Tuesday 9 June 2009

Update on Stadium Company Proposal

A copy of this statement in PDF format is available to download here

Introduction


Since the beginning of April, The Jags Trust has been working with a number of professional advisors (acting in their private capacity) who are also supporters of Partick Thistle to try to determine the strategy of the Football Club board in relation to the proposed split of the existing stadium assets from the football business as outlined at the Football Club AGM. These same advisors have been making their own enquiries to the Football Club board and to date only limited information has been forthcoming. The assessment made by the Trust and its advisors in this note can only ever be as good as the information provided. As more information becomes available, the Trust may require to alter its position from the one outlined below.

Given the passage of time and the ongoing uncertainty, the Trust needs to make its position clear and explain matters, to the best of its ability, to its members. The following note has been put together using information freely offered by the club board, available at the club AGM or within the public domain. Where full information has not been made available and assumptions have been made, these are clearly identified.



Background



  • Partick Thistle Football Club Limited (the “Football Club”) owes a significant debt, believed to be in the region of £1.6M, to Halifax Bank of Scotland (the “Bank”).

  • This money is secured against Firhill Stadium in the same way that a loan for a residential purchase is secured against the house that is being bought. In the event that the Football Club defaults on its loan repayments, or breaches other terms of its loan agreement with the Bank, then the Bank is entitled to recall the loan.

  • If the Football Club is then unable to immediately repay the loan in full, the Bank would be entitled to “call up” the security, ultimately resulting in the repossession and sale of the stadium in much the same way that houses are repossessed.


Until recently, the value of Firhill has significantly outweighed the amount of debt that has been secured against it – i.e. if the Football Club were ever to default on the loan, the Bank remained confident that the money received from any repossession and sale of Firhill would be more than enough to re-pay the loan in full. (It is important to understand that the “value” of Firhill that the Bank is interested in, is the value of the land for development, most likely residential development.)



However, over the last 18 months, several things have happened which are likely to have changed the position with the Bank:

  1. Property prices, and in particular the price of residential development land, have plummeted. It is possible that the land is worth less than half of the value it could have achieved if it had been sold in the summer of 2007.

    As a result of this, the amount of the Football Club’s debt is now much nearer to the development value of Firhill, meaning that the Bank may not be comfortable that it could easily repossess Firhill and recover its loan should the Football Club default on its repayments.

    Added to this, purchasers of residential development land are currently few and far between, meaning that even if the Bank repossessed, it could be difficult for it to find a suitable buyer.

  2. The crisis within the financial sector has, amongst other things, forced all banks to carry out a review of their balance sheets, looking at which borrowers present a serious risk of defaulting on their loan repayments and, where appropriate, forcing them to take appropriate action to reduce their exposure to the risk of “bad debt”.

  3. The recession in the wider economy will almost certainly have a detrimental impact on the Football Club’s income over the next few years.


We know from previously published annual accounts that the Football Club has already been operating at a loss for a number of years. With a possible reduction in income as a result of the recession, and in the absence of the Bank being willing to continue to support a loss making business, the Football Club may find it difficult to sustain full time football.

Add falling property prices into the mix, and it is easy to understand why the Football Club Directors believe that significant action as outlined at the Football Club’s 2009 AGM, is required to pre-empt any possible withdrawal of support by the Bank.


The Proposal

Against this backdrop, the Football Club announced plans in March 2009 to raise money through the sale of Firhill Stadium to a separate company (the “Property Company”) which would enable the Football Club to repay its debts in full to the Bank, but at the expense of selling its primary asset, namely the stadium. The Football Club announced that investors in the Property Company would be “Thistle Minded People” and that the Football Club would retain a “major interest” in the Property Company.

Immediately following the sale, the Property Company would lease Firhill back to the Football Club. Details of the terms of this lease were not released by the Football Club in March, however, the following details have since been disclosed by the Directors of the Football Club in response to questions raised by individual fans and the Jags Trust:

  • The duration of the lease will be in the region of 100 years;

  • A nominal annual rent (e.g. £1) will be charged by the Property Company to the Football Club under the lease;

  • The Football Club will retain responsibility for the repair and maintenance of the stadium.

  • The Football Club would retain a 50% interest in the Property Company. In effect, a 50% stake in the land would be sold in order to clear the debt.


The Benefits

  • The sale of Firhill to the Property Company would remove the cost of servicing the debt (reported in the press to be around £175,000 per annum) from the Football Club’s balance sheet, giving it a better chance to break even without the Bank debt dragging it down.

  • Repayment of the debt would take the Bank out of the picture and enable the Football Club to proceed safe in the knowledge that the Bank could not repossess Firhill. (Note that even if the Property Company “mortgaged” Firhill to a bank at a later date, the bank would be obliged to sell Firhill with the lease still in place should a repossession take place, so while the landlord might change, the Football Club should be unaffected.)

  • The grant of a 100 year lease at an annual rent of £1 gives the Football Club some security to enable it to plan for the future.



The Drawbacks

  • Following the sale of Firhill, the Football Club would not be able to approach a bank for any form of secured lending since it would no longer have any tangible assets to offer the bank in security. The market for unsecured lending is expensive and limited, so in effect, the Football Club would require to operate within its means going forward.

    For the year ending 2007, the Football Club posted losses of £269,000 (which included Bank interest costs of £100,000). In 2008, the Football Club posted losses of £512,000 (which included Bank interest costs of £83,000). Supporters will recall that the “option” granted to PTF Developments straddled these two financial years, so while the figures are skewed somewhat, any impact of that option should even itself out over the two year period.

    If we assume that the larger figure of £175,000 for loan repayments is correct, once this sum is deducted from the Football Club’s overheads, it appears that the Football Club is still unable to reach the break even point. In a very short space of time, without the option of further bank borrowing (this option will be lost if there is no land asset to “underpin” its business model), the Football Club will run out of money unless it is able to substantially reduce costs or increase income to enable it to break even.

    We are not aware of the Football Club having made any public statement as to how they intend to achieve a break even trading point.

  • Switching from outright ownership of Firhill to being the tenant under a lease (even a long lease) presents its own problems. Insolvency of a tenant will typically result in the landlord being able to terminate the lease.

    In practical terms, this means that if the Football Club were ever put in administration then the Property Company would be entitled to terminate its lease, even if the Football Club successfully came out of administration (for example as Motherwell did a number of years ago). The Football Club have not confirmed in public whether protections will be put in place to prevent this from happening.

  • It is not clear how the structure of the deal would impact on the Football Club’s ability to generate revenue from the stadium. For example, would income from catering and shop concessions, the ground share deal with Glasgow Warriors, corporate hospitality, trackside advertising, international matches, boxing matches, concerts and function hire be for the benefit of the Football Club or the Property Company?


Differing Interests of Property Company and Football Club

Since a commercial rent is not to be charged to the Football Club under the lease, future development of Firhill appears to be the primary means for Property Company investors to make money from their investment.

There is a clear conflict between the interests of a Property Company investor (to maximise his profits by developing the whole of Firhill as soon as the property market recovers) and the interests of the Football Club (to remain playing at Firhill rent free indefinitely).

To date, no information has been provided by the Football Club as to how this conflict is to be resolved. The Trust will continue to press for an answer to this point and will update its members as soon as the Football Club has responded.

In addition, there remains the potential for conflicts of interest to arise if both companies are managed by common directors;




  • For example, say the stadium is sold and a 100 year lease is put in place at an annual rent of £1. Five years later, the property market recovers and the Property Company investors wish to sell Firhill for development and claim their profit.

    They cannot do so without removing the lease, so the common directors of the landlord and tenant companies agree to vary the duration of the lease from 100 to 6 years. The Directors of the Football Club have given no information as to how such a situation might be avoided / prevented.


Gaps in Information

Since the Property Company investors can only realise value from their investment by removing or substantially varying the long lease to the Football Club, it is essential that we understand how that will be achieved, and importantly, what will happen to the Football Club when the Property Company takes back possession of the stadium in order to effect redevelopment.

If the intention is for the Property Company investors to secure their profit from developing around the edges of the stadium (for example, by developing the former South terracing), then it is not clear why the whole stadium would require to be sold to and leased back from the Property Company, although it should be noted that partial development around the fringes of the stadium gives rise to its own set of difficulties.

We have no information on the protections that will be put in place to ensure that tenant insolvency does not terminate the lease and to ensure that the commercial terms of the lease are not varied to dilute the protection offered to the Football Club.

At present, no information has been provided to confirm who will receive the benefit of income from the Glasgow Warriors’ deal and other income generated from the stadium. It is important to understand up front what income will be stripped out of the Football Club’s balance sheet so that this can be assessed against the cost savings resulting from the removal (or reduction) of the Bank debt. As explained above, it is essential for the survival of the Football Club that it is able to trade at break even point following the sale of Firhill. Again, detailed proposals from the Football Club as to how this can be achieved have not been provided as yet.

The Football Club have not given any public indication how potential conflicts of interest between the Football Club and the Property Company might be resolved.


Going Forward

In the current economic climate, the Jags Trust and all fans of the club are united with the Football Club’s Directors in their desire to secure the long term future of Partick Thistle Football Club. However, in the absence of detailed information on the proposal to sell Firhill Stadium to a Property Company comprised of “Thistle Minded Investors”, outlined in Allan Cowan’s letter to shareholders on 18 March 2009, the Trust cannot in all conscience throw its support behind the proposal as it stands at present.

The Trust Board believes that appropriate safeguards could be built into the proposal which would ring fence the future of the Partick Thistle Football Club, and the Trust Board is committed to working with the Football Club to ensure that such safeguards are put in place.
If the Trust Board is able to satisfy itself, having taken appropriate expert advice, that such safeguards exist, then the Trust Board will endeavour to explain these safeguards to its membership. Once the safeguards are in place, the Trust Board is willing to back the Directors of the Football Club by recommending in principle that its membership supports the proposal, assuming the proposal goes ahead.

In the interests of constructive oversight on behalf of its members, the Trust Board has invited the Football Club Directors to a meeting at which the current details of the Football’s Club’s proposal can be laid out and openly discussed. The Football Club Directors have indicated that they are unable or unwilling to meet the Trust Board on this basis, but have agreed to hold an open meeting with all shareholders of the Football Club to provide an update on the property proposals. We understand that this meeting is intended to take place on 24 June 2009, but we await final verification of this date from the Football Club.

The Trust Board welcomes such an open meeting, but does not believe that it provides the most suitable forum for detailed discussion and examination of the property proposal, nor will it provide any forum for non-shareholder supporters (who have a major stake in the future of the Football Club and its stadium) to express their views. The Trust Board will therefore continue to press the Football Club Directors to meet with them in advance of the open meeting so that the detail of the proposal can be properly examined and reported on to its members – as a significant minority shareholder in the Football Club, and as the principal representative body of the supporters, the Trust Board believes that the Trust is entitled to the courtesy of such a meeting with the Football Club Directors.

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