The downgrading of a relatively obscure Bermuda-based reinsurer should have little consequence for a 144-year-old football club, having arguably its most encouraging sequence of games in several years (albeit now penalised 10 points for breaching the Premier League financial rules) and with the tantalising prospect of moving into the brand new stadium at Bramley-Moore Dock in as little as just over 12 months time.

However, with the proposed takeover of Everton in the balance over regulatory and yes, financial concerns relating to 777 Partners, a small event can have significant consequences. Franklin’s poem regarding the consequences of being short a horseshoe nail comes to mind, or in more recent parlance, the butterfly effect.

The notification of a downgrade by AM Best contains one very significant observation – potentially, the horseshoe nail or the fluttering of a butterfly’s wing.

Having extensively utilized the 777 Re. balance sheet to fund the 777 Partnership and many of its portfolio businesses (see below), 777 Re. confirm that it is within their business plan to reduce the reinsurer’s exposure to related party loans and investments.

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the completion of its (777’s) plans to improve risk-adjusted capitalization materially by divesting the majority of its affiliated holdings

Not only is it within their business plan to divest, it has become a necessity to do so in order to not suffer further downgrades. The impact of such is not only the increased cost of capital to the reinsurer but the potential for it to lose existing clients. The loss of existing clients causes a reduction in capital available to the re-insurer, requiring the sale of assets as clients move their capital elsewhere.

The solution for the reinsurer is either divest or attract new capital, thereby in relative terms reducing their related party exposure. It has to be said that the prospect of attracting new insurer clients in this scenario are slight, so we are back to divesting 777-related investments and loans.

Any divestment programme is not that of an orderly sale of liquid, quoted stocks. It is the sale of illiquid, privately owned, poorly performing (in the main) stock and debt instruments. The very assets which AM Best deduce are weakening 777 Re’s balance sheet.

So what is 777 Re’s exposure to 777 related party companies?

As of 31 December 2022, the headline figure is investments of $26.93 million and total funds withheld receivable of $1,482.5 million. This equates to 49.8% of their total assets. Interestingly this figure remains somewhat short of the 65% private equity exposure level objective stated in a late 2021 investment deck.

     
Investments Classification Amount ($)
     
777 Partners LLC Preferred Equity 13,500,000
Scout Law Group LLC US Corporates 454,545
Trans Atlantic Lifetime Mortgages Ltd Preferred Equity 2,162,000
SPFS Residual LLC US Corporates 8,164,426
F3EA Funding LLC US Corporates 2,645,326
Total   26,926,297
     
     

Funds withheld receivable

   
     
Heron Finance 2021-1 LLC US Corporates 139,482,691
Brickell PC Insurance Holdings Ltd Asset-backed securities & loans 23,163,052
Brickell PC Insurance Holdings Ltd US Corporates 43,918,612
Claughton Island Holdings LLC US Corporates 35,824,690
Case Strategies LLC* US Corporates 39,514,335
Employee Funding of America US Corporates 22,500,000
Film Finances Inc US Corporates 52,336,991
Noble Financial Solutions LLC US Corporates 25,105,874
Nutmeg Acquisition LLC US Corporates 102,958,112
Sutton Park Servicing LLC US Corporates 46,572,881
STX Financing LLC US Corporates 54,916,491
777 Partners LLC US Corporates 11,853,372
777 Partners LLC Preferred Equity 11,250,000
F3EA Funding LLC US Corporates 994,702
Trans Atlantic Life Time Mortgages Ltd Preferred Equity 7,520,000
Trans Atlantic Life Time Mortgages Ltd Mortgage-backed securities and loans 61,798,714
SoundWaves Holdings LLC Preferred Equity 4,730,550
Fanitiz Holdings LLC US Corporates 3,390,703
Sevillistas Unidos SL US Corporates 9,227,569
Triple 7 Finance Leasing Ltd US Corporates 232,667,918
Medset Funding LLC Asset backed securities & loans 137,636,289
SPFS Residual US Corporates 229,058,736
SPSS 2021-1 LLC US Corporates 39,756,844
SPSS 2020-1 LLC US Corporates 36,741,438
SPSS Fund 1 LLC US Corporates 4,057,942
SPSS Fund 2 LLC US Corporates 16,490,827
SPSS Fund 2021-A LLC US Corporates 13,621,341
SPSS Fund 6 LLC US Corporates 22,734,028
Flair Airlines Ltd US Corporates 58,114,537
777 Stream LLC US Corporates 5,812,840
777 Asset Management LLC Accrued Asset management fees -11,235,194
     

Total funds receivable, at fair value

  1,482,516,885

Source: 777 Re & Subsidiary Notes to Consolidated financial statements Dec 31, 2022

The source of the above information is the Consolidated Financial Statements to 31 December 2022 for 777 Re. It is important to note that unlike the accounts of 777 Partners LLC, these financial statements have been audited by Grant Thornton. However that’s not to say there’s not questions arising from the above.

For example, it is difficult to establish precisely two of the corporate entities in the above schedule. It is not immediately obvious who or what Claughton Island Holdings LLC is nor Medset Funding LLC. Equally it is difficult to reconcile the cash flow statements with information elsewhere in the same document. There appears to be inconsistencies with the information disclosed in the financial statement footnotes.

That aside, we must return to the fundamental issue. How do 777 Re reduce their exposure to related parties?

What are the options?

777 Partners have two options – raise fresh capital in order to buy out 777 Re.’s positions or sell those positions to other investors. The question is which is most likely to succeed?

It’s a matter of record, published in the public domain, that 777 Partners have attempted to attract fresh capital. Investment decks aimed at professional investors have sought investment for the partnership (promoting projected returns of 40% plus!!) and specifically for Project Echo – an investment deck which includes, and makes the assumption, that Everton are part of the portfolio. Details of the Partners investment deck can be found here (by Liz Hoffman of Semafor and the Wall Street Journal) and details of the Project Echo desk here (by Matt Slater of the Athletic).

777 Partners LLC have not produced audited accounts for more than two years. The investment deck republished by Liz Hoffman above, written in 2021, projected earnings in excess of $120 million for 2023 – yet current projections suggest significant losses of hundreds of millions of dollars. These figures include an associated entity 600 Partners. Why is that relevant? As revealed by Josimar, 600 Partners LLC, not 777 Partners LLC, appear to be the owners of Standard de Liège – part of the multi-club acquisitions by the group – yet still related to Nutmeg Acquisition.

Nutmeg Acquisition as of 31 December 2022 had received $102 million from 777 Re.

Many of the portfolio businesses remain loss-making. The portfolio of football clubs acquired by Nutmeg Acquisition LLC show combined losses of circa $180-200 million in the most recent full year. This is the vehicle that would apparently (subject to regulatory approval and funding) acquire Everton. Everton who still are operationally cashflow negative (estimated at £3 million a month), have continued monthly cash obligations to Laing O’Rourke, and have external debt of £340 million. In addition, a further £80-90 million (and climbing) is owed to 777 Partners, emergency funding provided during the period seeking regulatory approval. That’s before the remaining funding for the new stadium at Bramley-Moore Dock – a minimum of £150 million. This excludes the acquisition price paid for Moshiri’s shares and assumes his shareholder loans (a minimum of £450 million) are completely written off.

Everton’s external debt includes Rights and Media Funding – up to £200 million, and £140 million to MSP. The MSP debt includes their limited partners, Andy Bell, George Downing and £22 million provided by Farhad Moshiri. To complete the trail of debt, there is the Covid-related loan owed to Metro Bank (circa £20 million).

Elsewhere in their football portfolio, Genoa, the Italian club owned by 777, announced a restructuring, a renegotiation of debt to the Italian tax authorities. The negotiated settlement included a 65% discount on the €106 million owed by Genoa (pre 777 acquisition). Smart work by private equity investors or morally questionable denial of tax revenues to the Italian Government, public services etc – you can decide. The €37 million debt includes €4 million already paid, €7 million this year and the remainder paid over the next 10 years.

*Update: 23 November 2023. Further reporting by Josimar shows that the tax debt renegotiation is still subject to final approval by Tribunale di Genova.

The extent and scale of the portfolio businesses within the 777 Group almost require a book to be written rather than a couple of thousand words in an article such as this.

Unaudited financial statements to June 2022 (as published by Josimar) suggest total losses attributable to 777 Partners and 600 Partners of above $425 million.

Is it any wonder that there should be concern over 777 Re.’s exposure to its parent company and associated investments?

A-Cap and Kenneth King

Again revealed by Josimar, 777 have the support of another insurance company – A-Cap. A-Cap’s CEO and Chairman Kenneth King is so involved as to have attended a 777 steering commitee – discussing future investment strategy (perhaps now divestment strategy). As of July 2022, A-Cap had lent $338 million to 777 and associated companies. That’s more than 6% of A-Cap’s portfolio – a perhaps unusually high level of exposure?

Further revelations by Josimar show another reinsurer, Haymarket is providing huge sums to 777 – up to €50 million, much of which connected with the acquisition of Everton. According to its 2019 financial statement, Haymarket is controlled by the very same, Kenneth King.

Everton’s reality

The point of the above is to attempt to expose the reality of the situation Everton find ourselves in. Driven to the point where our existence is threatened, there’s minimal options provided by or to our owner Farhad Moshiri. The outcome of the independent Commission (subject to appeal) clearly casts even further doubts over Moshiri’s judgement.

Yet, we are, under his instruction, thrust into the arms of a sprawling private equity group in 777 with no heritage in football club ownership, a wholly unimpressive track record of managing businesses across multiple sectors, and increasingly questionable financing. Add to that the requirement for the principal funder (to the tune of $1.5bn) now requiring divestment of the majority of its exposure to 777, continued operating and partnership losses plus a continued acquisition strategy (including Everton), then is it any wonder questions have to be asked?

Ultimately, for the sake of the club, the UK regulators have to ask the same questions. Presented with similar historical data, the same overview of the current situation, the performance of the management team – supported by hard evidence, and the divestment requirements of the main backer, then there can only be one logical conclusion.

The risks associated with ownership by 777 Partners far outweigh any potential benefits. As a result, 777 Partners are not appropriate owners of Everton Football Club.

We cannot rely upon Moshiri’s judgement. Neither can we rely on his choice of acquisitors, 777 Partners.


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