Follow the money


It wouldn't be the start to an F1 season without a good dose of controversy and this year we were narrowly spared what would have perhaps been the most extraordinary season-opener ever.

Earlier this week it came to light that McLaren and Renault threatened F1 boss Bernie Ecclestone with a boycott of the Australian GP unless they were paid prize money they say is owed to them. As ever, Bernie called their bluff and a no-show was avoided. Since then John Howett, vice chairman of the FOTA teams' association has admitted that although there is displeasure over the situation, a public protest is unlikely to take place. End of story? Not according to Pitpass' business editor Chris Sylt.

The first thing to do is look at what is said to be owed. At the heart of any dispute about prize money in F1 is the famous Concorde Agreement which commits the teams to race. The last Concorde expired at the end of 2007 and it entitled the teams to prize money totalling around 25% of F1's profits. According to a statement released on Thursday by FOA, the company which directly owns F1's rights, "all prize fund entitlements payable to the signatory teams under that arrangement were paid when due."

The payments for 2008 are much murkier.

In 2006 the car manufacturers reached an agreement with FOA to increase the prize money to 50% of F1's profits and payment of this was due to begin last year. However, the agreement was not legally binding and last December Ecclestone, when questioned by Sylt, said: "we have no contract and no invoice so why are we paying them?" The latest dispute suggests that payment to some teams may have stopped to a certain extent.

Thursday's FOA statement reveals that the company has signed separate contracts (not a Concorde Agreement which must be agreed and signed by all the teams) for 2008-2012 with some F1 teams. "Each of these teams has been paid its full prize fund entitlement to date," said the FOA statement.

However, the teams (presumably at least Renault and McLaren) which have not signed a new contract are not so lucky. The FOA statement says that it "has made substantial payments," to them but not that it has paid their 2008 prize money in full. And it doesn't stop there. This entire scenario has been playing out in the media and it certainly has more significance to some members of the audience than others. The consequences of this could be severe.

As regular Pitpass readers will know, F1's owner, finance firm CVC, has $2.3bn in debt which it used to finance its purchase of the sport in 2006. F1 pays back $260m in interest on this loan every year and the right to this repayment 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. Since then, F1 has itself been battered by the economic downturn raising questions about its ability to pay back the debt.

Earlier this month the Observer newspaper reported that the F1 debt had recently been sold for 50% of its value. In a nutshell, although the debtholders paid over $2bn for the debt, they sold it for half that. The theory is that the debtholders would sell for half now, even though it meant making a big loss on the deal, because F1 may struggle to pay back the full amount over the coming years. To put it simply, a bird in the hand is worth two in the bush.

And why did the debtholders think that F1 may struggle to pay back the loan? The Observer answered this question quite clearly by saying that "the company, run by Bernie Ecclestone, was shaken by the shock exit of the Honda team three months ago. The move 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."

In short, the debtholders were worried that the more money that F1 has to pay to keep the teams in the sport, the less the sport has to pay off the debt. Likewise, if Ecclestone refuses to pay the teams more money they could leave F1. This in turn could lower the sport's value to TV companies and if the rights from broadcasters decrease then it becomes tougher for F1 to pay off the debt.

So if the F1 debtholders were concerned that the teams might need more money just imagine what they will have thought when they read that some teams have not even got their prize money in full. Without a Concorde Agreement the debtholders have no legal security that the teams will stay in the sport.

But this still may not be the end of the story. To get the debt F1 had to pledge that certain conditions would not be broken and that others would be met. These conditions are known as covenants and although there is no suggestion that F1 has breached its covenants, if this were to happen the debtholder would be entitled to call the loan in. It could do this simply to ensure that it gets as much of its money back as possible rather than risking waiting for the company to get into financial difficulty at which time it may not have as much in the bank.

The worst case scenario would be if F1 didn't have enough money to pay off the loan if it was called in. If it couldn't pay its creditors then the sport's solvency could be in question. Thankfully, there is no evidence, nor any suggestion, that F1 has breached its covenants. What we do know however, is that the price of the debt is plummeting and that, perhaps more than anything else, says a lot about the financial confidence in the future of the sport.

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Published: 29/03/2009
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