Guest Post – A Look At County Finances

First up an apology. Man in a Barrel wrote this piece for the blog during the middle of the India v England test series and we couldn’t quite squeeze it into a proper slot pre-Christmas. Then, with all the events going on with me personally in January, it got left by the wayside. MiaB has had his say on the financial situation he sees in county cricket, and it is an interesting take. I find Yorkshire’s financial situation particularly fascinating given who the county owes its future to and the potential for conflicts of interest (if in doubt, read the notes to the ECB accounts). Anyway, MiaB’s views, updated in recent weeks are worth a read, and as always I’d like to thank him (and others) who take their valuable time to write for us. Also, although we all know MiaB can handle himself, take into account he’s a guest writer and not one of us. We want to encourage people, not put them off!!!!

I’m over the other side of the pond at the moment, so now is the time for some more articles if people think they have something to say. There’s a long time before England’s next test. Ok, enough of me, take it away MiaB:

County Cricket Finances….by Man in a Barrel

In the November 2014 issue of the cricketer, there was an article about the generally poor state of the finances of the county cricket clubs.  It came as something of a revelation to me – I always assumed that cricket was a poor relation to football in the UK but that the sponsorship provided by companies such as John Player, Gillette, Benson and Hedges, Cornhill Insurance, Investec, Sky etc was sufficient to keep it in reasonable health.  However, it seemed from that article that the situation was dire.

Football has always been more transparent.  Some teams have tried to float on the Stock Exchange, for example.  However, I think we all know that, in reality, the clubs are rather small financial entities for the most part.  In the book Soccernomics, you can read an interesting selection of financial facts and figures.  It seems that few football clubs are run as money-making machines – remember how Alan Sugar failed at Spurs? – but that very few actually go bust.  Someone always turns up to bail them out.  In practice what that tends to mean is that they are run, at one end of the scale, as shiny toys or status symbols for the very wealthy such as Chelsea, Man City or, at the other end of the scale, as glorified social clubs where the players run around between stands made from corrugated iron and scaffolding props, such as Stevenage Utd.  In between, there are a mass of clubs supported by successful local businessmen or by people who are probably more intent on either developing (or stripping) any available assets.

I tried to locate sources of financial data for the county cricket clubs.  Not many of them had anything available on their websites but I located data for Yorkshire, Warwickshire and Worcestershire.  This was an interesting sample because it included 2 sides with Test match grounds and a comparative minnow.  I intended to put together a blogpost on my discoveries but this coincided with the start of 2015.  The general feeling of disenchantment with cricket that took me over around that time meant that I never completed it.  Subsequent events suggest that my conclusions for this sample are typical of the bigger picture.

The main conclusions were that cricket is not a money-making business; it just about pays its way, if rain holds off.  Most clubs are just about muddling along.  However, it is likely that the clubs that host international matches have been very bold and have over-extended their balance sheets to such an extent that they are close to being insolvent.  In football, many clubs have spent way too much money acquiring players and have amassed significant debts thereby; in cricket they build new pavilions.  Oligarchs and sheiks buy football clubs.  No one has so far come along for county cricket apart from a certain supermarket chief.

I’ll start this overview with Warwickshire in 2014.

Total turnover was £12.5 and they seemed to make an operating profit of £4.7m.  Within these figures, cricket revenues were £3.8m, with a cost of sales of £4.2m.  So, on its own, cricket was loss-making for this county in 2014.  Thankfully, the ECB chipped in with £3.1m – some of which was probably prize money for winning The Blast.

By comparison, the Yorkshire cricket revenues for 2013 were £2.7m and for Worcestershire in 2012 £0.6m – there is a note to the effect that their results were adversely impacted by weather.  For the purposes of this snapshot, it is worth noting that all 3 counties lost money on cricket pure and simple.

In terms of EBITDA – profit before tax, interest and depreciation, the figures were £1.7m for Warks, £0.2m for Yorks and £0.1m for Worcs.  So, you expect the balance sheets to be pretty small-scale affairs.  These are relatively small businesses.

You could not be more wrong.  Warks declare fixed assets of £36.8m, totally off the scale for this size of income statement.  How on earth did they amass so much in the way of fixed assets – the major single element is given as Pavilion Development at £31.1m?

A quick scan shows that they have taken on loans of £21.6m.  Most of it is a loan from Birmingham City Council repayable starting from March 2017 at 5% interest.  It is secured on the freehold land and buildings owned by the club.  Just to cover the interest on this loan would require profits of £1.1m – which would come close to wiping out their EBITDA.  As it was, they charged interest of £1.4m and depreciation of £1.4m, so there was no profit left over.

If this were a property company, as the investment in buildings would suggest it really is, you would expect the building to generate a return of, say 5%.  Given all the quantitative easing that has inflated asset values and decreased yields, let’s assume 3%.  This would entail getting a profit after interest and depreciation of £1.0, which is way out of sight.  It is tough to see how they would get from a loss of £1.2m to a profit on that scale.

Moving on to Yorks, the figures are comparable.  Fixed assets of £28.5m supported by a pre-tax loss of £0.7m.  They have loans of £24.1m.  However, Warks’s main creditor was the local council.  Recent events show that councils can be persuaded to forgive debts.  I am not sure that, if I lived in Leeds, I would be totally happy for my council to lend £7.6m to a cricket club that was basically insolvent.  Surely there must be a quid pro quo in terms of out-reach efforts and community work?  If there is, the club keep quiet about it.  In any case, the council has a charge over the freehold land and buildings at Headingley and, as an example that the council might be worried, Mr Graves has given a shortfall guarantee.

So far so good.  However, the club has also taken out a loan from HSBC for £3.3m.  This is secured by a first charge over the Cricket Centre and a second charge over Headingley.  HSBC also has a fixed and floating charge over all the assets of the club.  Needless to say, Mr Graves has given another personal guarantee.  The loan is repayable by 2020 and interest is base +4%.  As a commercial institution, HSBC are putting very onerous conditions on the club that they are probably unable to comply with on the basis of their own trading activities.

However, it gets worse; various trusts in the name of the Graves family have “lent” £10.1m to the club – up from £7.1m the previous year.  The increase basically seems to have paid down some of the HSBC overdraft.  So the Graves family is basically bankrolling the club on a day-to-day basis by providing long-term loans.  Interest is payable at base+4%.  C J Graves is personally owed £4.5m and this is repayable on 12 months’ notice and secured by a 4th charge over Headingley.  The 2 Graves trusts are owed £5.6m and are repayable in October 2016, secured by a 3rdcharge over Headingley.

Obviously you have to wonder just how much these charges are worth if HSBC or the council pull the plug.  How much leeway does the HSBC branch have to waive interest or extend repayment terms?  Could they be persuaded to classify it as, say, marketing spend in an attempt to garner local affection? Did the trusts insist on repayment in October 2016?  Time will tell.  However it is clear that both Warks and Yorks need to get their assets sweating a bit harder if the clubs, or Mr Graves, is not to go bust.  You wonder also what impact this might have on the affairs of Costcutter.  Maybe Yorks should be treated as a subsidiary of that supermarket chain.  What would be the impact on the chain if the guarantees given by Graves were called in?

It was a relief to turn to Worcs.  £5.1m of fixed assets supported by loans of £2.7m is at least a conceivable ratio.  True, their income statement makes sorry reading in 2012 but they have a track record of making around £0.3m EBITDA and their 2012 turnover was adversely affected by rain.  However, they have also leased out some land to Premier Inns for 150 years for a 120 room hotel and they are very clear about the need to build a 365 day business instead of one that depends on 50 days of cricket.  This gave them a boost to profits of £0.4m in 2012.

When a football club over-extends by buying players, at least there should be some benefit for the fans in terms of trophies or the chance to see a few galacticos.  Is cricket held in such affection by the fans that solutions will emerge if the counties get into difficulties – such as what happened to Glasgow Rangers or Southampton FC?

Questions that I cannot answer.  But if I were running Yorks or Warks, I would not be sleeping easily at night.

Update

I downloaded the accounts for Yorkshire for the year ended December 2015.  Things have moved on but they are still far from rosy.  The guys are obviously pedalling vigorously so I hope that my assessment does not look as if I am dissing them.  They have worked hard to increase turnover and improve profitability.  Turnover has grown from £6.8m to £8.4m, which I think represents a considerable achievement.  They have also moved to a position where they are making retained profits of £0.4m compared with losses of £0.3m in 2014 and £0.6m in 2013.  It’s a start but nowhere near enough to service the debt mountain.  Debt remains about £24m.

However, you must always beware of the sleight of hand, particularly with corporations in distress.  In 2015, there is an exceptional item of £0.8m as a result of the local authority reconsidering the amount of interest due on its loan and effectively giving the club a kickback.  Without that surge of generosity, the retained profit would disappear.  Also, it is worth noting that the 2014 position benefited from a grant of £0.5m from the ECB, which Yorks used to repay a loan from the ECB.  Smoke and mirrors?  Every little helps.

The real interest is in what has been done to restructure the debt.  Obviously Mr Graves is not able to bankroll the club personally anymore and they were in thrall to the vipers at HSBC.  So they have found a genie, in the shape of another Graves family trust.  To quote from the accounts:

The Graves family trusts have provided loans of £18.9m which has allowed the previous loans from Colin Graves, the Graves family trusts and Leeds City Council to be repaid. As part of the refinancing we are grateful to Leeds City Council who after reviewing the actual cost of interest that the Council had incurred in servicing the debt which demonstrated that the cost to the Council of the loan has been fully met by the Club, accepted £6.5m in settlement of the £7.4m capital outstanding on the loan. This gave rise to exceptional income, net of costs, of £781,106.

As part of the refinancing HSBC agreed to return any capital payments made in 2015, lower their interest rate to 2.5% and defer full capital repayment until 1st October 2018 in return for a First Legal Charge over the Cricket Centre and a Third Legal Charge over Headingley Cricket Ground in respect of the bank loan and overdrafts. HSBC Bank plc also has a fixed and floating charge over all of the assets of the Club, subject to the Legal Charges referred to above.

To enable the repayment of the Leeds City Council debt, further debt has been incurred. CJ & J Graves Accumulation & Maintenance and J Graves Accumulation & Maintenance Trusts loans now stand at £6.7m each bearing an interest rate of 4.625% and with initial capital repayments to be made in 2019 (£2m each Trust) and during 2020 (£1.5m each Trust) with the balance at 31 December 2020. The two Trusts have been granted by the Club joint First Legal Charge over Headingley Cricket Ground and joint Second Legal Charge over the Cricket Centre.

A further £5.5m of debt has also been incurred from the CJ Graves 1999 Settlement Trust bearing an interest rate of 0%. The Club has granted Second Legal Charge over Headingley Cricket Ground and Third Legal Charge over the Cricket Centre.”

So the local authority is off their backs and has accepted less interest than was originally due – I wonder if the details of that arrangement will ever be forthcoming.  It could be that the authority was borrowing at a very low rate and charging the club a higher rate and has decided to waive some of the difference.  Let’s be generous.  HSBC have also reduced the interest rate and granted a repayment holiday.  I guess they can recognise a distressed debtor when they see one and have taken the view that taking control of a cricket ground is outside their area of expertise.  It also helps when you can find someone to loan you £5.5m interest-free.  I can only imagine that the terms of the trust are that it exists to ensure the survival of Yorkshire cricket club.  I hope the beneficiaries are happy.  So it is no longer Colin Graves who supports the club, just a bunch of trusts with £19m of his family wealth tied up in them.  It seems a little bit “Maxwell” to me but at least the cricket club still exists.  I guess that things down in Hampshire are not so very different.  Oh and those family trusts did not get repaid in 2016 – as if we could not have guessed.

In January, David Hopps wrote an article about Warwickshire that echoes what I have been writing here but in a more easygoing way –http://www.espncricinfo.com/county-cricket-2017/content/story/1079949.html

Another point of interest is the recent revelation by Vic Marks about Cook:

we once discussed county cricket and Cook said 14 counties would be infinitely preferable – a very sound argument but how do you get there? “Simple,” he said. “Get rid of whoever are in the bottom four of the second division at the end of the season.” At the time two of those positions were occupied by Surrey and Yorkshire. The implications of their expulsion, while briefly amusing to me, did not seem to have any impact on his thinking.”

 Perhaps Cook was unaware that bankrupting 2 of the clubs who supply Test match grounds might be a self-defeating gesture?

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