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The long-term value of peace

NEWS STORY
25/08/2009

Getting Formula One's teams to sign the Concorde Agreement earlier this month kept the wolves from the door of the sport as questions about a rival series have since ceased. However, news has now come to light that there has already been a more immediate financial benefit for investors in the sport.

As regular Pitpass readers will know, F1's owner, finance firm CVC, is $2.3bn (1.4bn) in debt after taking out a loan for this amount to finance its purchase of the sport in 2006. F1 pays back $260m (158m) in interest on this loan every year and the right to repayment of this money has been sold several times. Two banks, RBS and Lehman Brothers, provided the loan originally but they quickly sold the right to repayment to get the cash back as the economy nosedived.

In March this year, in the wake of Honda pulling its team out of F1, the F1 debt was selling for 50p in the Pound. This meant that although the debtholders paid over $2bn for the debt, they were selling it for half that. The theory is that the debtholders were selling for half, even though it meant making a big loss on the deal, because it looked at the time as though F1 would struggle to pay back the full amount of the loan over the coming years. It was a case of a bird in the hand is worth two in the bush. How the times have changed.

According to a report in the Telegraph by Pitpass' business editor Chris Sylt, the F1 debt is now selling at its highest price this year having risen 7.6p to 82.5p in the two weeks following the peace deal with the teams.

CVC secured the debt in a booming market and there have been concerns aplenty that F1's business model could crash as a result of the economic crisis. The departure of the top teams would have put huge pressure on F1 since it would have made the sport less appealing to the circuits and television companies which provide around 70% of its $1.5bn (916m) annual revenue. In turn this would have made it tougher for the sport to meet its interest repayments on the debt.

The debt is fully repayable by 2014 and CVC has told Sylt that it hopes to clear $1bn (610m) by then before refinancing. The recent peace deal with the teams keeps this plan on track and the only obstacle could be teams pulling out regardless of the Concorde. For the Concorde Agreement only commits the teams, not the companies which own them, to race so in theory they could simply be put into administration without any penalty for their owners. With continued speculation over the F1 future of both Renault and Toyota the historic contract could soon be tested to the limit and F1 has a lot riding on it.

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