On 20 September, the Club announced that it had completed the refinancing of the bridging loans provided by three banks in 2017 to finance the new stadium build. The announcement was accompanied by an interview with Daniel Levy in the Financial Times (paywall). The existing debt of £637m was repayable in 2022. As the Club would be unable to repay this amount from current cash flows it was facing a financial cliff edge with the clock ticking (to coin a phrase). The refinancing is, therefore, good news and the publicised terms are better than we anticipated in our earlier analysis of the Club’s financials.
As we predicted back in 2017, the Club has sourced the US bond market to refinance a large part of the debt. Of the £637m, £525m has been refinanced through an unspecified number of bond tranches with varying maturities of up to 30 years. The Club’s statement indicates that the bond issues were ‘significantly oversubscribed’, that is to say potential bond purchasers offered more money than the Club took.
The balance of the refinancing was taken up by a £112m loan from Bank of America (BoA) while HSBC has provided an additional ‘revolving credit facility’ which would appear to replace an existing £25m facility. Terms for each of the bond issues and bank debt facilities are not provided but in aggregate we are told that the average maturity is 23 years at an average interest cost of 2.66%.
What does this mean?
In short, while the Club has only provided summary detail of the new debt facilities it is evident from the announcement that the Club will be paying reduced interest charges and has, at the very least, pushed out the ‘cliff edge’ by a substantial period of time.
Our previous analysis estimated from the Club’s financial statements that it was paying an average rate of c. 3.3% on its debt. Reducing this to 2.66% and assuming full utilisation without any repayment during the year results in a saving of around £4m per annum.
On top of this cost saving, the Club has effectively reduced its annual debt service requirement. Other than the 30 year max / 20 year average, the Club has not provided any detail on the number of bond tranches or their repayment structure, but in general there are two alternatives – an amortising structure (rather like a capital repayment mortgage) or a bullet (similar to an interest-only mortgage).
The former involves higher regular payments as you pay off the underlying debt as you go, while the latter reduces your regular payments but leaves you with a substantial debt to repay at final maturity. Bonds are typically (although not exclusively) repaid as a bullet while bank loans are more usually amortising. The effect of the Club issuing bonds of varying maturities while keeping a certain amount of bank debt is to achieve something of a blend between an amortising and a bullet structure.
Without knowing the details of each bond tranche or the BoA loan, it is not possible to accurately determine the Club’s annual debt service requirement. We can, however, model two scenarios:
1) the full amount of the debt on an amortising structure
2) the same but with a bullet
We will take the 23 year average as our debt maturity in both scenarios. This will give us a range within which the future annual debt service requirement can be plausibly placed.
Under the bullet scenario, annual debt service is only around £17m per annum until 2042 when the full principal of £637m falls due. Under the amortising scenario, debt service commences at c. £45m per annum, falling to £28m in 2042 as the principal gradually gets repaid. Our earlier analysis assumed much shorter tenor(s) for the debt and the effect of the longer tenor is to reduce the annual debt service requirement to a level which looks perfectly manageable against the operating profit of £163m in the latest available financial statements of the Club.
Our best guess of the debt structure is that the £112m provided by BoA is amortising and has a tenor of no more than 10 years while the bonds probably come in something like 15, 20, 25 and 30 maturities. Modelling this doesn’t provide a forecast that can be relied upon but plotting the result on a graph can help shed a light on the financial strategy.
The balance of the refinancing was taken up by a £112m loan from Bank of America (BoA) while HSBC has provided an additional ‘revolving credit facility’ which would appear to replace an existing £25m facility. Terms for each of the bond issues and bank debt facilities are not provided but in aggregate we are told that the average maturity is 23 years at an average interest cost of 2.66%.
What does this mean?
In short, while the Club has only provided summary detail of the new debt facilities it is evident from the announcement that the Club will be paying reduced interest charges and has, at the very least, pushed out the ‘cliff edge’ by a substantial period of time.
Our previous analysis estimated from the Club’s financial statements that it was paying an average rate of c. 3.3% on its debt. Reducing this to 2.66% and assuming full utilisation without any repayment during the year results in a saving of around £4m per annum.
On top of this cost saving, the Club has effectively reduced its annual debt service requirement. Other than the 30 year max / 20 year average, the Club has not provided any detail on the number of bond tranches or their repayment structure, but in general there are two alternatives – an amortising structure (rather like a capital repayment mortgage) or a bullet (similar to an interest-only mortgage).
The former involves higher regular payments as you pay off the underlying debt as you go, while the latter reduces your regular payments but leaves you with a substantial debt to repay at final maturity. Bonds are typically (although not exclusively) repaid as a bullet while bank loans are more usually amortising. The effect of the Club issuing bonds of varying maturities while keeping a certain amount of bank debt is to achieve something of a blend between an amortising and a bullet structure.
Without knowing the details of each bond tranche or the BoA loan, it is not possible to accurately determine the Club’s annual debt service requirement. We can, however, model two scenarios:
1) the full amount of the debt on an amortising structure
2) the same but with a bullet
We will take the 23 year average as our debt maturity in both scenarios. This will give us a range within which the future annual debt service requirement can be plausibly placed.
Under the bullet scenario, annual debt service is only around £17m per annum until 2042 when the full principal of £637m falls due. Under the amortising scenario, debt service commences at c. £45m per annum, falling to £28m in 2042 as the principal gradually gets repaid. Our earlier analysis assumed much shorter tenor(s) for the debt and the effect of the longer tenor is to reduce the annual debt service requirement to a level which looks perfectly manageable against the operating profit of £163m in the latest available financial statements of the Club.
Our best guess of the debt structure is that the £112m provided by BoA is amortising and has a tenor of no more than 10 years while the bonds probably come in something like 15, 20, 25 and 30 maturities. Modelling this doesn’t provide a forecast that can be relied upon but plotting the result on a graph can help shed a light on the financial strategy.
The amortising structure (orange line) has the highest annual payments but there is no cliff edge, unlike the bullet repayment (blue line) which creates a dangerous refinancing risk (albeit at some distance in the future). The blended strategy (grey line) keeps repayments lower and effectively breaks the bullet cliff repayment into more digestible components.
One further point to note is that bond facilities issued in the US would ordinarily be denominated in USD giving rise to currency risk via fluctuations in the $/£ rate. It is understood that this risk has been managed by issuing sterling bonds with the cost of a USD hedge imbedded in the 2.66% fixed rate.
Completion of the stadium removed construction risk from the equation and was crucial to the success of the recent debt refinancing. In turn, the refinancing has resulted in a material reduction in the financial risk associated with the Club. It goes without saying that minimum performance levels will need to be sustained on the pitch but based on the limited information made available by the Club it would appear that a financial structure has been put in place that can support the playing operations rather than acting as a drain on them.
Credit is due to the Club and its advisers for achieving this position.
Michael Green
THST Board
4 October 2019
One further point to note is that bond facilities issued in the US would ordinarily be denominated in USD giving rise to currency risk via fluctuations in the $/£ rate. It is understood that this risk has been managed by issuing sterling bonds with the cost of a USD hedge imbedded in the 2.66% fixed rate.
Completion of the stadium removed construction risk from the equation and was crucial to the success of the recent debt refinancing. In turn, the refinancing has resulted in a material reduction in the financial risk associated with the Club. It goes without saying that minimum performance levels will need to be sustained on the pitch but based on the limited information made available by the Club it would appear that a financial structure has been put in place that can support the playing operations rather than acting as a drain on them.
Credit is due to the Club and its advisers for achieving this position.
Michael Green
THST Board
4 October 2019
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