Wednesday 21 January 2009

Administration Thoughts

Of course there’s always a silver lining. If the worst happens (come on, its not inevitable yet), next season us old farts are going to bore everyone else rigid with postings about the last time we went to Northampton and assorted tales from the old third flight. Oh, what fun we had. Actually it still raises a totally puerile and schoolboy humourish chuckle to remember the infamous conga (in which I hasten to add I did not participate at the time) to the tune of of ‘we’ll be running ‘round the Orient with our willies hanging out’. Just the recollection of times when you could run around the terracing brings a tear to the eye, usually as this generally involving numbers running around to avoid the chasing opposition pack.

The coach on Saturday (and may I add it was splendidly arranged and organised, even to the point of the lady inquiring after the game with a straight face to someone whether they had enjoyed it; it was just the Abba that spoilt my attempts to get into a catatonic state for the return) did afford the opportunity to finally read the club accounts. That was going to be the motivation for a post on the administration rumours, but most of the necessary has been done with Wyn Grant’s posting and subsequent comments.

For what it’s worth my reading of our situation and options tally with those comments, namely that the potential advantages of going into administration do not look compelling – unless of course significant bills have been run up since mid-2008. Richard Murray made it clear at the meeting early this season that the intention was to run the club on a breakeven basis from now on. This goal may have foundered on subsequent events, including Pardew’s reported pay-off, but its hard to think that the comings and goings to date have thrown the finances that far off plan. Or at least nothing that the sale of Shelvey wouldn’t correct, if rumours are to be believed.

As I understand it, under the revised rules players contracts etc are ring-fenced, making administration to cancel and restructure the playing staff bill off the agenda. That leaves admin staff contracts, trade creditors, and other creditors, primarily the bank and the directors. Usually a club goes into administration because one or more creditor, often the Inland Revenue or the bank, are owed sums that are impossible to repay (or in Ken Bates’ case as a natural consequence of having brought in Ken Bates). In that respect the bond issue seems to have been a sensible and timely restructuring.

Nevertheless, and with the caveat that I’m no expert on football clubs’ finances, it has to be noted that monies owed to the bank are material. The company had reduced its overdraft with the bank from £9.2m in mid-2007 to only £1.4m. But there were three bank loans as of June 2008 totalling £7.1m (down from £8.2m a year earlier), costing £1.2m this year to service (as over half is on a floating rate at least the club will be saving a bob or two from the base rate cuts). Plus an overdraft of £1.4m this means that as of mid-2008 the club owed the bank (HSBC it seems, so don’t say a word against them) some £8.5m. When you add in trade creditors of £4.1m you start to make a case for administration. However, contrary to rumour banks are not entirely daft. The loans and the overdraft are secured by charges over the club’s assets, ie The Valley. Administration to try to clear bank debts would mean the ground being sold (have we been here before?).

As for the directors, the bond issue means that the accounts show a £14.6m debt to corporate bond holders. There is a servicing cost (also cut by lower base rates) and one might think that the bond holders would be shooting themselves in the foot if the club went into administration. However, like the bank facilities the bonds are secured by a debenture over the group’s assets – ie The Valley. If there is a danger of forced administration it would arise from the bond holders collectively deciding that the game’s not worth the candle and cashing in, along with the bank, from winding up the company and selling the ground (so any more criticism of Murray et al and I’m coming round). I’m inclined to assume they are not the sort of person that would do that. Just to be sure, we should be hoping for a continued slide in property prices to take the value of The Valley to a level which would ensure that there were insufficient funds to justify the move. It is more likely, if the club is not sold in the interim, that the bonds will end up being converted into ordinary shares further down the line. Aaah, this means a further dilution of the value of my shares; such is the world we live in. In truth conversion would be another act of good faith by the bond holders.

Like any set of company accounts it is an history lesson. The headline loss was shocking, but I don’t think anyone was really surprised (it underlines the extent of the backing that was given to Pardew at the start of last season – and of course the understandable desire to get back to where we belong). To assess the current situation you would need to be closer to the club than I am to know the extent of the cutbacks made since mid-2008. With that in mind, I thought the best place to look for comparison would be the books of another club in a position not dissimilar to our own. I also wanted to look at the accounts of a third-flight club to get an idea of the revenues base we might expect if we are relegated, but I haven’t found one yet that doesn’t have until the end of March to report. And let’s not forget that the TV deal for next season is crap for League One. So part to of this lengthy ramble will have to wait a while.

The obvious choice for a Championship club for comparison was Southampton (far be it for us to hope that another club will go into administration, but we have to get off the bottom one way or another). In the year to mid-2008 Southampton paid out staff costs of £16.9m. The club employed an average of 129 football employees in the year, 43 commercial staff and 16 in administration. In 2007/08 our staff costs were £23.7m (albeit down from £34.3m the previous season) with an average of 85 football staff and 101 for admin, commercial and stadium management. It is to be assumed that our staff costs have been further substantially reduced this season, although whether they have been brought into line with those of Southampton remains to be seen.

As regards the revenues base, that for Southampton in 2007/08 totalled £14.9m, down from £23.3m the previous year (and they reported an operating loss before player trading of £12.5m). Ours was £26.7m, down from £35.9m. Southampton’s income from broadcasting was £2.9m (from £8.1m the previous season), ours was £13.5m. I’m assuming that the parachute payments fall into this category as other comparisons are similar (match day recepiepts, commercial etc). I shudder to think what the correction will be if we are in the third flight next season.

This has gone on long enough and I have a cassoulet in the oven and a bottle of cognac that’s just crying out to be reduced. Bottom line is whatever necessary corrections to our cost base have been made this season, one way or another there will have to be further huge corrections for the season ahead. Not exactly news is it? If we sell Shelvey and anyone else so be it. Just how large the adjustment will be depends of course on which division we are in. Barring a benefactor rebuilding is going to take years. But we’ll still be here (hopefully not with our willies hanging out).


Anonymous said...

So, BHA, Administration would only be desirable to our Directors if they really wanted to cut their losses (not seeing their debt repaid) and were happy to see Charlton disappear - HSBC taking possession of the Valley?

Given we haven't seen a January wholesale flogging of our expensive "stars" (maybe a lick of the cat would motivate..)which seems the only means of achieving breakeven in Championship or League1, I wonder what the plan is.

I suspect that a compromise keeping several options open is the plan. Make a fight of it for the second half of the season with what we'e got (plus occasional loans) and then sell in the summer if we fall.

Whether the Admin rumour was started by the Boardroom or not, the debate that it has generated certainly makes you appreciate the Directors' situation.

Pembury Addick

Anonymous said...

Will you be attending the AGM next Wednesday , BA ? And do you think there'll be a statement of any great significance from that meeting?

New York Addick said...

Excellent post, but am I missing something with regard to the administration option?

In short, what if the creditors conclude that their interests are best served not in a debt restructuring, but in a liquidation? Isn't this what happened with Maidstone Utd?

In the current environment where cash is king, surely this is a bigger risk than normal?

Burgundy Addick said...

Compo, I hope to be there on Wednesday but can leave it to a late decision depending on work commitments. Holding the AGM the morning after the Palace game suggests either supreme confidence in the outcome or that someone forget to check the calendar.

NYA, I think such concerns could be justified, but the creditors involved in our case are effectively the directors and the bank. As long as the former don't give up and the latter remains satisfied (as it should be as long as the loans are being serviced - and in this environment for HSBC to unnecessarily pull the plug and fold a football club would be a PR disaster).

I don't know much about the Maidstone case, but just reading the wikopedia account it seems there were some other things going on there, with the chairman having property development interests. He has subsequently been banned from involvement in football clubs. Current casflow position and management will, I assume, feature strongly at the AGM.