Following an extraordinary year of hardship for the sporting world, Paul Atkinson, restructuring partner at specialist business advisory firm FRP, explains how clubs can use restructuring processes to get back on their feet and re-position themselves for new growth in 2021.
The coronavirus pandemic has upended the 2020 sporting calendar like nothing we’ve ever seen before.
Almost every facet of the sporting value chain has been impacted by the crisis, with all main income streams from broadcasting, sponsorship and ticket sales adversely effected. And as income has ceased or slowed, many sports club’s liabilities – from a balance sheet perspective – have continued to grow.
The pressures of the pandemic have prompted some directors to defer payments, such as VAT or rent, and many have taken on additional debt to help bolster their club’s resilience and support losses. Only last month, the government unveiled a £300 million rescue package to help sports clubs get through the winter months. But of course, all of this will need to be repaid.
While fans are allowed back into sports venues under the new Tier 1 and 2 rules that came into effect this month, playing schedules and ticket sales are still heavily disrupted, meaning many well-run and previously healthy sports clubs could find the revenue they generate isn’t sufficient to service their debts.
Directors of sports clubs are working tirelessly to find a strategy to overcome this and get back to strength and profitability. And while some creditors might agree to take haircuts on debt by making concessions through informal negotiations – such as offering forbearance on outstanding rent – this won’t always be possible.
While it might not be the first thing that comes to mind when directors think about recovery, formal restructuring procedures such as Company Voluntary Arrangements (CVAs) or pre-pack administrations could offer an effective way forward.
A CVA, which involves establishing a binding, formal agreement with creditors to repay outstanding liabilities, can give a club valuable breathing room to focus on recovery. A CVA will typically operate over three to five years, with regular contributions made to creditors. A lump sum payment to creditors, often secured from third party private lenders, is another option.
A CVA must be approved by both at least 75 per cent of voting creditors and more than 50 per cent of the creditors unconnected to the club. Once approved, it will bind all unsecured creditors but will not bind secured or preferential creditors unless they consent.
Securing the 75 per cent vote can be a challenge, but there are some steps directors can take to help secure creditors’ support. Right from the outset, it is essential to thoroughly assess the pressures facing operations, as well as determine how directors will address headwinds going forward to stop the same problems reoccurring and how they expect the wider outlook to change. Clear, open and honest communication throughout the process is key – creditors must understand the situation and the value that can be derived for them by agreeing to a CVA structure.
It’s important to identify and engage with all creditors who will be needed for continuing operations, even if they have little or no voting capacity. And, where possible, it’s worth exploring how interests can be aligned by finding ways for creditors that are compromised by agreeing a CVA to benefit from healthier performance in the future, such as a share of profits.
For an otherwise successful and previously well-run club that has suffered this year, a CVA can help give the motivation, and ability, to emerge in a healthier condition. But where it isn’t appropriate, for example where there’s a limited chance of fully recovering its level of liabilities – consideration often turns to pre-pack administrations.
A ‘pre-pack’ involves administrators arranging the sale of some or all insolvent assets to a new or existing entity prior to their appointment. The sale is then completed upon their formal appointment, and the club in question is then liquidated, with the proceeds from the sale of its assets distributed to creditors.
The structure of a pre-pack can benefit both a purchaser and creditors, and the purchasing vehicle could include directors, existing management or a third party, who can acquire some or all the existing assets – which must be independently valued.
As with CVAs, directors need to carefully assess whether a pre-pack administration is the right way forward. Taking the advice of a professional adviser can be invaluable in this process.
There is no doubt that the coming months will continue to pose challenges for sports clubs up and down the country. But by making the most of the specialist tools available, clubs with otherwise viable operations will be able to secure the best possible outcome for themselves and their creditors, while putting themselves in the strongest possible position for future success.
FRP recently hosted a webinar on CVAs: a tool for rehabilitation. To watch the webcast recording, please click here.
In response to the COVID-19 pandemic, FRP has launched a new business solution, Review. Adapt. Evolve., designed specifically to help support businesses considering their options and prepare for the future.