Neil Francis: Big-spenders Wasps looking stretched on and off the pitch
Leinster play Wasps tomorrow night in the RDS to get this season's Champions Cup competition under way.
Wasps are a club with a strong pedigree and an illustrious CV when it comes to winning championships. They are perennial contenders in every competition and they continuously provide healthy numbers of quality players to the England national side.
Important so that they thrive and prosper and stay at the forefront in any competition that they are engaged in and be the driving force they have been for generations - but the question has to be asked: for how long?
On June 26 this year, PricewaterhouseCoopers resigned as auditors of Wasps Holdings Ltd, the company that owns the rugby club. A chunky audit fee of £300k-plus - got to be something bad to walk away from that fee. For the year end 2017 Wasps Holdings Ltd had a turnover of £33.4m. They posted a loss of £3.7m - not bad in the scheme of things given some of the shocking losses in other Premiership clubs - and down from a loss of £9.2m for the company the previous year.
The company has retained losses of £36m on its balance sheet and can continue to trade only because the company issued a retail bond of £35m on a 6.5pc coupon repayable in 2022. For those of you who did honours maths, the retained losses now supersede the bond's cap value by £1m and are only going one way - what will they have to raise in four years' time when they come to refinance the bond? This is what brought the PwC resignation in to sharp focus.
The financial covenants of the bond are based on the trading performance of the group. Do the maths on their obligations - the bondholders are due £2.27 million every year until 2022.
If you continue to lose money, you won't be able to meet your obligations on the bond. You have two choices: Call in People Before Profit and get them to occupy the Ricoh Stadium with flags and bunting like 'Burn the Bondholders'. Or you could engage in a little bit of financial rinky dink.
PwC found irregularities in accounting procedures where £1.1 million was treated as revenue instead of what was very obviously a capital contribution. That act breached their covenants and, as PwC said in the auditor's report and a letter to the London Stock Exchange, "given the seriousness of the events" they resigned from office.
A re-statement of the 2017 accounts was made and an EGM was called by the Bondholders (bless them) to waive the breach. It means that Wasps don't have to pretend that their income was higher than it actually was and the chairman of the club, Irishman Derek Richardson, can top up losses so that the dividend can be maintained.
The bond trades at £86.50 currently (£13.50 below par). I shudder to think what it will trade at in 2022 when the bond becomes repayable. There is no way that Wasps will be able to pay off the £35 million at that time and so they have two options - sell the Ricoh Stadium which is used as security for the bond or try and refinance the bond.
If losses continue at the current rate, the bond cap value would need to be closer to £50 million just to cover losses and the coupon would have to rise to 8.5pc or over.
You would have to be a thrill seeker or have one concussion too many to invest in the whole scheme. Wasps are in serious trouble and you would have to admire their choice to turn down the CVC Capital Partners offer of last month. You can only kick the can down the road for so long.
It is unfortunate that Wasps will field a weakened side tomorrow night. At the time of writing, this there were serious doubts about the fitness of England stalwart Joe Launchbury and in-form scrum-half Dan Robson. Another England international Nathan Hughes was cited for punching last week and is unlikely to play.
Nineteen-times-capped All Black Lima Sopoaga also has a neck injury and is touch and go even if he is selected. There will be pressure to play him as he is being paid €670,000 to forego his All Black aspirations.
You spotted it too, didn't you? How in the name of Jehovah is a team in such financial peril shelling out €670,000 per annum on one rugby player irrespective of how good he is.
Willie le Roux, who went off for a HIA in Pretoria last Saturday in the epic Springboks v All Blacks match, is also on big money. Wasps can't afford to pay for these players and yet they still buy them. They got fined £20,000 last season for breaking the salary cap - just a piffle!
Wasps travel to Toulouse at Christmas time. They have a club competition where a registered fan can travel to Toulouse with the Wasps team on a private jet. The champions of Europe travel there for next Sunday week's game but not on a private jet.
Leinster's imports James Lowe and Scott Fardy are not as high-profile signings as Willie le Roux and Sopoaga but they are far more effective and, more importantly, Leinster can afford to buy them because the money is in the bank to do so.
Wasps still have quality in their ranks and they can put Nizaam Carr and Ashley Johnson in their back-row and Elliot Daly and Juan de Jongh in their midfield. If Sapoaga and Le Roux start, that will make it interesting - but only for a while. Wasps' front five, particularly if Launchbury doesn't play, are going to find Leinster's tight five formidable on all fronts.
Leinster haven't looked like a scrummaging powerhouse thus far this season. Connacht and Munster edged them at scrum time but this is Champions Cup and I feel Leinster will ramp it up at tight and squeeze the life out of Wasps and compound it when Leinster's replacement all-international front-row comes on.
The abrasive nature of the clear-out at ruck time and the uncanny ability of all the forwards to pick the right angle into contact means Leinster will generate enough quick ball over the 80 to win well. If Leinster are focused they can bonus-point the Wasps despite the weather forecast.
Wasps will be competitive but would have needed all hands on deck to get close or stay in the match for the full 80. They are unfortunate to be stretched on two fronts at the moment. It seems to have eluded them that this is a nil-sum game. If you shell out big dough for a quality squad, even if you win the Champions Cup and the Gallagher Premiership five times in a row, the prize money still won't have any material effect on your finances, particularly if the model is flawed in the first place.
Wasps will win neither completion. Their perilous state doesn't seem to bother them, so carry on regardless - until 2022 that is.