Our initial thoughts are shared below.
Closing the Funding Gap
The package replaces a £200m loan signed at the end of 2015, of which only £100m was drawn. According to THL £340m has been spent on the new stadium project to date. Add in the new £400m financing and THL has now secured £640m of the £800m stadium project cost confirmed by the Club at the meeting with THST on 2 May. This suggests a shortfall of £160m. It is unclear to what extent the WCF and LC are integral to project costs. The LC is likely only to be a backstop, in place to cover, for instance, any further cost overruns so can probably be discounted. The WCF may also partly fulfil the same function but may also be used to cover increased working capital needs as a result of doubling stadium capacity e.g. twice as many Spurs stores are going to require twice as much stock which can fairly be ascribed as a project cost and which will need to be financed. We can be generous and allocate £15m of the WCF to the project, giving a shortfall of £145m. This will need to be financed from either cash reserves or the normal operations of the football club.
We saw from our recent analysis of THL’s 2015-16 financial statements that THL was holding cash reserves of £172m. As much as £100m of this was the disbursement of the earlier £200m loan and therefore has already been committed to the project. Allocating the remainder to the project leaves a £72m funding gap.
The same accounts show the strong cash generation of THL. Net profit from operations amounted to £43m, a figure which rises significantly when player trading, depreciation and a large, unexplained payable are factored in. Being conservative and sticking to the lower number suggests that a similar result for the two seasons over 2016-18 would generate sufficient cash flow to cover the remaining gap.
Additional positive variables for these two seasons are the increased income from TV rights and CL participation while cash negative variables are the reduction in WHL capacity in 2016-17 and increased player salary costs. Our assumption is that the move to Wembley for a year is broadly revenue neutral. We do not factor in income from naming rights for the new stadium, increased income from new shirt manufacturer and sponsorship deals, additional income from the NFL deal and increased revenues from the near doubling of capacity at the new stadium that is excluded. We have no access to THL’s detailed modelling but at face value the numbers seem to suggest that THL has the financing need covered with potential for further upside and backs up Daniel Levy’s statement to THST that ‘no player needs to be sold for non-football reasons’.
As predicted in our analysis of THL’s financial statements, the loan is a 5 year bullet, that is to say interest only is payable until maturity when the full amount outstanding falls due. This has the advantage of reducing debt serving costs during the final year of construction and the first years at the new stadium but presents a refinancing risk in five years’ time. The strategy seems clear: establish the business model in the new stadium through achieving the potential upside noted above and refinance at a cheaper rate. This could be a similar but longer term bank facility but two of the current bank lenders are US investment banks, not noted for putting their own balance sheets at risk. If THL were to successfully establish a full NFL franchise in Tottenham our suspicion is that these investment banks will fancy their chances of placing a bond in US markets. Nevertheless the relative short dated maturity of the new loan means that THL will need to hit its targets in the model presented to Banks in pretty short order and even then a fundamental change in the external financing market (e.g. another 2008 crash) could leave THL vulnerable in 2022.
Our analysis shows that assuming a similar level of 2015-16 financial performance should cover any funding shortfall for the project but we also need to factor in increased interest costs. The new loan comes at a cost of LIBOR + 2.25% to 3.0% (the latter likely to apply during the construction period when the risk is higher) which does not appear to be unreasonable. This will generate interest costs of £10m to £13m per annum (assuming full disbursement). Excluding upside these increased costs look just about absorbable based on 2015-16, which included income from Europa League participation. This would tend to suggest a minimum requirement for team performance and although this excludes upside some of that will be dependent on reaching a certain level (e.g. CL participation). It doesn’t need saying but the general lesson is: be nice to Mr Pochettino.
31 May 2017