Exeter's asset sale should concern every English rugby fan
English rugby has been through a tortuous few months after the administrations and suspensions of Worcester Warriors and Wasps Rugby. However last Friday evening, eyebrows were raised again, with the statement published by Exeter Chiefs, stating that they will sell a ‘non-rugby asset’ primarily due to struggles in generating the income to repay Covid-19 Government loans.
Given Chiefs were the only club to post a profit prior to the pandemic, what has happened and what does that statement mean for the beleaguered Premiership?
The Exeter Financials – what does it Show?
Well firstly, it is important to look specifically at Exeter Chiefs, and peruse their last accounts posted on Companies House. These were posted in December 2021 covering the 12-month period up to 30th June 2021 and relate to Exeter Group PLC, which covers both the playing side of the rugby club, as well as off-field affairs, including the hotel site.
Turnover in that period was pandemic affected and stood at £9.6m. To get a real feel for what their actual revenue stream should be, a peek at their accounts in 2019 is required and reveal a robust £21m in the coffers. That 2021 turnover was combined with a loss for the group of just under £4m.
The balance sheet for the group, at first glance looks healthy. The Group PLC have a positive Total Net Assets figure of £25m, very strong levels of cash at bank with £7m, with high levels of fixed assets to their name, totalling £62m. As a result, the accounts were signed off by the auditors on a going concern basis. Therefore, in theory, there should be no concerns over the club.
Borrowings
However further inspection in the accounts starts revealing what could be the cause of furrowed brows at the South-Devon club. The PLC has accumulated a total of £28m in long-term borrowings, both bank-led and otherwise. It is here that the challenges start to reveal themselves.
For a business that has turned over a figure of £9m, having long-term borrowings of that size can be dangerous and leave them exposed. Now in mitigation, the revenue for the latest year-end, up to June 2022, will be much higher given crowds were allowed back into fixtures. A figure of closer to 2019’s £21m is more likely to be posted. However, even with this in mind, carrying that level of long-term debt is a risky strategy to have for a club, and more importantly business, like Chiefs. This has been reinforced by recent events.
What are the loans?
Of that £28m, the largest due is £10.4m relating to a bond, raised by the company, and paid into by investors, including Chairman Tony Rowe. This is secured with an ‘unsecured debenture’. This is rare. Most funding facilities are secured against specified assets of the business, providing security to the lender in case of business failure or defaulting of the repayments. Such unsecured lending is usually for a business that has a very strong credit rating and history, reflecting the previous strength of the Exeter business. However, such lending comes at a higher risk, and that is reflected in the cost of borrowing which is notified at a fixed 5.5 per cent in the accounts. This would have been considered an expensive form of lending when this was first taken out, however in the current climate it now looks reasonable.
The next largest borrowing relates to the £6.81m loan provided by Sport England, secured by a fixed and floating charge against all properties and undertakings of the company. This sounds intrusive, however in reality, the Government are unlikely to pursue it. It also comes with fixed interest rate of 2 per cent, which would have been seen as good value in 2020. In the current climate it is by far the cheapest form of borrowing that the club have. Neither the bond nor the Sport England loan will be causing the club too much of a headache.
What will concern Exeter the most are the bank borrowings. The PLC has a Government CBILS loan from Barclays Bank for £5m that is due by 2030. This was taken out with an interest rate of 2.3 per cent above LIBOR and is secured against the receivables of the business – what is owed to Chiefs. Secondly, they have a term loan from NatWest for £6.6m. This is secured against the assets of Sandy Park Hotel Ltd – a subsidiary business of the PLC – as well as by a Personal Guarantee of £750k from Tony Rowe. This has an interest rate of 3.5 per cent over LIBOR.
These two loans are the issue for Exeter because of that cost of borrowing. In 2020 LIBOR was under 1 per cent throughout the year, getting lower as the year went on, with three-month LIBOR being below 0.1 per cent by the close of 2020. As a result, Exeter’s borrowing decisions at the time of taking them out looked smart, and a good decision to make. However, interest rates have now spiralled in the last two years, three-month LIBOR is now 4.46 per cent, taking Exeter’s CBILS and Term Loan to 6.76 per cent and 7.96 per cent respectively. That now must be having an impact on business performance.
So what are the implications?
The issue mainly appears to be around cash flow. With the vast increases in borrowing costs, Exeter are suddenly more exposed due to how much borrowing they hold. Add in those HMRC obligations – previous and current, an increase in trade creditors as well as a monthly wage bill of circa £1m, and you can see where the coffers are being stretched. Judging by their statement last week, they are clearly not generating the income required to generate the liquid cash needed to repay everyone. Attendances are also down compared to last season and home fixtures cancelled due to Wasps and Worcester’s well-documented issues, which will be potentially causing challenges to the business.
So last Friday’s announcement means the club are either selling an asset to be proactive to try and get ahead of the issue. Or it is more serious, and they are being reactive because the problem is becoming too large to handle. For now, the club remain tight-lipped. Either way, it appears that cash flow is a headache, caused by a large amount of long-term borrowing that’s become more expensive with the recent interest rates rise. The good news for Chiefs is that they can tackle the issue and have an option to find a way out, whereas many other businesses or clubs do not have such luxury.
The Challenges facing English Rugby
When you think of sports clubs, you think of massive institutions like in Premier League football, which is a billion-dollar industry. Rugby, specifically English rugby, is very much the opposite. Clubs like Exeter, are the very definition of UK SME’s (small and medium-sized enterprises), meaning they face the same challenges as local family-owned businesses in the area. The cost of borrowing increases affect everyone. The difference is that Chiefs are in the public eye and will come under more scrutiny as a result.
The challenges facing Exeter are typical of those facing Premiership clubs in general. Going into debt is not a bad thing for a business, depending on what type of debt it is. There is bad debt – such as HMRC arrears, or there is good debt, where you borrow to invest or grow your business.
Ever since the sad demise of Worcester and Wasps, there has been a lot of calls for rugby clubs to grow their revenue streams to prevent further administrations. However, as Exeter’s challenges show, this is easier said than done. Exeter took on debt to invest in their business, as well as grow and diversify their income stream. Yet almost straight away, they are having to contemplate side-lining this project given the costs involved. There is no point increasing your revenue if it is all being spent on increased borrowing costs.
It therefore poses a conundrum to clubs. Borrowing to invest is tricky, as shown at Exeter. Lifting ticket prices alienates your fanbase. Sponsors are increasingly hard to find. Hospitality income is struggling to recover post-Covid. Where does this new income come from? That’s what club CEO’s will currently racking their brains about.
What does that mean for the rest of the Premiership?
The crisis in English rugby is not unique to those clubs already gone – as the issues at Exeter attests. English rugby is also not alone in facing challenges. The UK economy is dealing with rampant inflation, spiralling interest rates with insolvencies beginning to tick up. Forecasts indicate that the UK economy is set for a longer-lasting recession than any since the Second World War. As a result, the headwinds are heading only one way only.
The worry for English rugby is that the country is about to head into a recession, yet the sport is there already. Two clubs have already gone from the top-flight, with more rumoured to be on the breadline, yet the economy is far from reaching its nadir. It is like knowing there is a hurricane coming imminently, yet your house has caved in at the first light rain shower. Put simply, your chances of survival are not good. The added danger is that of contagion. If more domino blocks fall, even your strongest businesses get dragged into a mess. Having a good business model to recover is of no use if you have no opponents to play against.
Last week’s news out of Exeter should concern every English rugby fan – if they, as a well-run business, are beginning to creak, no one is safe. English rugby is set for an uncertain future and the problems are not going away any time soon.
Exeter statement on asset sale: “As a result of the Rugby Football Union and Premiership Rugby Limited’s decision to continue playing behind closed doors during the Covid-19 pandemic, Exeter Rugby Club were forced to borrow substantial government-backed loans to pay our players and staff.
“The funding from the government was not in the form of grants, but loans which carry interest. These are due to be repaid and the income from our normal trading is not sufficient to pay them and all other expenses.
“Accordingly, the rugby club board decided to sell one of our non-rugby assets for which members’ approval is needed and which is being sought at an extraordinary general meeting at Sandy Park on Wednesday, November 30.
“This should be more than sufficient to see the club pay the loans and be financially secure for the future. No further comment will be made by the rugby club.”
Comments on RugbyPass
Anna, You are right, we need to have patience whilst the others catch up to England and France. Also it is the PWR that has been the game changer for England. the RFU put money into that initially at the expense of the Red Roses. I was sceptical at first but it has paid off in spades.
1 Go to commentsI think Matt Proctor became a 1 test AB in the same fixture. Cameron is quality and has been great this season, can’t believe’s he only 27. Realistically how would he not be selected for ABs squad this year. Only Dmac is ahead of him as a specialist 10. With Jordan out, it will come down to where and when Beauden Barrett slots back in, and where they want to play Ruben Love. Cameron seems an absolute lock in for the wider squad though. Added benefit of TJ-Cameron-Jordie combination at 9, 10, 11 too.
1 Go to commentsFarcical, to what end would someone want to pay to keep this thing going.
1 Go to commentsHavili, our best 12 by a mile, will be in the squad, if he stays fit. JB is the most overrated AB in the last 50 years.
61 Go to commentsWe had during the week twilight footy, twilight cricket, tw golf plus there was the athletics club. Then the weekend was rugby 15s plus the net ball, really busy club scene back then but so much has changed and rugby has suffered. And it was all about changing lifestyles.
6 Go to commentsIn the 70s and 80s my club ran 5 Senior sides plus a Vets. Now it is 2 sides with an occasional 3rd team. Players have difficulty getting to training now, not sure why and the commitment is not there. It seems to me more a problem of people applying themselves and not expecting to turn up and play whenever they want to.
6 Go to commentsROG’s contract is until 2027. The conversation about a successor to Galthie after RWC 2027 may be starting now. We can infer that Galthie’s reign stops then. He is throwing the Irish Coaching Job angle in because he is Irish. The next Irish coach MUST be Leo Cullen. As well as being the best coach available, coaching the vast majority of Irish Internationals week in week out, he has shown incredible skill at recruiting the best coaching staff for the job in hand. That was a failing in France. Cullen is a shrewd guy and if there is a need for foreign coaches underneath him he won’t hesitate. Rightly so. Ireland does need to start to bring Irish coaches through. Not just at the professional level but we need to train coaches to man new pathways for developing kids from schools/clubs up through the divisions.
8 Go to commentsNo Islam says it must rule where it stands Thus it is to be deleted from this planet Earth
18 Go to commentsThis team probably does not beat the ABs sadly Not sure if BPA will be available given his signing for Force but has to enter consideration. Very strong possibility of getting schooled by the AB props. Advantage AB. Rodda/Skelton would be a tasty locking combination - would love to see how they get on. Advantage Wallabies. Backrow a risk of getting out hustled and outmuscled by ABs. Will be interesting to see if the Blues feast on the Reds this weekend the way they did the Brumbies we are in big trouble at the breakdown. Great energy, running and defence but goalkicking/general kicking/passing quality in the halves bothers me enormously. SA may have won the World Cup for a lot of the tournament without a recognised goalkicker but Pollard in the final made a difference IMO. Injuries and retirements leave AB stocks a bit lighter but still stronger. 12 and 13 ABs shade it (Barret > Paisami, Ione = Ikitau, arguably) Interesting clash of styles on the wings - Corey Toole running around Caleb Clark and Caleb running over the top of Toole. Reece vs Koro probably the reverse. Pretty even IMO. 15s Kelleway = Love See advantage to ABs man for man, but we are not obviously getting slaughtered anywhere which makes a nice change. Think talent wise we are pretty even and if our cohesion and teamwork is better than the ABs then its just about doable.
11 Go to commentsCompletely agree. More friday night games would be a hit. RFU to make sure every club has a floodlit pitch. Club opens again Saturday to welcome touch / tag. Minis and youths on Sunday
6 Go to comments1.97m and 105Kg? Proportionately, probably skinnier than me at 1.82 and 82kilos. He won’t survive against the big guys at that weight.
55 Go to commentsThe value he brought to the crusaders as an assistant was equal to what he got out of being there. He reflected not only on the team culture but also the credit he attributed to the rugby community. Such experience shouldn’t be overlooked.
8 Go to commentsGood luck Aussie
11 Go to commentssmith at 9 / mounga 10 / laumape 12 / fainganuku 14
61 Go to commentsBar the injuries, it’s pretty much their top team …
2 Go to commentsDon’t disagree with much of this but it appears you forgot Rodda and Beale, who started at the Force on the weekend.
11 Go to commentsExcept for the injured Zach Gallagher this would be Saders best forward pack for the season. Blackadder needs to stay at 7, for all of Christies tackling he is not dominant and offers very little else. McNicholfullback is maybe a good option, Fihaki not really upto it, there was a reason Burke played there last year. Maybe Havilli to 2nd five McLeod to wing. Need a strong winger on 1 side to compliment Reece
1 Go to commentsTo me TJ is clearly the best 9 in the competition right now but he's also a proven player off the bench, there's few playmaking players who can come off the bench as calm and settled as he is, Beauden can, TJ can and I doubt any of the scrumhalves in contention can, if they want to experiment with new 9s I want him on the bench ready to step in if they crumble under the pressure. The Boks put their best front row on the bench, I'd like to see us take a similar approach, the Hurricanes have been doing similar things with players like Kirifi.
61 Go to commentsROG has better chance to win a WC if he starts training and make himself eligible as a player. He won’t make the Ireland squad but I reckon he may get close with Namibia (needs to improve his Afrikaans) or Portugal. Both sides had 1000:1 odds to win the RWC in 2023 which is an improvement on ROG’s odds of winning a RWC as a coach. Unlike Top 14 teams, national teams can’t go shopping and buy the best players - you work with the available talent pool and turn them into world beaters.
8 Go to commentsthat backline nope that backline is terrible why would you have sevu Reece when he’s not even top 5 wingers in the comp why have Blackadder when there’s better players no Scott barret isn’t an automatic the guy is more of a liability than anything why have him there when you have samipeni who’s far far better
61 Go to comments