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?

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.

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.

Donington’s bond rated high risk

Reuters reports that rating agency Standard & Poor’s (S&P) assigned Donington Holdings a CCC+ rating, seven notches below investment grade.

“The ratings on Donington reflect our view of the significant construction and marketing risks relating to the upgrade of Donington’s racetrack and development of hospitality facilities,” S&P analyst Silvia Ortolan told Reuters.

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.

No cause Bernie charges too much to host races.