Who needs $2.9bn? F1 of course!


Whilst most of the F1 world was busy at the end of 2006 analysing the consequences of the new eco-friendly regulations being introduced by the FIA, Bernie Ecclestone was busy pulling off the deal of his life.

A report in today's Sunday Express newspaper reveals that F1's billionaire boss and the sport's majority owners CVC have managed to secure a $2.9bn loan from Royal Bank of Scotland and US Investment bank Lehman Brothers with the latter becoming an investor in a new F1 holding company. As the report's authors, Christian Sylt and Caroline Reid, reveal, the purpose of the loan is even more fascinating.

Sources say that the bulk of the loan is likely to be used to refinance debt CVC took onboard to fund its acquisition of F1 in November 2005. Although it had an investment fund of $7.2bn at its disposal, CVC's acquisition of F1 was almost entirely funded by a high-interest loan from RBS.

In fact, although it is estimated to have cost CVC around $1.35bn to buy F1 as well as its corporate hospitality and trackside advertising arms, RBS lent the private equity firm $1.17bn. The loan was paid by June 2006 after the European Commission had cleared the acquisition and the rebellious GPMA carmakers had signed their memorandum of understanding with CVC.

Sources say that getting the carmakers signed up was crucial to RBS loaning the money and it was all part of what was known internally at CVC as 'Project Alpha' after Alpha Topco - the new F1 parent company it set up. Topco in turn initially owned Alpha Prema which was CVC's vehicle for acquiring its majority stake in SLEC - F1's previous holding company.

However, as is often the case in F1, matters got more complicated. Alpha Prema is now a subsidiary of Alpha D2, a UK company which was lent $865m of the original loan used by Alpha Prema to buy SLEC. Another UK company, Beta Holdings, received $305m and bought F1's trackside advertising and corporate hospitality arms. The one catch was that with RBS lending so much money, the interest rate was high.

The RBS debt is believed to have been what is known as a Payment in Kind loan. This is the same type of loan which Manchester United Football Club's owner Malcolm Glazer took out to fund his purchase of the team. The interest on these loans soars to stratospheric heights of 10-20% - something which greatly angered United's fans and shareholders. However, the latest F1 loan could pay off CVC's original debt and the rate is sure to be lower.

Recently released documents show that under the latest financing deal a new F1 holding company has been created in Jersey called Delta Topco. Lehmans has invested in the company alongside another US investment bank, JP Morgan, Ecclestone, his family trust and the F1 group's majority owner CVC.

Delta Topco is believed to be the ultimate owner of UK firm Delta 3 which in turn is the majority owner of Alpha D2. Since Alpha D2's subsidiary is Alpha Prema, which owns F1, the banks would be lessening their risks in giving the loan to F1 by being investors in it.

The irony of course is that CVC bought out Lehmans and JP Morgan when it acquired F1 as they were previously shareholders in the sport. The banks even sued Bernie Ecclestone in 2005 to get control of the rightsholding company Formula One Administration (FOA). Clearly the experience didn't put them off. Nevertheless, they have themselves well covered under the latest loan.

A deposit, thought to be around $600m, is being held as a security. Crucially, the loan is also secured on the shares and assets of most key F1 companies including SLEC and FOA. This makes it impossible to secure other loans on the rights whilst the latest debt is being repaid. But yet another payday may still be in store.

The F1 group's current contract to promote F1 expires in 2010 but in 2001 it acquired an extension to the rights to the sport until 2110. This is currently being held by a UK company called Formula One Asset Management and late last month documents were filed to allow a mortgage to be taken out on its shares.

But despite the vast resources at its disposal, F1 tears through huge amounts of cash. The sport's annual operating costs are around $400m and it recently committed to paying back a $313m loan taken out to fund its acquisition of the 100-year rights. The RBS/Lehmans finance could come in handy for funding that payback.

This would still leave almost $1bn after refinancing and it seems that one possibility for this could be a payout to CVC's fund, Ecclestone and his family trust. This still leaves open the question of exactly how F1 will pay back this staggering sum of loaned money which is the largest single amount it has ever raised.

The loan is a huge endorsement of F1's prospects but great risk still lies ahead for the banks. The manufacturer-owned teams have signed the memorandum of understanding but there is no Concorde Agreement committing them to F1 post-2008. Should they pull out and depreciate F1's value, the latest loan may be tough to repay. And whilst one of the carmakers' conditions of signing was that corporate transparency improved, since acquiring F1, CVC has set up around 15 F1-related companies with at least eight located offshore.

FIA president Max Mosley says he expects a new Concorde to be signed "at or near, before or soon after the start of the season." With the first race of 2007 taking place in Australia on 18 March, there's not long to wait.

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Published: 14/01/2007
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