F1 links: Donington claims it has funding
14th October 2009, 23:53 by Keith Collantine 26 Comments »
Donington Park unveils last-ditch plan to stage British Grand Prix (The Times)
"Donington has launched a last-ditch attempt to hang onto the British Grand Prix with an ambitious bond issue to raise £135million. But the scale of the task is nothing short of epic with only seven working days left until Bernie Ecclestone, Formula One’s commercial rights holder, finally pulls the plug on Donington’s plan to become the new home of British motor racing."
Schumacher: Todt will change the FIA (Autosport)
"Having worked for the FIA and FIA Foundation on many projects for more than a decade, I may also claim that I am very familiar with the FIA." Talk about making a virtue out of necessity. I seem to remember his involvement in a safety campaign in 1998 was punishment for trying to ram Jacques Villeneuve off the road in 1997…
Mosley vows to step back after election (Autosport)
"I hope in a modest way through membership of the Senate and the Foundation to continue to stay in touch with the clubs and with the new leadership of the FIA." We all know what that means…
Jenson Button is exactly the charismatic world champion the troubled sport needs (Daily Mirror)
David Coulthard: "Rubens is a friend I've known him for years and it would be fantastic for him if he won the championship but if you think selfishly about it for the sport, Jenson would make a better champion. Younger has got a better image. The sport needs good ambassadors just now. He has not made a lot of mistakes this year."
These are links I’ve bookmarked using Delicious. You can see my Delicious profile here.
Tom Chiverton said on 15th October 2009, 1:48
OH dear, from the Times “Ecclestone has already admitted … there is no chance of the Leicestershire circuit being ready for full-scale action by the date scheduled for the 2010 race”. So if it is pulled off at the last minute, we’ll lose the Grand Prix for a year (because Silverstone say they don’t want a one year deal)…
Geez. What was so wrong with Silverstone, eh, FIA ?
Red Andy said on 15th October 2009, 8:08
The BRDC were given multiple opportunities to improve their facilities in line with other F1-standard venues worldwide, and they refused every time. So Bernie found a better offer.
What is “so wrong” with Silverstone is that the BRDC are in control.
Phil said on 15th October 2009, 15:07
Not quite, allegedly the BRDC needed a long-term deal in order to get the money to make the changes required; this deal was never forthcoming.
Red Andy said on 15th October 2009, 15:22
But Bernie has been asking for these changes for over a decade. The BRDC got a five-year extension on their contract in 2004. Had they made the required changes then, they would have no problem getting a renewed long-term deal and a return on their investment. But they chose to rest on their laurels instead and now we have another circuit being driven to near bankruptcy solely because of the BRDC’s incompetence.
SamT said on 15th October 2009, 19:38
So they can just find £150m out of nowhere.
No cause Bernie charges too much to host races.
Red Andy said on 15th October 2009, 23:14
Silverstone pays far less to host a GP than nearly every other venue on the calendar, yet its facilities are among the worst in the world. The British GP is one of the few Grands Prix that is run at a profit. The BRDC would have been able to afford the improvements if they’d made them at a sensible time.
Bigbadderboom said on 16th October 2009, 17:37
The BRDC were hoping that the British Government would bank roll the GP, but it was decided that the tax-payer will not foot the bill, and that any independent British sporting event should stand alone and finance itself. The BRDC are too commercially niave to understand how to raise the funding for the improvements. As Red Andy points out, Bernie gave Silverstone all the opportunities to improve, Bernie has made it publicly clear for the last 10 years the improvements that need to be made. I want the GP at Silverstone, but Silverstone needs to sort itself out and stop trying to play the historic card all the time.
Adam said on 15th October 2009, 2:37
What is Citi thinking being associated with that offering from Donington Park? I hope they are careful to get their underwriting fees up front. For those of you who don’t work in the bond world everyday, this offering reeks of desperation and has very little chance of working out. The problem with an offering like this is that for an offering of this size you virtually have to be able to have institutional investors purchase a good percentage of the bonds. I’m not sure if they’ve even had enough time to have the bonds rated, but from what I’ve read here and in the FT it if they did they couldn’t have rated well. The coupon rate is 15%, which is priced in ‘junk bond’ territory (meaning the bond is rated below investment grade). Institutional investors don’t buy junk bonds and many of the institutional investors that are regulated can not legally buy them as investments. If there was any doubt of their risk, despite carrying an extraordinarily high coupon rate of 15%, they are anticipating having to sell them at a 10% discount, making the rate of return even higher. When you’re pricing this type of an offering you’re looking at two main things, the rate of interest an investor would get on a relatively riskless investment (i.e. a government bond) plus the risk premium needed to compensate an investor for the additional risk of loss this investment has beyond that riskless investment. With bond rates and LIBOR rates as low as they been the interest rate shown here is virtually all risk premium. If that is the return needed to sell the bonds they are clearly very high risk, and there is no way an institutional investor will touch them.
If you don’t have institutional investors involved in an offer of this size you next have to look at international sovereign wealth funds. The down side here is that if some wealthy ruling family in the middle east wants to invest in Formula 1 they are much more interested in building a track in their own country. So the demand here is going to be minimal.
This leaves them in a position of having to raise almost all of the funds from retail investors. These will be very small purchases in comparison, so you’re going to have to find a huge number of investors.
This is such a difficult method of raising the funds the financial world is not really taking it seriously. I doubt Bernie is taking it seriously either. You don’t make the amount of money he has in his life without any understanding of these types of things. This is the kind of scheme that makes you choke on your tea when you read it.
The group had said earlier that Citi had lined up a £120m loan, subject to the company obtaining a £12m line of credit for their operating expenses on a year to year basis. This plan raises no more funds than the loan, which means they will still have to find operating cash, it just eliminates the operating line as a condition of the loan. The only possible conclusion that can be drawn here is that their advisers think their chances of getting a line of credit is so small that this wacky scheme is more likely to succeed. As an investor I’d be very scared to purchase the bonds of an entity in such bad shape that they can’t secure an operating line, have to offer a coupon rate of 15% on their new bonds, and then have to sell those bonds at a discount.
mattBT said on 15th October 2009, 11:28
Glorified bloody raffle tickets! So, after all this time he still doesn’t have a bean of ACTUAL investment. How has it gone on for so long?
Anyone left dreaming that a Donington GP could still happen must now surely wake up.
HounslowBusGarage said on 15th October 2009, 12:44
Adam, interesting post. I know nowt about bonds: what’s the coupon rate though, is it the promised interest percentage?
Adam said on 15th October 2009, 14:58
The coupon rate is the rate of interest paid on the full face price of the bond. For simplicity sake lets say that they are selling 12,000 £1000 bonds and we’ll assume they only pay interest once per year. The interest paid each year on each bond would be 15% of the £1000 face value, or £150 each year. But that isn’t a good enough return to attract an investor according to the articles. They are having to sell the bonds at a 10% discount, so the bond holder is only paying 90% of the £1000 face value, or £900. They will be paid interest each year based off the full face value of the bond, so they will still receive £150 per year in interest. So Donington is paying interest on the full £1000, but only received £900 from the investor. This means their £120m bond offering will only get them £108m, and that’s only if they can sell them at that discount and don’t have to increase the discount to get them sold. Donington will still be paying 15% per year on the full £120m that’s being offered, so the interest they’re actually paying will be 16.67% because they really only received £108m from the sale. Plus Donington will have underwriting and other fees associated with holding the bond sale. If I were doing the bond offer I would have required the fee upfront, as that is very common and especially common when the bond is junk.
HounslowBusGarage said on 16th October 2009, 8:55
Now I understand. Many thanks.
Keith Collantine said on 15th October 2009, 22:10
Very interesting stuff, thanks Adam!
Adam said on 16th October 2009, 0:53
An interesting update… http://www.autosport.com/news/report.php/id/79459
Donington’s bond rated high risk
VERY few bonds come to market with a CCC+ rating. Usually when you see a bond with that rating its something that was issued with a much better grade and was subsequently downgraded over a period of years as people became concerned the company would fail.
Bonds don’t come to market at this rating very often, because usually the company would rather find some kind of short term solution to put off issuing bonds until they are in better shape. They are truly desperate if they are putting all of their hopes on this financing structure. I can only conclude that their loan commitment, that was subject to them getting a line of credit, was pulled.
Becken said on 15th October 2009, 3:24
Felipe Massa: “Alonso knew (about Crashgate)” (audio in Portuguese)
Ferrari´s PR tried to fix Massa´s statement:
Becken said on 15th October 2009, 3:28
Felipe Massa: “Alonso knew (about Crashgate)” (audio in Portuguese)
The people in my blog have said that Massa´s head was affected by the crash in Hungary.
Ferrari´s PR tried to fix Massa´s statement:
Sorry, Keith, I mess up with the quotes)
Becken said on 15th October 2009, 6:11
Alonso to Domenicalli: “I wasn’t perfect in my relationship with Lewis”
In a lunch with Italian press, Stefano Domenicalli has revealed interesting points about “his” Ferrari, Massa, Alonso and Kimi. Some translated excerpts below. The original you can find HERE.
About Fernando and Lewis:
About Massa and Alonso I already said they will be trated equally. I don’t fear the internal conflict. I spoke with Ferando about his problems in McLaren with Hamilton. He felt betrayed by the british guys, but admits he wasn’t perfect in his relationship with Lewis. In Maranello nothing like that is going to happen: it’s my responsibility and I’ll guarantee (nothing like that will happen).
About Kimi and Fernando:
Chapter Kimi. I take the chance to motivate the choice. Ewin, I consider Raikkonen, in absolute terms, at the same level of Fernando, Felipe, Lewis. So, why this change? Because I’m sure our team, Ferrari, needs a man more similar to Schumi, as for the relationship with the team. Kimi is very fast, very competitive but also very closed, introvert. It’s not a limit and not a guilt: it’s his temper. With a winning car, he was and he is perfect. With a car to fix and a team to direct, I believe Alonso is superior. This I explained to Raikkonen: he wasn’t happy but he understood.
About “his” Ferrari
To consider Baldo (Baldisseri), Iley, Simon and Kimi events similar, you are mixing different things, as I’ll explain later.
Baldo, to name one, was and is still my friend and despite none believes that, it was Baldo, after Malaysia, to ask me to do something else. BTW, it’s true 2010 Ferrari will be more “mine”, the Stefano Domenicali’s Ferrari. And I’m fine with that.
DGR-F1 said on 15th October 2009, 8:15
Old Schuey saying what a good guy Jean will be, Mad Max talking about ‘transparent’ elections…..where is the support for Ari?
Becken said on 15th October 2009, 11:30
The question for me is: why a Ferrari employee (Schumacher) is directly involved in Todt campaign?
None seems to pay attention to that!
ajokay said on 15th October 2009, 9:29
Autosport with a quote from the Donington funding plans:
http://www.autosport.com/news/report.php/id/79420
I’ve never seen so many words make so little sense.
rmac923 said on 15th October 2009, 18:14
You should try living in America, that’s the kind of stuff that comes out of every potitician/creditcard exec/bank exec, all the time.
Adam said on 16th October 2009, 1:02
The dollar amounts here are different than what the FT reported. They may have had to incrase the bond offer from £120m to £135m because they are having to sell them a a discount. The proceeds from selling £135m in bonds at a 10% discount would be £121.5m. Factor in underwriting fees and they would net about £120m, so I think it looks right.
As far as what it means…
They are first priority senior secured notes, which means that they are backed by a lien against the company’s hard assets (the land, the track, the buildings, the contractual rights to the GP, etc.), they are senior notes meaning another bond issue won’t step ahead of them in payment priority or lien position against the assets. Basically it means these bondholders will be paid before anyone else.
To have the bonds be senior notes and secured (in a first position no less), yet still be rated CCC+ is extraordinary. Then to have first lien senior notes have to carry a coupon rate of 15%, and then have to sell at a 10% discount to the face value is almost unheard of.
The story also talks about an offering of perference shares, which means that in addtion to the £135m in debt being placed, they are also having to sell none voting ownership stakes in the company.
Everything is being offered through a private sale, which they are doing so that they don’t have to deal with some of the regulations and disclosure requirements, since a private offering has somewhat looser regulations than a public offering.
Achilles said on 15th October 2009, 19:35
Thanks to Adam for providing a proper insight into the Donnington Junk bonds, and thanks to Becken for his translations, I also have to question Schumi’s involvement in the lobbying for Todt! My thoughts were that Alonso must have had some knowledge/involvement, but it needed a driver to confirm it. It amuses me that Schumi is playing up to a team that shafted him as they are now shafting Kimi…F1…awesome!
Godfrey said on 16th October 2009, 11:40
Thanks from me as well Adam for your clear explanation of the offer. One question: if the company offering the bond is not the owner of the freehold of the park but only holds a lease over a period of many years (?120) does this make the offer even less attractive?
Adam said on 17th October 2009, 1:00
It could. I haven’t been able to find a copy of the full investment prospectus, so the only specifics I have on the offer is what’s been reported in the media.
It would be much less attractive if collateral offered to secure the bond is only an assignment of their interest in the lease. An assignment of their interest in the lease would mean that if they didn’t pay the bonds the bondholders as a group couldn’t auction off the property.
If there was a default the bondholders would only have the same right to use the facility that the company had, so really to see any recovery they would either have to find someone willing to pay them for the rights to operate the events at Donington Park, or would have to operate the facility themselves. Most investors don’t want to be that hands on (otherwise they would be after equity not debt), so that would be a big turn off.
If the entity that owns the park is guaranteeing the bonds in the event of default by allowing the bondholders to foreclose and take ownership to Donington Park the bonds would be much better collateralized and would be MUCH more attractive. I would be surprised if there is much interest in the bonds if there isn’t this potential to take ownership of the facility in the event of default.
Adam said on 17th October 2009, 1:28
I think the lack of time will doom this bond offering. Because they have so little time this is having to be a private offering, rather than a public sale. While sometimes a private offering is better (because you have less hassle and regulations with disclosures), it means fewer buyers each putting in a larger amount of money. It can be very difficult to find enough people willing to put in those kinds of large chucks, especially when the offer is pretty shaky.
The people who will be buying these bonds in a private sale will be quite familiar with all of these details and know how it should be structured to reduce their risk. These are people who have bought bonds before and probably do so regularly. They have large investment portfolios, and typically both understand them well and and have a well qualified financial adviser or team of advisers.
These people will each be asked to each make a substantial loan to the company by purchasing these bonds. They stand to lose large amounts of money and they wouldn’t be investing if they felt weren’t convinced they were going to be paid back. This won’t be like going around to a group of fans at a GP weekend and asking if they would like to buy a piece of the GP. These investors won’t decide to invest because it will be fun to say they’re a part of the action. These investors won’t be like the fans there at all, they’ll be people just like Bernie. These people won’t be swayed by the emotional aspect of being able to say they have some control over a GP, these people will be all about the money and want to make sure they’re not just throwing away £100,000. They all will want their original investment back plus a healthy return. If they don’t think they can get it, they simply will not invest no matter what the interest rate offered.
They won’t be easily fooled into thinking this plan has a great chance. They won’t be easily convinced that the GP will come to Donington Park even if the money is raised.
They have already been given a notice to cure the default of the contract. That doesn’t mean the contract has to be honored just because the money is raised. If Bernie wants out of the contract this will give him cause to do it. To satisfy the notice to cure the default they will have to not only have raised the funds but also to have substantially completed construction within the next 12 days. The notice to cure the default doesn’t mean you have to fix that one breach, you have to satisfy the contract.
Think of it in terms of something more of us can relate to, a loan from a bank. If you miss your payments and are in default eventually the bank will send you a cure notice. The typical boiler plate language will tell you that you’re in default of your loan and that you have so many days to pay off the loan and cure the default. If you ignore the notice the bank can begin to foreclose on its loan, and you will lose whatever is securing the loan. If you go to the bank and pay the payments you’re behind often they will let you go back to making payments and all will be well, but technically they don’t have to. The bank can require you to pay the full balance of the loan, as you have breached your contract and they are no longer obligated to continue the contract with you.
Similarly now that the contract to hold the GP at Donington Park has been breached if the funds are raised the rights holder has a choice. They can choose to allow Donington Park to hold the race (assuming they perform the rest of the contract on schedule), or they can choose to terminate the contract unless it is completed before the end of the two week notice period. This would mean all construction be complete, etc. and the track to be ready for the GP (as described in the contract) now, or they could pull it.
Raising this money does them no good if Bernie wants out of the contract, because he already is well within his rights to get out. The investors would have put their money into a track without a contract or an F1 event. Also, there may have been other deadlines missed and/or they may be on track to miss other deadlines. If they miss that deadline they will once again be in default, and there’s no guarantee they will get any more extensions on any other deadlines. Also, construction will need to be done before the GP date. This would appear to be an even bigger and more important deadline than the financing. If they can’t get the work completed on time the contract is null and void. It is entirely possible that some how they raise this funding, but the bond holders end up completely screwed because the contract is lost for other reasons of nonperformance. This explains why a HUGE risk premium is needed here.
Because of how late this has gotten there are really no assurances the contract is worth anything to Donington Park. And without a contract, how much is anything securing the bonds really worth?