F1 debt is $3bn but returns are so good, hedge funds want in
RBS and Lehman Brothers are negotiating to syndicate a debt that has done a few laps
Sunday, 5 August 2007
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The Royal Bank of Scotland (RBS) and Lehman Brothers are believed to be in discussion with several major hedge funds to syndicate the $2.9bn (£1.4bn) debt owed to them by Formula One motor racing.
The debt has already been refinanced several times since 2006 by F1's majority owner CVC Capital Partners, which used the money to fund its leveraged buyout of the sport.
CVC paid around $1.35bn to acquire a majority stake in the F1 Group from three investment banks – JP Morgan, Lehman and Bayerische Landesbank – and the family trust of the sport's supremo, Bernie Ecclestone. The group's key assets are its rights-holding company, SLEC, as well as its trackside advertising and hospitality divisions run by Swiss company Allsport.
RBS gave CVC a total of $1.17bn (around £600m): $865m was used by CVC vehicle Alpha Prema to buy SLEC, while the remaining $305m went to another new company, Beta Holdings, which bought Allsport. This debt is believed to have been a PIK (payment in kind),– a loan allowing interest and capital repayment to be delayed.
Six months later, CVC refinanced this high-interest loan when RBS and Lehman provided $2.6bn to the group in addition to $350m of mezzanine finance. The additional funds would cover a deposit of around $600m, lodged with RBS to get the new debt, and $313m could also be used to pay off another loan taken out by F1 in 2001 to buy the sport's rights for 100 years.
On 1 June this year, the original mortgage was declared to be fully satisfied.
Taking interest payments into account would still give the shareholders around $650m from the refinancing, putting CVC's return on its equity investment at approximately 250 per cent.
This high-octane return attracted Lehman and JP Morgan to reinvest in the sport and they now sit alongside CVC, Mr Ecclestone and his family's trust as shareholders in F1's ultimate holding company, Delta Topco.
The latest manoeuvrings make the arrangement even smoother. The debt is being increased from $2.6bn to $2.9bn, with the increase being used to pay off the mezzanine finance, and, according to syndication strategy documents dated the end of June, "the initial banks are now entering into the syndication process".
Core to the project is a paper, prepared by accountancy firm Deloitte, called Project Gamma – Tax Structure Report. Since CVC acquired F1, its ultimate holding company has changed from Jersey-based Alpha Topco to fellow Channel Islands-based company Delta Topco.
On 19 June Gamma Topco was incorporated at the same address as the other two companies, so yet another change seems likely.
He found he did have a reverse gear, but he still has his hands on the wheel
Septuagenarian Bernie Ecclestone is the son of a Suffolk trawlerman who has made an estimated $3.8bn (£1.9bn) from F1. He has presided over sales of shares in the F1 Group six times and he still remains in the driving seat as its chief executive.
Mr Ecclestone had a bumpy ride with the shareholders that preceded CVC. The three investment banks took legal action against him and his family's trust over board control of SLEC's subsidiaries. A court victory for the banks followed.
The three banks never set out to be involved in F1. They took over 75 per cent of SLEC following the bankruptcy of German media giant Kirch, which had owned the stake. The banks had lent Kirch $1.6bn to buy into SLEC and the lion's share of this came from Bayerische Landesbank.
SLEC itself is named after Mr Ecclestone's wife, Slavica, to whom he transferred his shares in F1's rights-holding company 11 years ago. He got into his position as F1's ringmeister by negotiating commercial contracts for the teams when he owned the old Brabham team in the 1970s.
