Friday, 5 June 2009

Liverpool auditors issue warning to Hicks and Gillett

Liverpool's owners Tom Hicks and George Gillett have been warned by their auditors that failure to refinance a £350 million loan due next month will threaten the club’s ability to operate as a going concern. All the national newspapers are running this deeply worrying story, with terrifying headlines screaming of financial ruin.

The club’s latest accounts, which were released by Companies House yesterday, revealed that Liverpool paid £36.5 million in interest on their debts in the financial year ending July 31, 2008. Despite the announcement of a record turnover of £159.1 million and a pre-tax profit of £30.2 million, the club’s net debt — not including that of the holding company — almost doubled from £43.9 million to £86 million. Kop Football (Holdings) Ltd made a pre-tax loss of £42.6 million, with its net debt rising to £299.5 million.

In the accounts submitted for Kop Football (Holdings) Ltd, KPMG writes: “The current economic conditions have had a significant impact upon world credit markets and, accordingly, raising finance in this environment is challenging. Whilst the directors believe the going concern basis is appropriate, the fact that facilities are not currently in place to fund all projected cash requirements over the next 12 months indicates the existence of a material uncertainty, which may cast significant doubt upon the group’s ability to continue as a going concern, and it may therefore be unable to realise assets and discharge liabilities in the ordinary course of business. Nevertheless, after making full inquiries and considering the uncertainties described above, the directors have a reasonable expectation that the group will secure adequate resources to enable the group to continue in operational existence for the foreseeable future.”

Today’s Times claims: “one senior Liverpool figure expressed disappointment at KPMG’s message, calling it “unduly alarmist”, while another said that it was a standard statement in situations where a company is in the process of negotiating a refinancing package. He added that, while Kop, the investment vehicle, may face uncertainty, the club are afforded some protection by the banks.” However it also goes on to say: “There is an acceptance within Anfield that the club are not generating enough money to cover the interest payments of Kop Football (Holdings) Ltd, the club’s holding company.” Meanwhile Tom Hicks and George Gillett Jr, continue to look for outside investment and, in the more immediate term, to renegotiate their existing £350 million loan. The Americans have until July 24 to refinance their credit deals with Royal Bank of Scotland (RBS) and Wachovia.

The Accounts also go on to reveal the owners plans for the new stadium, emphasising that securing financing for the development of a new stadium is central to their strategy for future growth. Pre-construction work on the new Stanley Park site was halted indefinitely last September, with the owners claiming "unfavourable conditions in the global financial market" the cause. In the accounts, however, they say that opening is “delayed until 2012” and that a revised planning application, with a view to raising the capacity from 60,000 to 73,000, will be submitted imminently. The Tmes says: "Hicks, who is bullish about the club’s future and his prospects of remaining at the helm, is unconcerned by the figures in the accounts. He remains highly optimistic that a refinancing deal will be agreed in the coming weeks and that outside investment will be secured after that.” However the article goes on to warn: “the search for financial backing began almost as soon as they bought the club in February 2007 and, more than two years on, the new stadium remains a pipe dream."

Although deeply worrying, the warning from the club auditors is based upon the club being unable to re-finance its loan, however realistically this is unlikely to happen. One thing is certain; the warning from the auditors should not be ignored. The club needs to restructure its financial position soon and the owners need to act in a responsible manner. Despite all this, Rafael Benítez has been assured that the owners will provide funds for new players; however the silence in the transfer market is deafening. We did not secure Gareth Barry’s services, despite claims Liverpool launched a late bid for the midfielder. If the club is unable to compete in the transfer market this summer, any momentum they have gained in the Premiership this past season could be lost. With other sides flexing their financial mite, the Reds could lose out on more 'key' signings Benitez has lined up. If he is to receive funds, where will it come from? Hicks and Gillett personally? Or will they have to wait until the re-finance package is in place? With deadline set for July 24, Liverpool could end up scrabbling around bargain basements looking for unwanted items.

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