24th Sep, 2018

EXCLUSIVE: Wasps 'breach agreement' with bondholders over Ricoh Arena value amid £43m debt

Les Reid 8th Nov, 2016 Updated: 8th Nov, 2016

WASPS appear to have breached an agreement with their mystery bondholders – who have loaned them £35million to plug £43million debts – that an independent revaluation of the Ricoh Arena was required by June this year, we can reveal.

The commitment was made as part of a guarantee – or ‘covenant’ – to bondholders that the value of Wasps’ groups assets including the stadium would remain at a certain level (1.4 times) higher than their group debts.

It was meant to provide guarantees to those buying retail bonds – effectively seven-year loans to Wasps – that the value of Wasps’ assets could be used as security to pay back loans should the Ricoh Wasps project fail.

It is the same as having a house as security against a mortgage – which can be sold to pay back a mortgage when people cannot meet their mortgage payments, unless there is negative equity.

Ordinary Wasps fans as well as institutional investors were invited to buy the bonds when the scheme launched last year.

The Coventry Observer has raised questions with Wasps over why there is no evidence they had an INDEPENDENT valuation of the Ricoh Arena conducted “no later than 30 June 2016”, as the Wasps bond scheme Prospectus specifically pledged to bondholders.

Instead, Wasps Holdings Limited’s group accounts published last week only reveal they effectively marked their own homework with a self-assessment.

The accounts, in failing to report any new independent valuation, state only that “management believe” there was “no impairment” this year on last year’s independent valuation of £48.5million.

Yet, as we revealed last week, those new accounts for the Wasps group of companies (which include Ricoh firm Arena Coventry Limited) recorded a worse than expected group operating loss of £3.8million with rising debts of £43million, for the year ending June 30 this year. It was despite revenues rising by 44 per cent to £30.9million.

Pre-tax losses rose from £6.3million to £9.3million. The bottom line figures were masked in the accounts by a massive £7million tax credit, which is not available to use every year. Cash balances were just £300,000.

A Wasps statement with the accounts states breaching covenants to bondholders could result in the loans having to be paid back, or interest rates being raised even higher than the current 6.5 per cent.

Both scenarios would potentially place additional huge strain on the Wasps/Ricoh business.

Wasps will also need a dramatic multi-million pound turnaround and change in financial fortunes by next year to avoid breaching covenants to the bondholders, the accounts reveal.

Last year’s Prospectus for Wasps’ retail bond scheme gave prospective bondholders assurances that their loans were secured against chartered surveyor Strutt & Parker’s independent valuation last year of the Ricoh Arena being worth £48.5million.

It was based on best-case scenario forecasts for the businesses’ growth, and on the massive 250-year lease sold to them by former owners Coventry City Council and the Alan Edward Higgs Trust.

In addition to the Ricoh Arena, the only other asset given as security to bondholders was Wasps’ ‘P-share’ permit to play in rugby’s Premiership, valued in the accounts at £9.7million. Similar to football’s ‘golden share’ right to play in leagues, it is unclear how the P-shares would necessarily be used to pay back the bondholders in all circumstances.

A second covenant – which kicks in next year – was also pledged as part of the agreement with Wasps’ retail bondholders.

As the prospectus states, it was that Wasps’ group’s EBITDA profits/losses must be one-and-a-half (1.5) times its finance costs each year from next year, meaning interest payments.

EBITDA is commonly taken as a measure of a company’s performance – its profits or losses – before taking into account tax, depreciation and amortisation, which includes interest expenses.

Wasps’ accounts show they have to pay annual interest of £2.3million to bondholders, with bondholders due to have their loans returned in 2022.

Therefore, Wasps need to make £3.4million of EBITDA profit by June next year to meet this covenant.

Yet Wasps’ accounts record much lower EBITDA losses of £2.2million (£1.7million loss in 2014/15). This is technically a significant £5.6million short of the ‘1.5 times’ covenant requirement (outlined above).

So, on any measure, a multi-million pound turnaround will be needed by next year to avoid a breach of this second covenant.

WASPS’ HOPES AND HURDLES

As we reported last week, Wasps are pinning their hopes on continuing to increase commercial revenue from stadium and other activities. Rising costs including wages, overheads and management costs explain the losses.

They also hope to secure lucrative ‘naming rights’ sponsorship next year for the stadium, although it was previously claimed this was expected to materialise last year.

Average attendances for games increased by 48pc to 16,916. But ticket income rose by only 19 per cent, reflecting the number of free tickets for Wasps home games.

The accounts claim: “Wasps will further take advantage of the fact that the Company now owns its own ground for the first time in over 19 years which will continue to lead to enhanced revenues and profits.”

The accounts make no reference to tenants Coventry City Football Club’s lack of commitment to a Ricoh deal beyond 2018 after Wasps called talks off.

Sky Blues’ stated preferred option is a groundshare with Coventry rugby club at an expanded Butts Park Arena.

Neither do the accounts refer to potential legal action by the football club’s owners Sisu over the council’s Ricoh sale to Wasps in 2014.

Wasps’ net debt from loans (less cash balances) was £43.4million (up from £27.7million the previous year).

It comprised the retail bond scheme Wasps Finance plc’s £33.8million debt; a £700,000 loan from HSBC bank; and £9.1million in loans from Wasps chairman and shareholder Derek Richardson, who controls Wasps’ parent company, the offshore Malta-based Moonstone Holdings Limited.

The accounts state under “going concern” information that the directors are satisfied existing shareholder support will continue in the event of a cash shortfall.

WHAT THE DOCUMENTS STATE:

Wasps retail bond scheme Prospectus (page 39) refers to last year’s Strutt & Parker independent revaluation, then unequivocally states: “In addition, pursuant to the Conditions of the Bonds, Guarantors and ACL2006 have undertaken that they will together require further independent appraisals of the value of the Arena, together with the current value of the P-shares, not less than once in each consecutive 24 month period, the first such valuation date to be no later than 30 June 2016.”

Yet Wasps accounts only state that Wasps’ directors themselves had decided that the value of the Ricoh was still £48.5million. They present no evidence that an independent valuation was performed.

The accounts state: “The Group revalued the property located at Judds Lane on which the stadium is located during 2015. The revaluation brought the value in the financial statements to £48.5m. Management believe that there is no impairment of this value for 2016.

“The P shares in Premier Rugby Limited have been recognised at their fair value. There is no change in the value (2015 upward revaluation of £4.3m).”

Wasps accounts, in outlining potential risks to the business, state: “Failure to meet Wasps Finance Plc bond covenants… Impact: Wasps penalised financially through increased interest rate or bond repayment.”

Part 2 of the second covenant also states the group’s debts must not exceed the higher of £40million and four times EBIDTA profits or losses.

LINKS:

Read Wasps’ accounts here

Read Wasps’ retail bond scheme Prospectus here

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