independent

Saturday 19 April 2014

F1 in pole position to slash loan costs despite bribe claim

The popularity of auto-racing boosts the firm's bid to cut interest on $2bn worth of loans.

REVVING UP: Sebastian Vettel, of Germany, drives during the qualifying session at the F1 Canadian Grand Prix race
REVVING UP: Sebastian Vettel, of Germany, drives during the qualifying session at the F1 Canadian Grand Prix race

Formula One is relying on its auto-racing dominance in Europe and a welcoming loan market to slash borrowing costs even as its chief executive may be charged with bribery and private-equity owners pull cash from the business.

The racing company is asking lenders to lower rates it agreed to pay eight months ago in exchange for permission to sell $1bn of junk bonds that financed a dividend to CVC Capital Partners and other private-equity owners.

CEO Bernie Ecclestone has been under investigation by German prosecutors for a bribery case tied to Bayerische Landesbank's sale of a stake in the company to CVC.

Formula One wants to trim the interest rate on a $1.33bn loan to as little as 4.25 per cent from 5.75 per cent now as junk-rated companies capitalise on strong demand in the loan market to extract favourable terms from lenders. London-based Formula One's racing is popular with fans in Europe and the company's earnings last year rose as the region's economy contracted 0.2 per cent.

"When you got a strong position like them, and in a sector you don't see very often, you're likely to be able to get very good pricing in the current environment," Melvyn Cooke, a Paris-based analyst with Standard & Poor's, said. "Formula One has no real direct competitors."

The company sells rights to host and broadcast Formula One races, and also generates revenue from corporate sponsorships, from Switzerland's biggest bank UBS to luxury watchmaker Rolex to Dubai-based airline Emirates.

The auto-racing series had $1.6bn of revenue and $540m to $550m of earnings before interest, taxes, depreciation and amortisation last year. That compares with $470m to $480m of Ebitda on $1.5bn of revenue in 2011.

The sales are at record levels, enabling Formula One shareholders to add debt to its balance sheet to pay themselves dividends, according to Xander Heijnen, a partner at Munich-based Communications & Network Consulting.

"They know they will be able to repay the debt because the sport is so profitable," Heijnen said.

James Olley, a CVC spokesman, declined to comment on the company's financing or any plans for Ecclestone to step down from his role as CEO.

Investor demand this year for leveraged loans, including from mutual funds and collateralised loan obligations, has helped riskier companies extract more favourable borrowing terms.

Formula One has a total $3.2bn of debt, including $1bn of subordinated bonds and $2.2bn of senior term loans, according to Cooke. The company also has a $70m revolving credit line, which is undrawn, he said.

S&P lowered Formula One's credit to B, five levels below investment grade, in November, citing the increased debt used for a shareholder distribution.

Formula One is seeking to trim interest on about $2bn of loans, according to a source with knowledge of the transaction.

The company proposed paying a minimum 4.25 per cent for its $1.33bn term loan and would pay more if the London interbank offered rate, the lending benchmark for leveraged loans that is set daily, rose above 1 per cent, the person said.

The company's shareholders will take another dividend of $332m this year using cash on hand, according to Cooke.

Senior lenders agreed last year to the dividends, he said.

CVC and other shareholders were poised to collect $2.2bn of dividends last year, including the payout from the bonds, according to a report from Moody's last October.

Formula One also operates in emerging markets, including Brazil and India, where fan following tends to increase in countries where a driver or team gains success in races, according to Cooke.

Not all of the teams benefit equally from the sport's growth. "Roughly half of the teams are fighting for long-term survival," Heijnen said.

The company has negotiated an eight-year contract with 10 of its 11 teams that runs through 2020 that states how much each gets paid for its participation and success on the track. The value of a team's brand can influence how much it receives.

"Ferrari is by far the star team," said Heijnen. "They have always received a larger size of the pie." The Italian brand is important because it's the only team to have competed in Formula One since it was founded in 1950 and without missing a single season.

The new contract will give driving teams more money to race, according to Cooke.

CVC bought a 63.4 per cent stake in Formula One using $2.5bn of loans, completing the deal in 2006, and has since sold some of its shares in addition to taking dividends. The buyout firm has reaped more than $4bn on its original investment of $1bn and expects to make as much as $7bn, CVC co-founder Donald Mackenzie said in October.

"It was a very good deal for the shareholders," said Heijnen. "It was not a good deal for the sport."

The owners have piled debt on to a multi-billion dollar business to collect dividends instead of re-investing that money, he said, which could include support for traditional circuits in Europe and smaller teams.

CVC remains P1's largest shareholder with 35.1 per cent, according to the annual financial report, called Formula Money "The carmakers or the teams should have bought shares in the sport when they had the chance," said Heijnen. "They didn't, and they will regret it forever."

The bribery investigation, which saw BayernLB's Formula One manager Gerhard Gribkowsky sentenced to eight-and-a-half years in prison in 2012, could result in the series deciding Ecclestone should step down permanently or temporarily

It is alleged that Gribkowsky accepted a bribe from Ecclestone in connection with the sale of the Bayerische Landesbank's stake in Formula One to CVC in 2006. Ecclestone has stated that the payments weren't a bribe.

©Bloomberg

Irish Independent

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