While Liberty Media has come in for criticism for a number of its moves since buying F1 at the beginning of 2017 – the logo, the theme tune and the plush new London HQ – there is no denying that it has taken some positive steps not only to improve the sport but to bring new fans in.
Certainly, whatever one might think of Liberty, it has made more effort than F1’s previous owner, CVC, which merely waited for the cash to roll in.
Unfortunately, the dark cloud of CVC still hangs over the sport.
As we await the next phase of the pandemic that is the coronavirus, many are looking at the financial aftershock that will surely follow.
In the UK alone, the government is making all sorts of promises to businesses and workers, home owners and employers, with seemingly no real thought as to how it will all be paid for.
And as people still attempting to come to terms with the virus and the life changes that go with it, there is the dread that bills still need to be paid, along with rent, mortgages etc.
When Liberty bought F1 it wasn’t merely paying for the sport as is, it was paying for loans CVC had taken out.
When CVC bought F1 in 2005 it did it with borrowed money, initially in the form of a loan from the Royal Bank of Scotland (RBS). F1 subsequently got another loan and promptly paid the proceeds to CVC, leaving F1 with the debt.
Over the years that followed, despite the sterling work done by Bernie Ecclestone on behalf of the sport’s owners, CVC borrowed more and subsequently used the proceeds to pay its investors.
When Liberty bought F1 in early 2017 the loan was around $4bn (£3.3bn). Liberty used a lot of F1’s cash to pay off the loan, which now stands at $2.9bn (£2.4bn).
Like Joe Blow, who is concerned as to how he is going to pay his mortgage once we get through the current crisis, Liberty also has to determine how it can maintain its loan payments.
To recap on a number of previous articles, F1 filings state that if races are not held, the “fees under the relevant advertising and sponsorship contract are likely to be reduced”, while corporate hospitality tickets have to be refunded.
Together, these two contributed 19.4% of the sport’s $2bn (£1.68bn) revenue last year, along with the $602.1m (£507.8m) received from race promoters, and let’s not forget that only last month, Chase Carey admitted to analysts that if races are not held “we would not receive the promotion revenue.”
The sport’s single biggest revenue stream is TV broadcasting, with the likes of Sky and others around the globe contributing $762.8m (£643.5m) to the F1 coffers.
However, according to the filings, “broadcast contracts include a provision to reduce the fee payable to Formula 1 if there are fewer than 15 Events”.
All of which explains why JP Morgan has warned that if too many races are missed, the sport could find itself in the gravel trap.
According to the Daily Telegraph, in a recent research note, JP Morgan said that F1’s credit facilities have “a maximum allowable net leverage of 8.25x (relative to 5.1x at year-end). While Formula 1 could conceivably breach this level with an extended shutdown, we believe it would likely receive a waiver, and in an absolute worst-case scenario, note that Liberty does have cash and liquid assets at the FWON tracking level that it can send down to F1”.
Basically, the loan that Liberty inherited from CVC had a crucial condition known as a covenant.
Much like when Joe Blow applied for his mortgage, the covenant is a warranty of how he earns when applying for a loan, for it is his earning capacity that decides how much a lender is willing to risk.
In terms of the kind of loan F1 has, the amount that can be borrowed is determined by how much profit the company makes, so if the profits nosedive below a certain level alarm bells will ring once it appears the repayments could be an issue.
First the bank calculates a company’s net debt, its total outstanding loans minus any cash in the bank. In F1’s case, there is $402m (£339m) in cash and $2.9bn (£2.4bn) in loans, giving it net debt of $2.5bn (£2.1bn).
According to JP Morgan’s research note, the terms of the loan state that the net debt has to be (at most) 8.25 times F1’s operating profit. Consequently, if you divide $2.5bn by 8.25 you get an operating profit threshold of $303m (£255m).
Last year, F1 made $482m (£407m) of operating profit, which as you can see comfortably exceeds the threshold.
However, with the sport having already cancelled or postponed 8 races, alarm bells are ringing, for a continued crash in revenue could see F1 struggle to repay a loan which incurs interest at 4.3%. That’s $124.7m (£105.3m) a year, $10.4m (£8.7m) a month.
With that $402m in cash in the bank, JP Morgan is confident that F1 won’t default on a payment, indeed with that amount of cash to hand the sport – like Joe Blow at present – would probably be allowed to ‘miss’ a few payments.
However, like Joe’s mortgage, which is secured on his house, the F1 loan is secured on the companies that run F1, so if a number of payments were missed the bank could end up owning the sport… the last thing that any bank would want.
However, while the bank might give the sport a period of grace, the situation is not helped by there being no end in sight to the current crisis.
Interestingly, JP Morgan’s warning was issued on 12 March, the Thursday of the ill-fated Australian Grand Prix weekend.
At the time it stated that F1 could “conceivably breach” the covenant on its $2.9bn debt if it had an “extended shutdown”, and as we all know, since then eight races have either been postponed or cancelled, and despite Chase Carey’s regular updates there is still no guarantee the season will get underway any time soon.
In the last two months, F1’s value on the stock market has crashed by 49.4%, more than double the amount the market itself has dropped during the same period.
Both JP Morgan and Liberty were contacted for comment, but neither replied.