Burnley's MSD loan reduction essentially confirmed

[OffTheBar]

In terms of missed I was thinking of the discussions on the Grim thread prior to the last accounts release

from the little I understand the Sonia rates are higher than the LIBOR rates and by quite a measure last time I looked in May

Sonia is just the BoE rate (pretty much when accounting for the technicalities involved - it’s 1.69% at the moment), so currently 1.75%. 3m LIBOR is 2.4% ish. The difference is purely due to expectations of rate increases by the BoE. The Sonia rate will compound for every day in the calculation period (i.e. about 90), so if rates increase as expected sonia and libor will be roughly equal (when adding the spread).

[Chester Perry]

Thanks, dsr and aggi. Some of the companies I worked with fit with the phrase "relatively rich corporate entities..." I don't recall how many large contracts I was involved in negotiating when I was working, easily several hundred over 30 years or so. All the major engineering contracts I handled included "liquidated damages" clauses. The commodity derivatives contracts (often ISDA based) contained provisions that estimated the mark-to-market fair value under those contracts, including the right to recover the full mark-to-market loss in the event of the other parties default. I've had occasions when I've successfully enforced those provisions.

If MSD were lending to BFCHL at Libor + 8% and funding those loans by borrowing from Offshore Fund at 8% I can easily agree that MSD's loss on early repayment is the Libor margin. We shouldn't overlook that MSD receives repayment of the principal and can, as we've seen on TISE, can withdraw these element of the funding when they require. Maybe there is an argument that they could have been earning Libor + 8% on the money, but it can also be argued that they (or Offshore Fund) have the opportunity to lend at Libor + 8% to another entity when they are repaid.

This is where the experience of the new Southampton owners and indeed Derby come into play

Southampton I highlighted above

Derby

- the initial loan was £15m with a Charge over the stadium. training ground and other Derby assets, it later came to light that Mel Morris was guarantor on the loan with properties in London and Dorset being the collateral
- I understand that MSD loaned Derby more monies to help them through administration
- this understanding goes as far as Mel Morris being directly responsible for £19m borrowed from MSD and that he intended to sell Pride Park (for which he paid £81m) at a price of £22n to pay off MSD everything he owed them - which suggest penalties or early exit fees
- Interestingly the auditors suggested the final demands from MSD were £24m which suggest that the club had outstanding interest payments to MSD, which the new owner would have had to clear

All the Derby stuff is of a limited understanding and I would be happy to be corrected on any or all of it with the appropriate evidence

[Paul Waine]

In terms of missed I was thinking of the discussions on the Grim thread prior to the last accounts release

from the little I understand the Sonia rates are higher than the LIBOR rates and by quite a measure last time I looked in May

I'm pretty sure the transition from Libor to SONIA is intended to increase the interest rate that any borrower has to pay. It was all about how the benchmark interest rate is established by the banking market. Don't forget that all the banks will be borrowers from other banks and other financial institutions using these terms as well as lenders to their corporate clients etc.

The issue was the way Libor was always established by a small group of London banks - and how, during the 2007/2008 financial crisis some banks started misquoting the rates they were being charged (let's put aside the possibility that BoE may have been knowledgeable and supportive of the lower rates that were established). Assessing Libor was switched to ICE (Intercontinental Exchange) after a pretty rigorous assessment and tender of a number of alternative parties.

There's an interesting set of ppt slides by Heather Pilley of the Benchmarks Policy Team at the FCA explaining the transition as part of The Working Group on Sterling Risk-Free Reference Rates

It includes the following bullets:

1) LIBOR includes a credit element to reflect the cost and risk to banks of lending over a term period

2) As SONIA is an overnight rate, the risk of lending is lower

3) The SONIA rate is therefore typically lower than LIBOR

4) To ensure a fair conversion of existing contracts, a small adjustment is needed to account for this difference

[GodIsADeeJay81]

That's the point - I'm not thinking anything.

The owners of the club have likely put it in a position where a finance company can sell players on the cheap if it suits them...!

It's quite possible it became a factor in the sale of Pope or it may not have been.

Wouldn't that require the club to either be ran by the finance company or have something written into the loan deal that sales can be done in the whim of said finance company?

Not sure the club would do either

[Paul Waine]

This is where the experience of the new Southampton owners and indeed Derby come into play

Southampton I highlighted above

Derby

- the initial loan was £15m with a Charge over the stadium. training ground and other Derby assets, it later came to light that Mel Morris was guarantor on the loan with properties in London and Dorset being the collateral
- I understand that MSD loaned Derby more monies to help them through administration
- this understanding goes as far as Mel Morris being directly responsible for £19m borrowed from MSD and that he intended to sell Pride Park (for which he paid £81m) at a price of £22n to pay off MSD everything he owed them - which suggest penalties or early exit fees
- Interestingly the auditors suggested the final demands from MSD were £24m which suggest that the club had outstanding interest payments to MSD, which the new owner would have had to clear

All the Derby stuff is of a limited understanding and I would be happy to be corrected on any or all of it with the appropriate evidence

On one of the "finance" threads we touched on Derby. MSD increased their loan to Derby after Derby entered administration. I think it was £5 million. It's not impossible that they increased it again before the sale to the new club owner was completed - all with the security of MSD getting repaid.

Did Mel Morris really pay £81 million for Pride Park? Wasn't that just one of the "ways to get around" FFP rules by inflating the value of the stadium? The other trick was a different accounting policy on player contract amortisation, not using straight line for the contract period.

[Paul Waine]

You may have mentioned this before but in note 2 (e) (i) it talks about relegation and the need of clubs to sell collatoral at discounted prices should a club be unable to pay either loan or interest MSD would expect the club to sell assets at discounted prices.

More supposition and conjecture but this could explain the early sale of Pope at what many now consider a disappointing price.

I think the club has been in the second scenario described by MSD and not the third scenario.

I've copied the two relevant sections from CP's post.

• The second scenario assumes the UK football teams cannot pay a portion of the balance due at maturity. Additionally, cash flows and the value of the investment s fluctuate depending on the investments’ current sporting performance and financial situation. In this scenario, the UK football club finishes the season in the bottom two/three spots of their national league and demoted to a lower division, which has implications on club revenues. The Company would require sale of the collateral in an orderly fashion and review comparable market transactions to support.

• The final scenario assumes the UK football teams cannot pay any portion of the loan (interest/principal)/ the UK football teams finishes the season in the bottom two/three spots of their national league and demoted to a lower division, which has implications on club revenues. The Company would require a sale of the collateral at discounted prices from current comparable transactions.”

[ClaretPete001]

I think the club has been in the second scenario described by MSD and not the third scenario.

I've copied the two relevant sections from CP's post.

• The second scenario assumes the UK football teams cannot pay a portion of the balance due at maturity. Additionally, cash flows and the value of the investment s fluctuate depending on the investments’ current sporting performance and financial situation. In this scenario, the UK football club finishes the season in the bottom two/three spots of their national league and demoted to a lower division, which has implications on club revenues. The Company would require sale of the collateral in an orderly fashion and review comparable market transactions to support.

• The final scenario assumes the UK football teams cannot pay any portion of the loan (interest/principal)/ the UK football teams finishes the season in the bottom two/three spots of their national league and demoted to a lower division, which has implications on club revenues. The Company would require a sale of the collateral at discounted prices from current comparable transactions.”

Fair point.

We don't know the financial situation at the point Pope was sold but it's a fair assumption that we did have the funds and therefore came under the second scenario.

[ClaretPete001]

Wouldn't that require the club to either be ran by the finance company or have something written into the loan deal that sales can be done in the whim of said finance company?

Not sure the club would do either

It's written into the financial statements of MSD that in the event of a borrower having problems repaying debt then MSD can insist that assets are sold.

It's a part of MSDs risk approach and likely written into contracts.

[aggi]

It's written into the financial statements of MSD that in the event of a borrower having problems repaying debt then MSD can insist that assets are sold.

It's a part of MSDs risk approach and likely written into contracts.

It would be very difficult to put something so vague into a contract other than in a very generic sense. I'd suspect MSD also wouldn't want to get too involved for fear of becoming a shadow director.

That mechanism is probably enforced by threatening to put the company into administration if they don't sell some players and pay back some loan.

[aggi]

Thanks, dsr and aggi. Some of the companies I worked with fit with the phrase "relatively rich corporate entities..." I don't recall how many large contracts I was involved in negotiating when I was working, easily several hundred over 30 years or so. All the major engineering contracts I handled included "liquidated damages" clauses. The commodity derivatives contracts (often ISDA based) contained provisions that estimated the mark-to-market fair value under those contracts, including the right to recover the full mark-to-market loss in the event of the other parties default. I've had occasions when I've successfully enforced those provisions.

If MSD were lending to BFCHL at Libor + 8% and funding those loans by borrowing from Offshore Fund at 8% I can easily agree that MSD's loss on early repayment is the Libor margin. We shouldn't overlook that MSD receives repayment of the principal and can, as we've seen on TISE, can withdraw these element of the funding when they require. Maybe there is an argument that they could have been earning Libor + 8% on the money, but it can also be argued that they (or Offshore Fund) have the opportunity to lend at Libor + 8% to another entity when they are repaid.

Yes, I deal with a lot of contracts for IP rights and there are usually liquidated damages clauses for improper exploitation but realistically these are just penalty clauses under a different name, the remedy isn't really reflecting a specific loss just what is agreed between the parties as suitable. The main difference I see over here is the lack of exemplary and punitive damages.

[ClaretPete001]

It would be very difficult to put something so vague into a contract other than in a very generic sense. I'd suspect MSD also wouldn't want to get too involved for fear of becoming a shadow director.

That mechanism is probably enforced by threatening to put the company into administration if they don't sell some players and pay back some loan.

Possibly so, I suppose the point is that it is a risk approach adopted by MSD, which would impose some leverage on the management of playing assets by the club in the event the club cannot repay the loan or trigger some mechanism in the contract, which requires a review of the loan.

I suppose it is self-evident that changing a situation of being relatively debt free into one where we have significant loans with finance companies would result in such a situation.

Clearly, MSD has an ongoing relationship with the club in terms of their risk, which is probably why Pace described them as a business partner. The nature of their relationship is alluded to in the notes to MSDs accounts, which gives you some insight into the fact that MSD is constantly monitoring risk. How far that relationship extends - I have no idea.

[Paul Waine]

Possibly so, I suppose the point is that it is a risk approach adopted by MSD, which would impose some leverage on the management of playing assets by the club in the event the club cannot repay the loan or trigger some mechanism in the contract, which requires a review of the loan.

I suppose it is self-evident that changing a situation of being relatively debt free into one where we have significant loans with finance companies would result in such a situation.

Clearly, MSD has an ongoing relationship with the club in terms of their risk, which is probably why Pace described them as a business partner. The nature of their relationship is alluded to in the notes to MSDs accounts, which gives you some insight into the fact that MSD is constantly monitoring risk. How far that relationship extends - I have no idea.

It would be very difficult to put something so vague into a contract other than in a very generic sense. I'd suspect MSD also wouldn't want to get too involved for fear of becoming a shadow director.

That mechanism is probably enforced by threatening to put the company into administration if they don't sell some players and pay back some loan.

I love this, something we can, and are, all agreeing on.

As aggi says, MSD will not want to fall into the situation of being a shadow director. The security charge and the right to appoint an administrator (or receiver) will be sufficient for MSD to say to the club, "you owe us X and payment is past due, we note you could offer for sale one (or more) of the players and raise some money. Please get the player(s) sold quickly, don't hold out for the maximum market price, selling at a discount will get the player sold and the cash in quickly and that discounted amount is all we require to clear the loan."

As for how close a relationship, I would expect 'very close.' If I was MSD and had leant £65 million to a football club I'd be doing a low more than just looking out for their results at the weekends. I'd want budgets forecast at monthly detail through an extended period. I'd want monthly actuals v budget reported and would meet with management when there were any significant deviations. I'd want discussions pre-transfer windows on plans. I'd want news on injuries to key players. Given the Good Friday departure of Sean Dyche, I'd have wanted immediate update on the plans post-SD's departure and been informed on the prospective new manager, including the financial implications of both SD's departure and VK's hire. Business partner is a good way to describe the relationship. Both Alan Pace and MSD will want the loan to be managed successfully. Both will want the outcome of the loan to go well for both parties. From the club's point of view, if there were some untoward events and additional finance would assist in managing the situation, then a good relationship will pay dividends (no direct pun intended). There have been a few occasions in my career when I've been on the MSD side of the table operating in the manner I describe. One counterparty surprised me by mentioning in their annual report how supportive and helpful my employer had been in the steps we took that eased their financial pressures and helped them develop and grow their business.

Agree, also on liquidated damages: pre-agreed amounts (or pre-agreed algorithm to calculate the amounts) will always work under English law. It's often the case that there are industry standards that determine the usual liquidated damages amount, e.g construction contracts, 10% of the contract sum.