Everton / 777 / MSP:  A Way Forward?

The following was posted to Twitter/X by @CitizenSuburbia, who has been an excellent follow for matters related to Everton's finances:

Warning: Long Read, but worth it with a glass of something 🍷

Facts in the Public Domain:

1. Companies House: Blythe Capital are the Security Agent & holding a charge over leasehold interests in property cited as "Plan 1" (ie stadium) on behalf of Lenders under a Loan Agreement with Everton Stadium Development Limited, a subsidiary of EFC. Neither identity of Lenders nor details of Loan Agreement are disclosed.

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2. Everton's latest accounts for June 2023 show £158m is due in less than 1 year. Lender is un named. Let us assume this is MSP.

3. Moshiri has agreed to sell all the Shares owned by Blue Sky Holdings in Everton Football Club to 777. The transaction price is unknown.

Matters quoted via the Press/X:

1. Everton have received somewhere around £160-£200m in funding from 777 in the form of deeply subordinated, unsecured loans which convert to equity on completion of the take over; this would appear to mean that part of the consideration for acquiring Moshiri's shares is an investment by 777 into Everton itself.

2. The club was in need of this liquidity, as Moshiri has stopped funding.

3. MSP's loan agreement appears to be a convertible, ie, MSP has the right to convert it into equity if it desires.  EDSL is the borrower under the loan, so at first instance, the question is: can MSP convert this loan into equity at EDSL level or at EFC level?  I would say the former, because I cannot see why 777 allowed Moshiri to "double deal" the shares of Blue Sky, having put in £200m into the club (vs MSP's loan of £158m). Happy to be proved wrong.

4. To close the sale, the PL require 777 to (a) repay MSP (b) deposit £60m of working capital into escrow for Everton's use (c) convert their £200m funding into equity. Solid conditions (although I think £60m is too little).

Scenarios

Scenario 1: 777 raises capital (via the latest investor mentioned by Dave Powell) and repays MSP, likely after a short extension in the repayment date. Satisfies all PL conditions and completes take over.   The club would have some funding in place, but is still in a parlous position. It is heavily indebted and its new owners do not appear to have deep pockets. The club, however, at least has a chance of turning around in a couple of years: something that it cannot easily achieve in Administration, which is the worst of all cases.

Scenario 2: 777 fail to repay MSP, triggering a default on the loan to EDSL. Here is how I would map out Everton's path through this mess:

(a) Moshiri will have to terminate talks with 777. They should become an unsecured creditor (ie, facing grave risk of loss).

(b) Issue of conversion: I am not entirely sure if Moshiri did grant the option to convert the loan at Blue Sky Level, because EDSL is the borrower. Furthermore, a 51% conversion in EFC requires PL approval and so MSP may have to provide additional capital to get the green light to own the club.  Furthermore, would MSP really want a 51% equity stake in the whole football club? It is loss making, heavily indebted and in some relegation peril.

(c)  Could the conversion be at EDSL?  Would make more sense to me. But, this isn't without its own risks.  You might have control over EDSL with your conversion, but you still need a solvent football club because that is the anchor tenant. Everton's solvency hinges on being in the PL and finding someone to fund losses. Would MSP be prepared to do this?  Or perhaps they may prefer 777 to continue doing it as it suits their risk appetite?

(d) The path to take, given all these questions and uncertainties, is to BUY TIME.   You probably need a two year window for Everton's situation to resolve itself:  - complete stadium; - remain in the PL; - visibility over future points deductions;  - lower losses due to better cost control;  - increased visibility/improvements in the club's state makes it more attractive to investors.

(e) How do Everton buy time? Answer: consensual creditor restructuring. That is, without needing an administrator, the creditors all get together and agree a "pact". MSP, lender against the stadium needs a solvent club, the anchor tenant. RMF, lender to the club, needs the stadium as a means of increasing Everton's attractiveness. 777, as unsecured creditor, needs both. All can see the exit path: it was provided by the Elliott/AC Milan case, which yielded a successful outcome. Creditors in this case would agree to a "stand-still" of at least 2 years where no creditor will take any action against Everton; it buys the club time. Debt Interest and Principal Repayment burden also postponed to free up cash to allow the club to fund its on going costs. Revenues + Annual net transfer Income of £30m (£200m) would cover all Wages and Operating Costs (£200m) each year during the 2 year stand still period.

(f) During the stand-still, creditors work together to find an investor to repay a big chunk of the debts + fund the club's funding needs including the remaining debt servicing. This comes down to the club having a good enough valuation in 2 years time to justify an investment. I am working on this at present but my thesis is that there should be sufficient equity value in the club to attract investors as long as we stay out of Administration and remain a PL club.

(g) Moshiri would be wiped out in all this - which he, ultimately, may have to accept if he can no longer fund. Creditors would simply exercise their rights to remove him from the scene. It may be 777 can continue to play a role *if* they become a supplier of liquidity; i.e. if they agree to keep funding Everton. Irrespective of their reputation, creditors will first amd foremost look at funding options for the club which keeps it solvent. If 777 can't play a role, then as (e) above lays out, there is still a way the club can keep itself afloat during this 2 year stand still.

Conclusion

Without needing administration, a consensual creditor restructuring can help to stabilise the club in the face of the large sum due to MSP if 777 fail to pay them off, collapsing the take over. We don't know the full details of MSP's conversion rights but I would be surprised if they went ahead given the risk profile. 777's funding kept the club afloat for a year. But now major creditors need repaying so they may lose (their fault: they should have had the cash in place). Moshiri too may have to disappear with them. It would seem their fates are entwined.

If that is the case, there is still a way through for the club. Let's hope that (a) sensible people from the creditor group get around a table to hash out a plan, and (b) they agree to engage the FAB and EFCSA so we as the fan base can be kept up to date in the correct way.

If that happens, please, for the love of god, park your self interest/alternate bidder/agendas if you can. Alternative bidders can surely go themselves to the club, creditors, board, FAB & EFCSA and present their cases and give us transparency. And let us try and be a little judicious around discussing administration: the noise only makes the job of stabilisation even harder.

 

 

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