Wasps Rugby Club – Update

 

ISIN	Issue Out	Coupon	Min Piece	Maturity	Bid	Offer	Ask YTM	Spread
XS1221940510	£35mn	6.5%	£2k	May 2022	99.75	101	6.23%	Gilts + 536bps

 

On 21^st December Wasps concurrently applied for approval from Bondholders to amend and waive some of the terms and conditions contained in the trust deed, as well as releasing unaudited accounts and their trading update for the year ended 30^th June 2017. Bonds sold off in the aftermath, from roughly 102.5/104.5. The low print at 84.3, where just £1.4k traded. Since then losses have been pared.

 

During a PWC audit it was discovered that a £1.1m cash injection from owner Derek Richardson had been included as income for FY 2017. This was in contravention to IFRS rules. It should have been accounted for as a capital injection (and for the year 2018). So EBITDA was overstated at £3.5m, when it should have been £2.4m. The result was that ultimately Wasps had failed to meet the consolidated EBITDA to consolidated finance costs (of at least 1.5:1). And consequently failed to maintain the requirement under Condition 4(d) to ensure that the amount in the Interest Service Reserve Account is at all times equal to or more than the Required Account Balance (two interest payments – i.e. £2,275,000). It also meant that deadlines were missed for filing audited accounts and the auditor’s report.

 

Bondholders have been offered consideration of just 20 basis points for a number of waivers and amendments to the trust deeds.

 

• Bondholds to waive the breach EBITDA covenant in exchange for an Interest Service Reserve Account hold 3.25% of the total nominal of bonds issued (£1,137,500). This cannot be reduced unless there have been three consecutive years of compliance with the original EBITDA to finance cost covenant.

• Bondholds to waive the breach of requirement to deliver audited accounts to trustee within 4 months of of its financial year end (30^th June 2017).
• To amend that it will be an event of default if the Required Account Balance is breached and not remedied within 10 days.
• The definition of Asset Cover Ratio shall be the ratio of the aggregate Value of the Relevant Assets (as shown by the relevant Valuation) to Consolidated Senior Debt (not Consolidated Financial Indebtedness)
• That the calculation of consolidated EBITDA should include shareholder contributions (in the form of subordinated debt, subscription of shares, cash contribution or otherwise). And will add back the amount of any distribution made by IEC to Compass during that period to profit before income tax. But the definition will exclude the increase of the Shareholder Loan to restore the Required Account Balance in the Interest Service Reserve Account.

 

The headline numbers seem to show that the business is progressing positively:

 

-Turnover up 8.5% £33.6m (FY 2016: £30.9m)

-Gross margin up to 34.4% (FY 2016: 33.5%)

-Operating profit before exceptional items and allocation to non-controlling interests of £0.8m (FY2016: £(3.8)m)

-Average attendance up to 19,338 (FY 2016: 16,916); season ticket sales up 25%; strong on-pitch performance – finishing 1^st in league and Quarter-finals of European Champions Cup.

– 895 events held with successful concerts hosted for the likes of Robbie Williams and Craig David. Hospitality sales up 49% on the year.

 

 

The swings between 2016 and 2017 in operating results before and after exceptionals + allocations to non-controlling interests are significant (see income statement below). However, management have ultimately been too ambitious. They missed their EBITDA target two and a half years after issuing the bond and tried to fiddle the number with a cash injection. The cash injection itself and the propsed injection of to the interest service reserve account are both credit positive. Leverage has gone up over the period, from £43.6m to £48.9m. Based on interest expense over the period this seems to be primarily non-paying shareholder loans.

 

Exactly what is meant by allocation to non-controlling interests is not entirely clear. The structure of a joint venture with Compass Group is laid out in the prospectus of the bond – Compass owns 23% of IEC Experience which is a service provider on the hospitality side of the business and it may be connected to this.

 

 

	2017	2016
Revenue	33,402	30,931
Cost of sales	-22,026	-20,568
Gross profit	11,376	10,363
Other income	158	–
Administrative expenses	-10,735	-14,135
Operating profit/(loss) before exceptional items and allocation to non-controlling interests	799	-3,772
Exceptional items	–	-936
Allocation to non-controlling interest	-1,583	-1,504
Operating loss	-784	-6,212
Finance costs	-2,328	-3,084
Loss before tax	-3,112	-9,296
Taxation	1,565	7,025
Loss for the year	-1,547	-2,272

 

 

 

The balance sheet shows total assets of £88.5m. The market value of the stadium, which was assessed by Gerald Eve LLP in March 2017 stands at £60m. Wasps’ P shares remain valued at £9.7m. P shares are the rugby club’s interest in the premier league as a participating member. Should Wasps be relegated, these would need to be sold to a promoted club (this transaction happens each season between clubs – so audited valuation should be relatively reliable).

 

Abridged Balance Sheet

£000
Assets	2017	2016
Property, plant and equipment	70,020	58,027
P Shares	9,725	9,725
Trade and other receivables	8,155	6,652
Other Assets	619	753
Total Assets	88,519	75,157
Liabilities
Loans and Borrowings	48,884	43,642
Trade and other payables	9,250	11,944
Deferred income	10,263	8,291
Total liabilities	68,397	63,876
Total equity	20,122	11,281
Liabilities and Equity	88,519	75,157

 

 

Comment

From an operating point of view the business is making progress, but not at the rate that investors or management had been planning for. Uprooting a rugby club from London and re-establishing in Coventry was probably never going to happen as quickly as planned. Or indeed the transforming the Ricoh Arena into the kind of modern multi-functional entertainment/conferencing/exhibition space that management are trying to build.

 

There is no doubt that the business has a number of strings – Grosvenor now houses one of the UK’s largest casino’s on site. In the trading update 121 room DoubleTree by Hilton hotel is described as having proved ‘very successful’ although the only measure given is Rev PAR (revenue per available room), which has increased to £49 (2016: £42). There is set to be a renaming deal for the indoor arena with Ericsson – as well as a partnership to bring a high-density Wi-Fi network for the arena. There is also a new deal with the RFU which will increase annual income by an average of £1.2m over the next 8 years.

 

Yet the business is draining cash, £3 million over the year, and without the injections from Derek Richardson it is hard to see where the money would come from. The bond looks well covered by the assets, but ultimately the business needs to start becoming cashflow positive.

 

The lag on results is a frustration. If the same positive momentum between FY 2017 and FY 2016 has been maintained then the business will have been turning a healthy operating profit for 6 months, but with the accounting fudge and cash injection, this doesn’t seem quite as likely. Yet, investment has been heavy over the last two years and it does feel like a viable business is being built with a supportive shareholder.

 

WASPS Trading Update 21-12-17