26/10/2009
NEWS STORY
If ever you needed proof that F1 boss Bernie Ecclestone and his partners at the finance firm CVC, which owns the rights to the sport, were shrewd then this is it.
At the beginning of last month various newspapers and websites reported the 2008 results for F1's UK-based rights-holding company Delta 3 when its accounts were released. Given the incredibly complex nature of F1's finances, the reports only covered the most basic of details such as the company's $517.6m after-tax loss and the $120m increase in its revenue to $1.1bn due to the addition of Valencia and Singapore. Pitpass' business editor Chris Sylt couldn't analyse the accounts at the time since he had just begun a two-month work trip to the US. Having just returned Sylt has got to work and writing in the Independent newspaper he reveals a startling fact in the accounts that no other reports picked up.
As any seasoned Pitpass readers will know, the key to F1's future is the huge debt which CVC borrowed when it bought the sport in 2006. To recap, CVC borrowed $2.8bn from Lehman Brothers and the Royal Bank of Scotland and in 2007 it made annual interest payments of $238.4m on this. If F1 fails to make these repayments then the sport could end up in the hands of the lenders since the loan was secured on its rights.
In a nutshell, the higher the direct costs of running F1, the less money it has to repay debt. The widely-held theory was that the increase in prize money paid to the teams to stop them leaving the sport could put F1's debt repayment under pressure. Remarkably, in fact, the opposite is true.
The increased prize money payments began in 2008 and the accounts show that these increased from $342m in 2007 to $521m last year sending Delta 3's operating profit plummeting 58% to $86.4m. However, instead of being put under pressure, the debt repayment accelerated.
In a move which almost indicates that Bernie and CVC had a crystal ball looking into the world's financial future, the interest rate on the debt was set at a rate of between 2% and 3.5% on top of the inter bank lending rate.
The inter bank lending rate does what it says on the tin: it is an independently-set rate of interest which applies to transactions between banks. Last year, when the economic crisis was in full swing banks refused to lend to each other in case the bank which was being lent the money went bust. This refusal to lend filtered right down to the high street since the less banks lent to each other, the more they had to rely on their own resources and the higher the interest rates became on mortgages. In a bid to stop this vicious circle, and to stimulate lending between banks, the inter bank rate was slashed and one unexpected beneficiary was Bernie and CVC.
In 2008 Delta 3's interest charges were 26% lower than the previous year leaving it paying $149m of bank interest. In 2007 Delta 3 had begun to repay the loan itself, and not just the interest, so the lower total amount owed also lessened interest payments the following year. Both of these factors, amongst others, led to Delta 3 making lower interest payments in 2008 but achieving larger reductions in its net debt than it made the previous year. In 2008 its net debt decreased from $2.3bn to $1.8bn whereas the previous year it only fell by $200m.
The debt needs to be fully repaid by 2014 and CVC says that this is on track. "We expect to pay off $1bn in debt over the next five years," says Nick Clarry, CVC's UK managing director. He adds that "we have no need to refinance until 2013 at the earliest, by which time we would expect conditions to have improved."
In short, CVC's plan seems to be to get the business into a position where it can pay off $1bn of the $1.8bn debt by the due date and then to secure another $2.8bn loan to repay the remaining $0.8bn and give F1's shareholders an interim payment of $2bn. With the teams signed to a new Concorde Agreement and the economy slowly improving it looks like the sport is finally on a road to recovery although in F1 you can never tell what scandal is around the corner.