Coventry City and SISU Capital. £60 Million in debt?

Ricoh

Take me home, t’Highfield Road, To the place, I belong,

West Terrace, watching the City,  Take me home, t’Highfield Road.

Sang to the tune of John Denver’s, ‘Take me home, country roads’

The long suffering fans of Coventry City have had very little to look forward to recently which has led some fans to reminisce of happier times at their former home, Highfield Road, and sing about bygone days at a ground, close to the city centre hemmed in by terraced houses with disjointed and creaking stands.  The place had history, witness to some great and important games, well, important if you were a city fan, a couple of league cup semi-finals and the seemingly inevitable last gasp win on the last day of the season to prevent relegation yet again for another year.  That was until the final year of the stadiums existence when the club finally fell from grace and out of the first tier of English football.  On a practical level, sightlines were pretty appalling, the capacity was restricted with little or no space for growth, parking around the ground was difficult, the PA non existent yet the place had a sense hope, of anticipation and survival.  Since leaving Highfield Road, the club plays home games at the Ricoh, a place that up to now has seemed largely devoid of hope for long periods.  The club has underperformed, a team oscillating between mediocrity and downright poor, lacking in investment, depth and quality that were relegated to Division One last season, which is reflected in the feelings directed towards the old stadium by the fans.  The new venue lacks a rich history and tradition due in part to the lack of genuine big games, the matches that remain long in the memory that soon become local folklore, that history you can somehow sense when entering any great venue, be it a cathedral of the church or a cathedral of sport.

Ownership of the club has changed since the Highfield Road days after being rescued just minutes away from entering administration in 2007 by the current owners, paying just eleven pounds for control whilst refinancing the clubs liabilities to £15,839,640, whilst actually injecting £9,119,523 in hard cash.  The club is now in administration and has had a ten points deducted by the football league.  It was stated at the High Court in March 2013 that debts are now pushing £60 million.  This level of debt is clearly unsustainable but how is that debt calculated, and what does it consist of?

A small proportion of the debt is owed to the landlords as the rent on the stadium remains unpaid since April 2012, with around £1.4 million owing.  The club is controlled by SISU Capital Ltd (SISU), a Mayfair based hedge fund, who have been in negotiations with the owners of the Ricoh, Arena Coventry Ltd (ACL) to agree new terms since the summer of 2011.  ACL is a joint venture between Coventry City Council and The Alan Edward Higgs Charity an organisation set up to help disadvantaged children in the City.  The City council stepped in to fund the building of the stadium and the surrounding areas of north Coventry under an urban regeneration program, developing a successful conference centre, football stadium, hotel, retail park and casino.  This was then leased to ACL for £21 million. The previous owners of the club sold Highfield Road for redevelopment with the intention of moving to the current site of the stadium, but could not afford to complete the stadia project due to financial constraints.   The rent is expensive for a club in the third tier of English football, set at £1.2 million per annum, but the stadium was designed as a high specification venue, with playing in the Premiership in mind.  As such, the Ricoh, as the Stadium of Coventry, became a host for Olympic Football in 2012 and has also been selected as a possible venue for the Rugby World Cup in 2015.  SISU have attempted to purchase the stadium from ACL but negotiations were unsuccessful, breaking down acrimoniously.  It would appear that the lease on the stadium does not contain any clauses to reduce the liability should demotion occur.  Rather than renegotiate the terms immediately, SISU began to withhold the rental payments and then entered into discussions later.  Negotiation between the two parties led to an alleged agreement to reduce the rent to £400,000 per annum, but disagreements on access to match day catering revenue streams led to a deadlock.  SISU refused to clear the arrears whilst contributing to the match day running costs, which are due over and above the rental payments.  Bob Ainsworth, the MP for Coventry North East (Lab), made accusations to parliament on 12 March 2013, stating that (Hansard, 12 03 12)

The club’s owners have been on a rent strike. They say they are fighting for a more realistic settlement for a league one club, although Arena Coventry Ltd … believes the agenda has been to destabilise the company and thereby gain control at a fire-sale price. A much lowered rent has been offered, but the dispute continues.

It has been suggested that the withholding of monies that was contractually agreed and due was an attempt to restrict the cash flow into ACL, in the hope that the company would be placed into administration and then SISU, as sitting tenant, would acquire the stadium well below market value.  The future of ACL had been secured in January 2013 when the council refinanced the mortgage ACL owed to Yorkshire bank, relieving some of the pressure on immediate cash flow.  ACL issued the club with a statutory demand for payment on the outstanding rent in December 2012, but the deadline passed without the amounts due being paid. As the issue remained unresolved and payment outstanding, third party debt orders were then issued in February 2013 followed by an application by ACL to place the club, through Coventry City Football Club Ltd (CCFC Ltd) into administration.  However the company was forced into administration the day before the original court hearing was due to be heard for non-payment of a £8.4 million debt on a debenture held by Arvo, a subsidiary of SISU.  This ensured that SISU could appoint the administrator rather than ACL which could be key in how the company exits and moves forward.

SISU claimed that a non trading subsidiary with no assets had been placed into administration and the football club would continue to fulfil its obligations to finish games in the league by trading and performing under another subsidiary.  A statement from the holding company released to the press claimed

It is important to stress that the Football Club itself is not under threat.  This is merely a property subsidiary which owns no material assets and has no employees, on or off the pitch.

There was confusion as to which company held the “golden share” with the Football League – which enables the club to participate in the league.  Was it the company in administration or was it the company that was continuing to trade?  It is the structure of the group of companies that contributed to this confusion and this structure is multi-layered and difficult to follow.  By looking at published accounts, we can try to unravel these layers and ascertain if the reports in the press were accurate.

Business Structure.

SISU has designed a complex business structure that forms the ownership of the football club, consisting of companies, subsidiaries and investment vehicles based in both the UK and Cayman Islands that are collectively linked. This structure, with so many layers, can obscure and distort what is actually occurring.  Bob Ainsworth stated, before the release of the more up to date figures, that (ibid)

It is claimed that SISU has lost £43 million over the period, but nobody can be sure as substantial management fees of millions of pounds are passed between the layers of ownership and debentures [that] seem to protect unknown investors.

The unknown investors in SISU’s hedge funds are the majority shareholders that are the ultimate owners of the club.   The identity remains unclear, yet were passed by the football league as fit and proper when the club was first purchased.  SISU Capital Ltd, own the investment vehicle Sconset Capital LP, both registered in the Cayman Islands.  SISU transferred their 100% shareholding in Sky Blue Sports & Leisure Ltd (SBSL Ltd) to Sconset in 2010.  SBSL Ltd in turn is the sole shareholder of Coventry City Football Club Holdings (CCFC Holdings Ltd), via a newly established holding company, Otium Entertainment Group Ltd, which owns the subsidiary Coventry City Football Club Ltd (CCFC Ltd).  Arvo Management Fund Ltd (Arvo), also based in the Cayman Islands, also holds shares in Otium and claim a debenture/mortgage over CCFC Ltd.  The accounts confirm that Arvo is part of the SISU group of companies.  SBSL Ltd also controlled the Prozone Group of Companies which was sold in 2011. Financial records for companies based in the Cayman Islands are not available for public scrutiny and so there is a lack of transparency in their dealings.  We have to use media reports or official documents that are filed for those companies set up under UK law to search for answers or any clues as to what exactly is happening.  The latest set of accounts currently available are dated 31 May 2011 as the more recent are now overdue and as such cannot be reviewed. Although over 18 months old the documents still contain some interesting figures and information.

Income

CCFC Ltd shows a total income in the year to 31 May 2011 of £10,267,7089 (2010, £9,291,108) an increase of just under £1 Million on the previous year, with Sponsorship, advertising, club shop & promotions contributing £6,341,808 (2010, £4,930,590) and match day receipts of £3,925,900 (2010, £4,360,518).  CCFC Holdings Ltd has a total income in the year to 31 May 2011 of £4,478,157 (2010, £4,432,954), which is a small increase on the previous year, with sponsorship, advertising, club shop & promotions contributing £1,791,315 (2010, £1,663,196) and charging management fees of £2,686,842 (2010, £2,769,758).  Who these management fees are paid to is not disclosed.  Both companies share an income header ‘Sponsorship, advertising, club shop & promotions’.  Why the income is split between two linked companies is not disclosed.  TV rights are most likely to included in the higher figures reported by CCFC Ltd.  SBSL Ltd publish consolidated accounts, which includes all the data from subsidiaries in the group whilst excluding inter-company activity.  SBSL Ltd owns CCFC Holdings Ltd, who in turn own CCFC Ltd.   SBSL Ltd has a group annual income of £16,021,046, which is an additional £1.2 million than that shown in the accounts of the two subsidiaries combined but includes £3,962,023 (2010, £3,179,589) for sports analysis work conducted by the subsidiary Prozone Sports Ltd.  There is no mention of the management fees of £2.6 million (from CCFC Holdings Ltd), so if we consider those to be an internal charge and remove them from the consolidated accounts we arrive at the income stated in SBSL Ltd accounts.  The consolidated accounts show similar levels of income to rivals of a similar size and status in the Championship.  When comparing the same financial year, Nottingham Forest posted sales of £15.1 million whilst Derby County received £18.1 million.  It would appear that the set of accounts posted by SBSL are an accurate reflection on the trading of the club as a whole.  Effectively SBSL Ltd is CCFC.

Salaries, expenses and the effects on Profit & Losses

CCFC Ltd incurred costs which amounted to £15,345,685 (2010, £15,739,921) and show losses of -£6,740,242 (2010, -£3,071,035).  Rather alarmingly, the accounts for CCFC Holdings Ltd also show a loss of £9,181,808 (2010, Profit £110,650), an increase of over £9 million on the previous year.  SBSL Ltd have posted expenses that total £32,162,478 (2010, £19,906,553) which resulted in a loss of £16,110,934 (2010, -£5,772,660), which is relatively consistent with the losses for the subsidiaries combined.  How have all of these losses come about?

CCFC Ltd staff costs remained stable if very high £10,374,688 (2010, £10,314,188).  It is worth noting that SISU has claimed in the press that the players contracts are believed to be held by CCFC Holdings Ltd, yet are being paid out from CCFC Ltd.  The amounts paid out are over 100% of the income stated for the company, and is clearly unsustainable. However, when looking at the data for the group, through SBSL Ltd, salaries are £12,478,977 (2010, £12,310,464).  SBSL Ltd wage costs have remained consistent with the previous year, yet in terms of income to wages ratio, the percentage of wages to turnover is down from 87% to 78%.  This is still a long way from the new requirements set down by the football league financial fair play regulations of 60% under the Salary Cost Management Protocol (SCMP) agreed by members in 2011 and set to come in to force next season, 2013/14.  Furthermore, relegation will ensure a smaller share of TV rights, lower attendance figures affecting the levels of match day receipts, lower advertising revenues and club shop sales which will be shown in accounts dated 31 May 2013 which are not due to filed until 2014.

SBSL Ltd has a total 610 employees, which includes the players, stewards and administrative posts across the group CCFC Ltd had an average 108 employees listed as players and management, that collectively cost the company £12.5 million.   The football league lists 34 full time professionals in the first team squad for the season in question, there are also the managers, coaching and academy staff along with players on training contracts that must also be taken into account.  However, reports at the time suggested a wages ceiling that was capped at £5,000 per week, or £260,000 per year.  This could be for players about to sign or renew, and those established players at the clubs for a couple of seasons may have contracts that were of a higher value.  Players such as Kieran Westwood, Lukas Jutkiewicz, Richard Keogh, Lee Carsley, Freddy Eastwood, Aron Gunnarsson and Marlon King were among the high earners, although Westwood, Gunnarsson and King would all be removed from the payroll at the beginning of the financial year to May 2012, leaving under Bosman’s in search of improved contracts in the summer of 2011.  Jutkiewicz was subsequently sold during the transfer window of January 2012, Keogh at the end of the season and Carsley is also likely to have accepted a less expensive contract when joining the backroom staff at the end of the 2012 season, thus lowering future costs.  When Jutkiewicz was sold, it was reported in the Coventry Telegraph that his salary was £7,000 per week.  If we take this report as a benchmark for senior players – he was leading goal scorer at Christmas, and then estimate £5,000 per week for established good players (in line with the ceiling) and £2,000 per week, the rest of the squad, we end up with an estimated wages bill of around £6 – 8 million for the first team squad.  These costs are only half of the declared total of £12.5 million.  Additional fees incurred could include signing on, appearance and relocation fees along with performance related pay in the form of win bonuses etc.  The club has sacked several managers over recent years, and it is possible that severance pay for Chris Coleman could be due in this financial year, sacked in May 2010 after being at the club for two years on a reported three and half year contract.  Aidy Boothroyd was also appointed to replace Coleman on a three year contract but was subsequently released a year later in March 2011 with Andy Thorn, the then chief scout, taking over.  These departures may well incur significantly costs that contribute to the totals.  Although Andy Thorn was also replaced in September 2012, his salary would be far less in value than previous appointments as he was an internal appointment and have less impact on payments for wages going forward.  These pay-off for forced departures, and the associated backroom staff that managers insist on working with, may well substantially contribute to the total stated in the accounts.   In terms of ongoing commitments however, these are largely one-off costs which when also taking into account the reductions from the senior players leaving, the wages bill must have been significantly reduced in subsequent years.  Andy Thorn had to make do with a squad consisting of largely promising young players from the academy, enhanced with reinforcements on loanees to minimise costs in the year the club were relegated.  This would suggest that the wages bill has reduced significantly since May 2011, signing on and agents fees largely disappearing due to the lack of signings, win bonuses negligible due to relegation, so how has the deficit continued to increased so dramatically?

On closer inspection of the costs incurred by CCFC Holdings Ltd, the majority of that increase in expenses derives from a ‘Provision against amounts due from subsidiary undertakings’ shown in the accounts as £8,441,360 (2010, £319,859).  Arvo have a debenture, in effect a long term mortgage that can be converted into shares if unpaid, that was agreed at some point after the accounting date.  An almost identical amount has been immediately written off in this financial year, showing on the profit and loss as an expense.  However, as it is a provision there is no actual money flowing out for this as an expense – it is a provision for future non-payment, allowing for tax relief and losses to be posted in advance.  This provision certainly accounts for a large proportion of the losses incurred in the year to 2011.  CCFC Ltd show interest payments of £721,383 (2010, £392,318) were made in the year on loans outstanding as of 31 May 2011 of £2,815,063 (2010, £870,371) which are secured on future income streams, most likely secured against next years season ticket sales.  The interest rate appears very high, around the 25% mark of the outstanding obligation on the balance sheet.  SBSL Ltd show interest paid as £1,0124,498 (2010, £442,438) which has more than doubled in value.  SBSL have a note in their accounts that £2 million is owed to monies forwarded from Arvo Master Fund Ltd that is not due to be paid for over a year but no mention is made if interest is accruing and due on that money.

SBSL Ltd have made an allowance in the accounts for an expense listed as an impairment in the value of the Goodwill.  Goodwill is an asset that appears on the Balance Sheet and as stated in the accounts in normally written off over 10 to 20 years.  It is unclear what part of the business that relates to.  The goodwill is showing at cost in June 2010 as £13,557,543.  The impairment charge is showing as a cost in the year to 2011 as £6,415,343 which contributes to the losses showing.  This may relate to a payment due to be made to a former director, Geoffrey Robinson, should the club have successfully return to the premiership by 2013.  The value of goodwill has dropped from £13 million to £2,882,587 in the space of two years, ensuring that losses incurred are maximised.  There is no immediate cash cost to the company for this ‘impairment’ – it is simply shifting sums around to increase costs and lower profits/increases losses.   So, both CCFC Holdings Ltd and SBSL Ltd show increased losses in the accounts due to writing down the value of assets, lowering the values of both companies.

What is CCFC actually worth?

The net worth of the CCFC Ltd as at 31 May 2011 is a negative – £54,930,977 (2010, -£46,239,532).  Of the £57,277,071 (2010, £49,970,693) owed to creditors, the vast majority is owed to members of the group of companies at £52,169,742 (2010, £43,728,382).  The increase in the amounts owing to subsidiaries in the financial year is £8,441,360 – exactly the same amount as that written off by CCFC Holdings Ltd, discussed previously.  This amount is showing as due in CCFC Ltd, yet written off in CCFC Holdings Ltd.  And this is incredibly close in value of the debenture invested – stated in the press as £8.4 million.  The net worth of the CCFC Holdings Ltd at 31 May 2011 is also negative – £47,109,008 (2010, -£37,902,012).  Of the £49,947,022 (2010, £41,798,652) owed to creditors, the vast majority is owed to members of the group, at £47,327,513 (2010, £39,584,467).  The increase in the amounts owing to subsidiaries in the financial year is over £7.7 million.   SBSL Ltd are also insolvent, worth -£33,983,658 (2010, -£17,872,724), a decrease in value of £16,110,934 on the previous year.  This implies that a proportion of the losses incurred in CCFC Ltd and CCFC Holdings Ltd are owed between companies in the group – hence the nett worth of SBSL is significantly greater at -£33 million than the combination of the two subsidiaries added together, which would be over -£100 million.  It hints that some of the losses incurred are ‘paper losses’, created by accounting policies and intercompany loans.  The group have net liabilities due within one year of -£486,610 (2010, +£7,322,916) with an additional £29,679,942 (2010, £24,099,055) owing to mid to long-term creditors.

The lawyer representing the administrator for CCFC Ltd at the High Court claimed the current situation for that company has deteriorated to £60 million, some of which is incurred by high wages bills and a significant reduction in income due to the issues surrounding relegation.  However, some of these losses relate to internal loans being written off and should have reduced significantly particularly in relation to the reduction in players contracts and wage bill.

In the three sets of financial reports discussed, the auditor states that the companies are undertaking significant restructuring to make significant reductions in the payroll costs along with negotiations on the levels paid in rent.  The text is identical, suggesting that the companies are essentially one and the same, so the true value of the club is held with the consolidated accounts from SBSL.  However, there is no mention of any post balance sheet restructuring activity, which would be expected to be found in the directors report, in line with international accounting standards.  These accounts were signed off in June 2012, so if restructuring had taken place in the financial year to 31 May 2012 then it should be noted.  This would suggest that the business has continued to trade in a similar manner to the submitted accounts and the restructuring, if any, has occurred more recently after the rent dispute escalated.  This suggests that comments made by SISU regarding CCFC Ltd being a mere holding company are incorrect.  Reports made to the press do not have to be necessarily completely true and can involve a element of spin.

So, is the club actually £60 million in debt, as suggested by the administrator at the High Court?  It is likely that CCFC Ltd are, as it is possible that costs could have been both incurred and put onto that company to increase liabilities from £57.2 million to £60 million some eighteen months later.  However, if we look at the results for the group, taking the reports submitted by the parent company and investment vehicle, SBSL Ltd, we can obtain a clearer picture.  The accounts for the group through SBSL Ltd show income and expenditure that compares to rivals and a net liability of £33.9 million.  If we remove the £6 million deduction for the goodwill impairment, which failed to become due, this would reveal an investment by SISU and its related companies of around £10 million when purchasing the club in 2007, along with only an additional £18 million over a period of six years, at around £3 million a year.  SBSL Ltd owe SISU and its related companies £29.6 million according to the accounts.  How much of that is real debt, monies loaned to the group of companies, of cash actually flowing into the club?  If Ainsworth is correct, a proportion of that debt could relate to management fees that have been charged to the group, but not yet paid.   It is worth noting that the liabilities for SBSL Ltd will also have increased in the last eighteen months, but perhaps not significantly above the £33.9 million stated in the last set of reports and certainly not to the region of £60 million.  The club is not alone in incurring losses year on year, as those in the premiership and championship all struggle to restrict wages paid in the pursuit of glory.  However, part of the devaluation includes monies written off against the goodwill so these are artificially low.  Either way, I would suggest the accounts for the club as a whole, as represented by SBSL Ltd show that the losses are far smaller than previously claimed.

Where does the club go from here?

There are rumours circulating in the press that an American property tycoon, Preston Haskell IV, is now interested in buying the club and has made enquiries to the administrator to bring the club out of administration, via the ownership of CCFC Ltd.  Haskell has also reached an agreement with the Higgs Trust to purchase their 50% stake in the stadium, via ACL, should a deal be struck with the administrator for the club.  SISU are of course reluctant to relinquish any control and as owners of the parent companies, CCFC Holdings Ltd and SBSL Ltd, may be able to create issues and difficulties for any future owners if the attempt is successful.  It seems quite clear now that CCFC Ltd holds the golden share to play in the football league, but which subsidiary has ownership of the players contracts?  To bring the club out of administration through the ownership of CCFC Ltd is likely to cost more than the liabilities owed by SBSL Ltd, forcing the repayment of loans made by SISU and its subsidiaries to CCFC Ltd over and above the £34 million invested in SBSL Ltd.  Investments funds are not finite, so the more it costs to purchase the club, the less money that will be available to invest in the playing staff.  The question also needs to be addressed as to why would an American property tycoon want to invest in a provincial football club languishing in the lower levels of English football, in a city where he has no connections or sense of belonging?  The land surrounding the stadium that is ripe for development may well be tempting.  City fans hope that isn’t the only motivator and the good times can return to Coventry City, and this time to the Ricoh.

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7 Responses to Coventry City and SISU Capital. £60 Million in debt?

  1. Richard says:

    Well done for your comprehensive account, what a tangled mess of a club and world we have !!!! A proper ccfcaclsisuarvosbsl mess !

  2. William Birchall says:

    I heartily agree! A very interesting article on the labrythine accounts affecting Coventry City. The majority of supporters, will not understand the article, but it was still a very worthwhile exercise, which I personally appreciated. It beggars belief that the Football League, allows these financial machinations to go on, but I guess that SISU are not alone, in utilising them. It is the Cayman Is. connection, that concerns me, as this totally blurs the picture.

    I fear that Coventry City’s future is doomed, unless they can get someone in, who has deep pockets and an interest in Football and I think that is very unlikely.

  3. Mac says:

    An interesting view and provides suggestions as to how the club debt could have increased so much. Obviously income reduced but costs were clearly reducing with the sale of players, contracts coming to an end and continued use of loans and young players. Internal recharges and write off’s appearing to give an answer, but what else should we expect in the circus that city have become meaning many of us have little hope for the coming season and for the first time in 27 years I may well not be buying a season ticket because of the uncertainty.

  4. Patrick says:

    This detailed disclosure is what CCFC fans have been waiting for ever since SISU took over. It is a real mess, & at the moment with an administrator appointed by SISU I can’t see a happy ending!

  5. ALLAN BENNETT says:

    A BRAVE ATTEMPT AT CLARIFICATION. THANK YOU FOR YOUR EFFORTS. BUT I FEAR SISU HAVE MUDDIED THE WATERS SO MUCH I DOUBT IF ANYONE WILL BE ABLE TO REALLY SORT OUT THE MESS.I CAN ONLY LIVE IN HOPE.IT APPEARS WE NEED THE CURRENT ACCOUNTS TO BE PUBLISHED FOR A CLEARER? PICTURE.

  6. dave bart says:

    I wish I understood what it all means.These appear to be completely random numbers. I doubt the numpties at Gloucester Place can make head nor tail of it either so no surprise they have little idea who is running the show.
    I cannot see the club surviving in its present form.

  7. Simon says:

    Very much appreciate the effort and research that has gone into producing this, the clearest account yet, of the manipulation, smoke screens and mirrors approach by the ‘custodians’ of our club. I wish this could be forwarded to the FL and other related governing bodies, that are considering our case in administration from a legal and sporting perspective, so that appropriate questions can be asked before any decisions are made with respect to our future punishment, or to our current owners credibility and suitability to run a football business.

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