what will they show.
29 Posted 01/09/2011 at 23:34:21
Now if the could only kick Moyeses arse in a footballing manner then things would deffo be on the up.
Well I supose they could in theory if they wanted to. To protect their investment they have MADE the Board do things the didn't want to, eg sell players...It's this or we call in our loans, start running it like a proper football club.
Banks; stop playing Johnny H in MF, stop bringing every one back for corners, stop, doing this, stop doing that, start doing this, sq pegs in sq holes, no more Big Vic...EVER. ETC ETC ETC ...It's this or we call in our loans, start running it like a proper football club.
30 Posted 01/09/2011 at 23:53:33
31 Posted 01/09/2011 at 23:44:05
Excellent explanation of the current financial landscape. Greatly Appreciated.
See Liam @17 and Steve @ 21. This wasn't Black Wednesday. It was good business and the jury's out on this season. Had we done nothing it would indeed have been Black Wednesday. As it stands I see us at least trying to right the ship and get back to financial semi-solid ground.
This needed to be done.
32 Posted 02/09/2011 at 03:17:03
33 Posted 02/09/2011 at 06:03:48
Will there be anything to spend in January/ or next summer when we'll be crying out for an established striker and /or wide midfielder?
Only the club and the bank will know - but it'll be interesting to see what business (if any) we'll be trying to do in the next few transfer windows. If we don't have any of the money to spend then I think the pressure on Kenwright and the board could reach a final tipping point.
34 Posted 02/09/2011 at 10:59:08
I think what Richard is saying is that as we?re committed to Finch Farm for the next fifty years, so that would be 50 x £1.1m, it is effectively similar to having taken out a loan of around £18m (we've been paying it off for a few years hence £15.7m) at a given interest rate over a 50-year term. Our Prudential loan of £30m is payable over a 25-year term, we?re going to pay back over £60m on this, and this is on the balance sheet; Finch Farm is paid as an expense and is shown on the P&L and therefore off balance sheet ? a term btw that will annoy the life out of our CEO!
Getting back to what has happened, there?s now the firmly held excuse that events on Wednesday were ?good business?. Getting £16m for three players was a ?good deal? (good deals) but let?s not kid ourselves it was ?good business.?
Our business is that of a competitive Premier League football team ? not a single penny of that is being re-invested in the football team so that isn?t good business. I?ve even read people claiming that it shows excellent business sense to reduce the debt burden; that would be the debt burden created by these fuckwits in the first place would it?
35 Posted 02/09/2011 at 12:15:41
"What happens when our players come good and demand higher wages?" - As an optimist I am hoping that they'll win us a spot in Europe, then they'll get the smell of success and w'ell make loads of money next season (EBITDA) lah, which in turn will provide the platform for a return to greatness - I would rather be happy than depressed.
Come on the Blues!!
36 Posted 02/09/2011 at 12:35:21
http://www.bbc.co.uk/iplayer/console/p00js1h5
37 Posted 02/09/2011 at 12:57:11
thanks for a very good summing up of our debt situation.
It has been obvious for some time that something had to give and it now seems the bank has taken control over this gang of muppets.
It is also depressing that Man U have a Net Profit that exceeds our income.
It is pointless looking back to how it all went wrong we just need to look at the next year or two as a watershed that will hopefully get rid of Kenwright and his "Friends of Everton" and be thankful that we didnt end up as Kirkby Town FC.
38 Posted 02/09/2011 at 15:56:26
The issue is that the shareholders will want more than £40 - 60M as cash to go away. But the club is worth less than that with its debts and knackered stadium.
The sticking point is that any owner needs £200-250M for a stadium, £50M to clear the debts, and £80-100M to get rid of bill. Everton do not simply generate enough to cover that outlay.
Bill needs to face facts: he will never get the sale proceeds he craves to repay the silent people who supported the takeover at the beginning. It really is like a living zombie nightmare.
39 Posted 02/09/2011 at 15:41:28
#18 Chris, I think what you're asking is how much cash we would free up by paying back the debt. Unfortuantely the answer is, not that much. We pay about £4-5m a year in interest costs. Obviously this would help but until we significantly increase revenue (or reduce costs), we'll always have a small budget. ie, debt is not our only problem.
#19 Robin, I think your first question is related to the above. In my view, whilst we'll never be able to match the likes of United or Spurs for corporate income from boxes etc, there is surely demand beyond what we're currently supplying. We clearly need to invest any spare cash in revenue generating opportunities ie, the stadium.
To answer your second question. Some of the gap relates to the fact that we outsource our merchandise and catering to Kitbag and Sodexo respectively. This means Everton shows the net profit earned from these arrangements, whereas Villa (assuming they don't do this) would show the gross revenue and then the 'cost of sale'. ie, their top line revenue will be higher but their net profit may not. Of course, they may also make more cash than us but it's hard to tell.
#27 Aiden, I wondered about leaving that bit in. Another way to look at it is that any time you need to acquire an asset, you need to finance it in some way eg, borrow money, sell another asset, lease it, borrow it etc. We have effectively financed FF by leasing it from ROM Capital. We will always need a training ground so you could say we will need to pay £1.1m forever. If someone offered to give you £1.1m a year forever, it would be worth £15.7m in today's money (assuming your cost of borrowing is 7%). Alternatively, it's effectively £15.7m that a bank won't lend us now we've signed the lease.
Clear as mud, eh?
40 Posted 02/09/2011 at 17:14:25
42 Posted 03/09/2011 at 00:23:09
43 Posted 03/09/2011 at 22:57:00
Thanks to Colin F too.
44 Posted 05/09/2011 at 06:00:58
45 Posted 05/09/2011 at 13:18:08
We do need to stop chasing that pack with money we don't have - which is what we have been doing - that dream is over until we get a new stadium or at the very least start investing money into our structure for the future.
This is the beginning of a new business model for the club - back comes the wage cap, in comes working within our income, out go highly paid players that don't justify their expense - Cahill & Jagielka may well be next to go putting an end to the three tragically injured just as we seemed to be starting the reach a peak with that team - that was the true end of our ambition this time.
Rebuild. Team and Stadium.
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Editorial Team
1 Posted 01/09/2011 at 14:02:23
If I read it correctly, the tipping point comes when EBITDA drops too low... but are you saying it is a business imperative to address this in the way the club has? Or do you think the banks expect/demand it?
Doesn't really matter, I guess. It's driven by increasingly poor fiscal performance. The point about about perhaps making us look better for sale is very interesting....