The “Complexities” of Financing a Stadium Build

Just how complex is it, and is it different for Everton than any other club?

Paul The Esk 14/09/2018 24comments  |  Jump to last
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One of the things that strikes me throughout the period that Bramley-Moore has been our proposed new home is the language various officers within the club have used to describe the process of raising finance for the stadium. Our past CEO often used the words 'difficult', 'challenging' and 'uncertain'. In his much welcomed first public comments, Colin Chong used the word 'complex', whilst Denise Barrett Baxendale similarly has referred to the “complexity around the funding models”.

So just how complex is it, and is it different for Everton than any other club?

Compared to many businesses football is a relatively simple business. There is the primary business of being a successful professional sports team and then the business of providing the facilities and resources required to match the demands of the principal product, the football team, plus the facilities for fans (customers) to watch the product perform.

Unlike most businesses, much of the income a football club receives is gifted (in the form of Premier League broadcasting deals plus prize monies) and by and large there is an extremely loyal and captive customer base in and around the principal area of business.

The key differentiators between the successful and not so successful teams are, to an extent, the skills of the directors and management teams including playing staff, but more importantly the resources available in terms of capital and additional income over and above that which is gifted.

Whilst performance on the pitch is obviously critical to the amount of revenues that can be generated, it’s also true that, once among the bracket of successful clubs, there’s a clear correlation between match-day revenues and overall revenues. Deloitte shows in a 2015 study the clear correlation that exists.

Thus, the case for having a stadium generating and maximising significant match-day revenues is clear. For Everton, that means building a new stadium and in our case on a site that brings many future commercial advantages. Which then turns to the question of funding it.

Funding

Funding generally is provided by some, or all, of the following sources: borrowings, capital contribution by the shareholders/owner of the club, and the monetarisation of the asset itself in the way of naming rights and commercial tie ins.

In the case of Everton, I am guessing that “the complexities” referred to relate to the borrowing element within the funding package.

This causes me some genuine concern. Why should it be any more complex for Everton than anyone else?

Any lending institution or investor will have a list of key requirements in order to satisfy itself that providing funding makes sense with the minimum risk.

The requirements

Firstly, it will require confidence in the owners and management team, in terms of their commitment to the project (how much are they investing and risking themselves) and their skills and experiences in similar projects plus their vision going forward.

It will want to see a business plan that demonstrates the investment into a new stadium generates sufficient income to meet both the borrowing costs but also provides additional revenues to develop the club and enhance the prospects of success. Without this second element there’s no point in building the stadium if all it does is meet the repayment costs going forward.

Finally, it will need to satisfy itself that there is sufficient security both in terms of the stadium itself but also future revenues generated by the borrower to protect the institution’s shareholders against potential losses in a default situation.

Let’s start with the personnel likely to be most involved in the funding

Firstly, Farhad Moshiri; as a well-established successful billionaire investor and operator used to running and part-owning multi-billion pound/dollar businesses many of which are extremely capital intensive, a capital project the size of a new stadium costing £0.5 billion should not be beyond his experience and expertise.

The Deputy Chairman, Keith Harris, is a former CEO of the investment banking division of one of the world’s largest banks (HSBC), and has a long career in finance and football, managing and directing businesses in the sector. In addition, he had a long association with the financing and building of the new Wembley stadium through his directorship of Wembley National Stadium Limited.

Finally, Everton’s Chief Finance and Commercial Officer, Sasha Ryazantsev has spent a successful career in corporate finance and investment banking specialising in capital structures, corporate financing and more recently bond issuance, mergers and acquisitions.

Therefore, on the face of it, this is a highly experienced team for whom the challenges of stadium financing ought to be well within their capabilities and should provide institutions with more than enough confidence to proceed.

The business case

The second element would be the business plan which has to ensure a significant uplift in revenues as explained above. Again, as with the first criteria, the individuals, I do not see how we can fail to provide a robust enough business plan to satisfy the requirements of lenders. Given the abilities of other clubs to raise revenues, often without the development potential that exists with Everton, it would be odd in the extreme if we fell short on this point. I accept entirely that the club has a poor commercial record in the past and has not proven itself particularly capable of promoting itself but, in a booming industry and in the world’s most popular sporting league, it’s difficult not to make a bullish business case moving forwards.

Security requirements

That leaves us with the security requirements of the banks/financial institutions, and Liverpool City Council if they are to be the primary lenders.

Let’s start with Liverpool City Council. In the Heads of Terms document produced in March 2017, there was an acceptance that security terms were acceptable and had largely been agreed, albeit subject to further due diligence and legal opinion. Given the risk profile between being guarantor and provider (as per the January 2018 post-AGM comments by Joe Anderson) are no different from each other is it reasonable to assume that this is still the case?

With the banks and/or financial institutions lending and then using the asset when built as security plus securing future income streams in the case of default is pretty standard financing practice.

Tottenham Hotspur created a £750 million funding plan for their stadium and Northumberland development project with three major banks, HSBC, Goldman Sachs and Bank of America. In return, as security, the stadium and associated real estate was secured as were several revenue accounts including (but not limited to) operating bank accounts, various reserve accounts, the NFL agreement, the Nike agreement, all contracts with a value greater than £5 million, advance ticket sales and all of Tottenham’s extensive intellectual property and trademarks.

My point is that, whilst Everton may offer different income streams from differing partners, the precedent set by Tottenham and many other clubs before them is there and works in practice.

So, assuming the financing arrangements are similar to other clubs, offering similar security, a business plan and run by competent people, we return to the issue of “complexity”.

Perhaps, and this is only conjecture, we are looking at financing from not just Liverpool City Council but also making up some of the perhaps £220 million shortfall from other lenders? ie, Moshiri is not providing all of the additional financing by way of capital (rights issue) but additional lending.

That I can see as potentially problematic, as perhaps is the existing 3-year rolling credit facility with ICBC in that we have already assigned some of our future income, but also different and separate entities will be potentially fighting over seniority in relation to assets and income streams in the case of any default in the future. To me, unless the stadium is prohibitively expensive, or the business case is weaker than thought, it can be the only reason for the suggested complexity and drawn-out process.

Explanation

This brings us full circle, back to the comments I made earlier in the week when Moshiri acquired his majority stake; it would be hugely useful and beneficial if an explanation of the proposed financing was made. Greater understanding of the issues stops speculation and indeed provides support to the people charged with finding the answers and ultimately the cash required.

Hope the above has been useful and perhaps even interesting.

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Reader Comments (24)

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Laurie Hartley
1 Posted 14/09/2018 at 23:44:41
Thanks for the article Paul. I think you have got to the crux of the matter in suggesting that the security for a secondary financier is creating the problem. Surely the LCC having first call on all of the club's assets in case of default would be a major stumbling block for any such entity.

Perhaps there is a lender in the mix who wants to provide all the finance but on less favourable terms (higher interest rate) than the LCC.

Put simply, a difference of 1% interest on a £280m loan over 25 years might cost something in the order of another £35m in interest repayments – big numbers!

David Israel
2 Posted 14/09/2018 at 00:41:29
Thank you for an excellent and well-explained article, Paul.

As I have posted elsewhere, I share Laurie's (above) suspicion that the 'complexity' may have to do with a secondary financing entity.

Don Alexander
3 Posted 15/09/2018 at 01:30:11
If you didn't know better, you might just think people now at the top of our club don't give a toss for the fans or supporters in comparison to them trying to gouge the maximum financially for themselves, at some bugger else's expense.

After all, if a financial muppet like Kenwright can realise £10s of millions after 20 years of mundanity, why shouldn't a billionaire maestro seek £100's of millions by utilising the same sort of smoke-and-mirrors (and highly dubious indeed) financial shenanigans?

Tom Hughes
4 Posted 15/09/2018 at 04:12:53
I think you've homed in on the precise financial connundrum, that has resulted in only 2 major clubs electing to build a whole new 55k+ stadium in the UK.

Both of these have been in London, the only place with the added leverage of vast swathes of corporate take-up to help fund it.

We also have to ask how/why the cost is £500m, when Meis's other current stadium project in Rome is half that, on an equally sensitive site for roughly the same capacity and quality.

Laurie Hartley
5 Posted 15/09/2018 at 04:13:05
Don – no doubt Farhad Moshiri wants to maximise his return on investment but you may be judging him a bit harshly regarding his concern for the fans and community.

Check out Colin Chong's article on the official website:

Colin Chong – New Stadium And Goodison Legacy

Paul Birmingham
6 Posted 15/09/2018 at 08:38:28
I'm no economist or finance expert, but I sense the Brexit, whatever decision and current indecision, is impacting this finance banking and security plan.

The Bank of England boss has suggested property value could drop by 35%. If that's close or if it became 5%, it's huge numbers, when talking 100s of millions of pounds. To caveat such potential loss is an interesting problem.

Sod's law, but bloody typical of the times and like a bad smell always seem to stink with matters of EFC ground development schemes the last 25 years.

I hope via the Usmanov and Moshiri network that this can be resolved solely or in partnership with LCC.

nb: Thanks, Paul The Esk, great write up and read. Times Econimists couldn't pitch it better.

Tony Everan
8 Posted 15/09/2018 at 08:45:14
Tom (#4),

I would like to understand why Roma's stadium is £350m for a comparable capacity. Why is ours costing £150m more?

There seems to be no comment or explanation on something that is so significant.

Paul [The Esk]
9 Posted 15/09/2018 at 08:55:27
Thanks for your comments – they are very much appreciated.

On the projected stadium costs, I understand two elements make the figure as high as it is. The ground preparation costs (given the nature and heritage related sensitivity) of around £120 million, and the design includes an asymmetrical roof which adds substantially to the overall cost.

Steve Hogan
10 Posted 15/09/2018 at 08:55:34
Informative and concise article Paul, and very near the truth I guess. A shame that the local paper doesn't have the level of financial expertise or insight, by anyone on it's editorial staff to produce a similar piece, instead all we see are banner headlines and 'click bait' titles.

Despite my concern over the length of time it's taking to announce the finance package is in place, I'm somewhat reassured that at least we have the right people in senior positions to give us the best possible chance of the project coming to fruition.

Sadly, the current remit was way way beyond the old regime of Kenwright, Woods and Elstone etc. The last 12 months has seen a new momentum from within the club with the new senior management set up, and I am quietly optimistic at last over the long-term future of the club.

Being an Evertonian for over 50 years, without the introduction of Moshiri and the wholesale changes taking place, we would I'm sure, have seen a slow but steady decline in the club's fortunes, at a ground which is now in a pretty poor state, despite the annual attempts at 'freshening' it up.

Now, some success on the pitch please would help, whilst we wait for our new home on the waterfront.

Peter Mills
11 Posted 15/09/2018 at 09:55:22
Very interesting article Paul, thank you.

It seems to me that being a lender to a football club is a pretty risky business. The principle source of revenue from broadcasting is high, and I would be concerned it may drop during the period of the loan. The team could be relegated, a European league could be formed which Everton would be unlikely to join, or football could simply fall out of favour with the public.

In the event of default in loan re-payments, how valuable would the asset be? Who would use it? Then to be offered only second dibs on it after the City Council hardly sets the lending juices flowing.

These are very challenging days indeed for our club. I personally think that a move to the docks is essential, but at the same time it is probably the biggest gamble, and decision, in Everton’s history. It will also be a huge gamble for those lending the money to bring it about, so it is no wonder that it is taking time to bring it about.

Pat Waine
12 Posted 15/09/2018 at 11:11:40
A really good article up to a point. But most Evertonians start to compare our position with that of Spurs and it goes off the rails.

Firstly, London is not Liverpool... and Spurs have a capability of charging and generating much more cash than Everton given the area we are in.

Secondly, Spurs have advanced on the field way past us now. A number of years ago, we were in a similar position to Spurs (on the pitch) – both clubs on the tails of the elites. We appointed Koeman, which was a waste and put us back years, and damaged our reputation also.

So all Evertonians have to look realistically at the situation: we are in a Nothern city with another big club and limited capability to generate more revenue from the city on match day. If we can get this over the line, it could change things (for the future) but, for now, to quote Koeman "It's difficult..."

Tom Hughes
13 Posted 15/09/2018 at 16:36:04
Paul (#9),

£500m still seems very high to me. An asymmetrical roof shouldn't cost anything like that... in fact, I would expect a full closing roof and moveable pitch, as at Lille, for that much (built in 2012, capacity: 50k, <£250m). Indeed, I would've thought this was highly desirable if the stadium was ever to become a multi-use venue but Meis has snuffed that out in previous comments.

Contrary to popular belief, the actual stadium build costs for the new White Hart Lane is only about £400m, that also has an asymmetric roof and a very expensive moveable pitch too, with 10,000 more seats too and a far bigger corporate capacity, so our stadium would need to be pretty special to come in at £10k per seat.

For me, it's a figure plucked from thin air, and would have to include various ancillaries and surrounding development. a bit like when Kenwright called destination Kirkby a £400m project, when in fact the stadium build was <£100m. So, there still needs to be some clarity on this fundamental issue. Otherwise, any analysis is akin to trying to knit fog.

Paul [The Esk]
14 Posted 15/09/2018 at 16:36:21
I appreciate the differences between us and Spurs, Pat (#12), and I agree particularly we have fallen behind in the last three years. The comparison stands from my perspective because, although we have significantly lower turnover, we are seeking to borrow a significantly smaller amount, and we have exactly the same types of security and income streams to offer potential lenders. Additionally, I might argue we have greater upside than Spurs but accept that's a subjective argument.
Paul [The Esk]
15 Posted 15/09/2018 at 16:43:14
Tom, I agree totally with your comments on the new Spurs stadium; I have made those points myself on several occasions.

It's not my business (construction nor design) and I'll happily concede to those with specific expertise, but given my sources for the costings, I believe them to be accurate.

The club could help enormously by sharing more information. Whilst I appreciate the argument that it's a private business therefore why should they, the club can't play the community and Citywide association angle and not accept it has a wider and greater duty of disclosure because of that relationship.

Don Alexander
16 Posted 15/09/2018 at 00:35:26
Laurie, thanks genuinely for the heads-up on the Colin Chong comments but I'm sorry to say that in my whole life I've later reflected on how poorly Everton's various owners have done in maximizing what was clearly available to them, as done by various other top teams in terms of winning trophies. For instance, the '63 Champions won just that one trophy (apart from West and Labone the whole '66 FA Cup winning team was completely different). In the meantime, Liverpool won two Championships and the FA Cup in three years at the very same time, with largely the same team. United also won two Championships and the European cup with largely the same team. Comparatively we therefore failed despite being known as "The Bank of England" club under Moores's ownership.

The '70 Champion team won just that alone. To me at the time and since our owners eviscerated the team by first buying nobody of note to push on, and then selling 26-year-old Alan Ball, to Arsenal, who'd just won the double. Sigh!

Most of us agree that events beyond our control or responsibility did for sustained success from the mid '80s team but then the Premier League was formed with us very much at the forefront but, given the, erm, leadership of those in charge (blokes like Carter, Kenwright, Johnson) we're the only one of those at the forefront to have been last throughout the many seasons since.

And that's before we come to the new-ground debacles of the King's Dock and Kirby. Or Green and the Virgin Islands (allegedly!), so no, words emanating from Kenwight's gob, presumably with Moshiri's support, don't thrill me at all. In fact, I consider that arse-wipe Jim White on Talk-Shite to have way more integrity than Kenwright.

Despite playing to the max the "Yes, but aren't we good to the community folks!" card for years I'm of the same opinion as Paul the Esk in that I am bewildered why we let them, the owners, get away, time and again whilst Kenwright's been involved at all, with effectively keeping the fans and supporters in a dark, cold fog of non-disclosure, disappointment to all, or most, being the eventual outcome.

Derek Thomas
17 Posted 16/09/2018 at 01:39:02
Don @ 16; Messrs; Harris, Temple and Scott wave and say hello.

It's so complex that there are reports on the BBC(?) That MacDonalds may fund the WHOLE Napoli new stadium.

Derek Thomas
18 Posted 16/09/2018 at 01:54:20
Tom @ 13; Given your estimates, it may be that the £280M from the Council... if we get it, would cover the basic early part of the build. Banks and such usually fund these things in tranches, dependent on progress, So builders don't go off half cock on marble splash backs, gold toilet roll holders... or whatever the stadium equivalents are... retractable roofs, pitches etc ?

The other funding may be needed for the rest plus transport upgrades or what not.

It may even be for the whole thing if the Council thing falls through.

Seems a lot hangs on the Council thing.

Terry White
19 Posted 16/09/2018 at 04:08:34
Derek (#17), Don has a very poor memory from the '60s apparently. In fact 7 members of the '63 Championship squad played in the '66 Cup run. In addition to his West and Labone, and your Harris, Temple and Scott, I raise you Jimmy Gabriel and, of course, Alex Young.

From that team, there were 4 members who also played in the '70 league side. West, Tommy Wright, Labone and Sandy Brown, while Johnny Morrissey who played in the '63 season also played in 1970.

Given the 7 years between 1963 and 1970 it is hardly surprising that through age and injuries plus loss of form, there were few who played in both teams. But we took the opportunity to improve the side and few will disagree that the 1970 side was better than the 1966 version.

Tom Hughes
20 Posted 16/09/2018 at 04:25:52
Paul, (#15)
I think we all know why there isn't disclosure. The club knows it would leave itself, and the process wide open to general scrutiny. Hence the age-old "commercial sensitivity" trump card, that was raised at every AGM when the questions began to cut deep.

It is surely entirely pertinent to question headline numbers, that are waved at us with little or no point of reference. Especially when they seem inflated in comparison to similar projects elsewhere. In essence we're being told that we're getting a £500m stadium, when the design is supposedly not finalised, and when the initial outline schemes did not seem to suggest that level of expense.

To be honest, when I first heard that figure, I could only think that it was the prelude to the announcement of yet another failed scheme. I'm not a "financial/accounting" type, but I was surprised at the new-found level of ambition and intent. A few years ago I was in meetings with Elstone where mentions of mere tens of millions to redevelop one section at a time was baulked at as financially unviable. I just sat back as he went into a fit about "ROI", and lack of "enabling-leveraged-finance" etc and here we are just a few years later, looking at a half a billion pound project, with seemingly little or no regard for such foibles.

We need to have a better idea of the breakdown of the costs if we are to ever be able to judge what we're getting ourselves into here.

Laurie Hartley
21 Posted 16/09/2018 at 07:46:39
Don # 16 - I couldn't disagree with your sentiments.

The only thing I would say is Farhad Moshiri and his team are now running the show now. The stadium is, for me, his acid test.

Paul and Tom - I think the estimated costs are a "budget only" so that the finance can be set up. You wouldn't want to run out of money three quarters of the way through the build.

I will say this though; the "designs" produced so far are underwhelming in my opinion. I reckon I could have done better myself.

There is a thought Lyndon - why not set up a competition for Toffee Webbers to produce a stadium design. Plans, elevations, sections and 3D views. No cogging and no "build it like so and so's".

Then have an online TW poll to establish the winning design to be submitted to Dan Meis.

Now that would be fan input and a bit of fun and I'll bet many would be surprised at the quality of the responses.

Derek Thomas
22 Posted 16/09/2018 at 09:08:14
Laurie @ 21; Has the Simpsons episode...'Homer designs a car' taught you nothing? Also, whatever you do don't mention a 'Monorail'.
Laurie Hartley
23 Posted 16/09/2018 at 12:24:57
Derek @ 22 - thanks, I just watched that episode again and as a result:

Lyndon I unreservedly retract my suggestion.

Come to think of it Lyndon I seem to remember I suggested this once before and you didn't think it was a good idea.

Will I never learn.

Don Alexander
24 Posted 16/09/2018 at 13:59:29
Mea culpa on the 63-66 error. I was 8 years old in 63 so relied, more fool me, on visiting t'internet for so-called correct info. It/I failed. Sorry lads, and thanks for the truth!
Steve Taylor
25 Posted 16/09/2018 at 18:26:44
The problem is simple investors will want a portion of the TV money. Moshri and Co want to keep it themselves and somehow get a Stadium built, a cake-and-eat-it situation.

As for a loan, the chances of a loan for a club sponsored by a Russian Oligarch and friend of the owner, with hints of already having a possible financial involvement, has as much chance of getting a Government loan signed off as Putin.

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