18/03/2009
NEWS STORY
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Another day, another set of cost cutting measures for F1. Yesterday's announcement that the FIA will introduce a budget cap in 2010 follows FOTA's own set of cost cutting proposals earlier this month which themselves followed several earlier proposals from the FIA. Get the impression that no one knows what to do? Pitpass' business editor Chris Sylt does and, crucially, he thinks that the real powers that be in F1 do too.
To understand this titanic tale you have to read through a few dry financial details but it's worth it. We start with the fact that when F1's commercial rights were bought by finance firm CVC in 2006 the company borrowed $2.7bn from two banks, RBS and Lehman Brothers, to fund the purchase. This vast sum of money is slowly being paid back by F1 at the rate of around $260m per year with the full amount due to be repaid by 2014.
But that's just the beginning of this tale.
We all know that RBS and Lehman Brothers got into financial trouble in the last two years and so the banks needed as much money as they could get their hands on. To save waiting until 2014 to get their money back from F1, RBS and Lehman Brothers sold the right to repayment of the loan. It's worthwhile spelling this out since getting a good grip of this is essential to understanding what is in store for F1.
In a nutshell, companies paid RBS and Lehman Brothers for the right to repayment of the loan and so these companies now get the $260m annual repayments from F1. However, Lehman Brothers and RBS didn't have a strong position when it came to selling since it was obvious that the banks needed the money as they didn't want to wait until 2014 to get it all back.
The upshot of this is that RBS and Lehman Brothers didn't get the full $2.7bn back when they sold the loan. This wasn't such a great issue for them since they got the majority of it and this gave them cash just when they needed it. Last September CVC told Sylt that the debt was priced at around 90 cents in the dollar, in other words, the $2.7bn was selling for 90% of its value - around $2.4bn. Things have clearly worsened since then.
An article in Sunday's Observer newspaper revealed that the companies which bought the debt from RBS and Lehman Brothers have themselves sold it to other finance firms which will then get the $260m annual repayments from F1. But the most astonishing fact is that the debt has been sold for 51p in the pound - 51% of its value which is $1.4bn.
This raises two big questions which actually give us the keys to the future of F1. Firstly, if someone paid $2.4bn for something which would eventually pay them $2.7bn why would they sell it? Secondly, if someone paid $2.4bn for something why on earth would they sell it for $1.4bn? Well, they might sell if they needed the money quickly as RBS and Lehman Brothers did but this isn't the reason given by the Observer's writers who have spoken to the debt sellers. The Observer article says that the "shock exit" of Honda "has led to speculation that others could also drop out and investor concerns that a greater share of earnings from the sport may have to be passed on to struggling teams." Of course, the more money paid to the teams, the tougher it could be for F1 to pay the loan back.
In a nutshell, the Observer article says that the companies which own the debt are worried that further teams will leave F1 and so more of the sport's earnings will have to be given to them. If more of F1's earnings are paid to the teams then it could be tougher for the sport to make its annual $260m debt repayments.
So, to answer the two questions above, someone who paid $2.4bn for something which would eventually pay them $2.7bn might sell it if they thought they won't ever get the $2.7bn. And why would you sell something for $1.4bn if you paid $2.4bn for it? Well, $1.4bn now is better than running the risk of getting nothing in future if the company cannot afford to repay the debt.
But the real significance of this story comes from considering just how high a risk it is that F1 will struggle to make its debt repayments due to more revenue having to be given to teams to prevent them leaving. The Observer article answers this neatly - the risk is high enough for a company which paid $2.4bn for the debt to sell it on for $1.4bn…