JANUARY 14, 2007

Bernie goes to the bank

The Formula One group of companies has secured a massive $2.9bn of funding from the Royal Bank of Scotland and Lehman Brothers in order to pay off a loan which was taken out by CVC in order to buy the Formula One group. It seems that $1.17bn was borrowed from RBS in the form of a high interest loan - rather than using CVC investment funds - in order to buy the SLEC, Allsport Management and APM companies and consolidate them into one firm. A new company called Delta Topco has been established in Jersey and Lehman Brothers and JP Morgan (which were previously shareholders in SLEC before the CVC purchase) are both shareholders, as are CVC, the Ecclestone Family Bambino Trust and Ecclestone himself.

The aim of all this is to pay off the debts and to allow the investors to take money out of the business, securing the cash on the future revenues of the sport. The Formula One group has an agreement with the FIA to exploit the commercial rights of the sport until 2110. It is worth noting that these rights are held by a company called Formula One Asset Management which has also applied for the right to take out a mortgage on its shares - in order to take out even more money. It seems that the FIA is happy with this situation as FIA President Max Mosley signed a document to this effect on December 21.

There is still a big risk for the Royal Bank of Scotland as the teams (ie the manufacturers) are only committed to the sport until 2012 - through a commercial agreement they have with SLEC - and they may decide that they wish to demand a bigger share of the sport's earnings after that. The new loan means that all the available cash will be used up paying off the loans - in much the same way as the Formula One Eurobond used up all available cash for much of the last seven years. There is still talk of a new Concorde Agreement being signed soon but the teams know that if they commit to that they will be tied into deals which pay them only half the money that is raised by the sport.

The big question is obviously the term of the loan because Formula One will struggle to pay $2.9bn in the course of 10 years. Incomes have been consolidated and revenues have risen but so too has the need to pay out more to the teams. The danger is that if the term of the loan is too long, the teams might finally walk out and do their own thing in 2012 as they must eventually get tired of being used to fund big banks and trust funds.