Why has KSE restructured Arsenal’s debt?

Before I start, a little disclaimer. I am not a financial expert. I studied law at university, but then now feels a life time ago. I now work in recruitment.

I enjoy the finances behind football. Reading on it, learning about it, gets the brain cogs going. I would like to think over the years I have learnt and understood a lot; and shared that knowledge through my blogs and on Twitter.

If you want to follow someone who actually knows his stuff, there is only one person on Twitter worth spending your time on. Swiss Ramble.

So it was announced on Thursday evening that Arsenal will redeem their fixed rate bonds. In layman’s term, this is basically the club paying off some of its bank loan.

Now the bonds we have redeemed is not all of the debt still owed from the building of the Emirates Stadium, but is the majority.

In the past, it has been deemed not worthwhile enough to make early repayments in debt.

Like a mortgage on your house, you have to pay Early Repayment Charges to clear the debt early. This is the creditor (ie the bank or mortgage lender) applying penalties for you clearing debt early, and therefore paying less interest over the long run.

The saving over a long period in interest would not have really justified a £200m+ pay out by the time the early repayment charge would have been applied.

So what has changed now?

The decision made by KSE to redeem the bonds seems to be driven by cash flow.

As most will know, Arsenal have to keep a certain figure in reserve within the club accounts as part of the lending agreement. This is money that can not be used to pay for new players, for wages. It just has to sit there.

That pot is around £37million, according to latest accounts.

By redeeming the bonds, Arsenal will be able to free up the majority of that debt reserve.

Taking into account what is happening in football due to Covid19, cash flow has become very important to the club.

Arsenal have missed out on the yearly windfall from season ticket holders. That money would usually now be in the clubs coffers, and be used to make payments on new transfers.

By freeing up money from the debt reserve, it should allow Arsenal to continue more “normal” operations over the summer period.

So who has paid the debt?

Arsenal have been loaned money by Kroenke Sports & Entertainment (KSE). The company owned by Stan Kroenke. In turn it seems KSE have taken out a loan enabling them to loan money to Arsenal.

Whilst Kroenke is a very rich man, that does not mean he has millions sitting in the bank ready to be spent. Much of his wealth is tied up in assets, such as Arsenal, the LA Rams, various ranches and other businesses.

KSE had to take out a loan when buying out Alisher Usmanov.

So KSE have taken out a loan, to loan Arsenal money, allowing Arsenal to pay off a loan.

What we do not know is what the terms of that loan are.

The bonds Arsenal have redeemed were at 5.14% interest. In comparison Tottenham’s are paying a little over 2.6%.

This is because since 2006 (when Arsenal were issued with the bond) money was a lot more expensive to borrow than it is now.

Since 2006, we have lived through a global recession and are now in the midst of the Covid19 pandemic.

The Bank of England rate is currently 0.10%. Back in 2006 it was 5%, with it being as high as 5.75% in 2007.

A high rate is good for savers, poor for borrows. A low rate good for borrowers, poor for savers. The current Bank of England is the lowest in history.

There has never been a better time to borrow money.

So what KSE have done is borrow money, at likely a lower rate than Arsenal’s 5.14%, loaned that money to Arsenal, likely at a slightly higher rate than what they have borrowed at, enabling Arsenal to pay off debt owed at a much higher interest rate.

It would be like you or me owing a chunk of cash to a pay day loan company at 1333% APR. Then a friend or family member  getting out a loan with Natwest at 2.9%, and loaning that cash to me or you enabling us to pay off the debt at the higher rate.

What we do not fully know is the terms of the loan agreements between KSE and Arsenal.

Chances are KSE will be loaning Arsenal the money at around 0.5% higher than what they have taken the loan out on. This is usual in business.

So lets say KSE took the loan out on similar terms as Spurs – 2.6%. KSE are then charging Arsenal 0.5% more – which equates to 3.1%. Arsenal would still make a big saving on the 5.14% they were paying on the bonds.

And what saves Arsenal money, makes KSE money as the clubs owners.

Payment terms of the deal will be interesting.

Arsenal were due to have paid off their debt by 2031. It wouldn’t be a surprise if KSE have extended this date – how long would depend on what the early repayment charge was.

The ERC would have had to have been paid by Arsenal. KSE would likely have loaned Arsenal this money, therefore increasing Arsenal’s overall debt, but reducing the total we have to pay off once interest is included.

Rather than an agreed repayment date, KSE might have decided to just leave the debt within the club, slowly accruing interest. And then if they ever sell the club, the debt would be repaid then. Chances are, however, is that we will be making yearly repayments.

The key for this deal is that is has freed up the money held for the debt service.

This money will be used in the coming months to pay the bills, pay the wages, buy new players.

So in the long term, Arsenal will not save too much; but in the short term the £37million will be very useful.

As time goes on we will probably learn more about all the loan agreements. But what it does is reiterate KSE’s commitment to Arsenal.

Keenos

1 thought on “Why has KSE restructured Arsenal’s debt?

  1. jordangooner

    I completely agree with your summary of the summary with regard to Kroenke paying off the debt by paying off the bonds.

    It is interesting in April on the LA Rams project, he extended the period of the loan from 15 years to 30 years.

    According to the Sun newspaper the loan of apparently £408 million pounds is in addition to the original loan of £328 million. So just on LA Rams he owes the banks £736 million.

    You never know what these guy’s are up to bearing in mind, when be bought Usmanor shares he borrowed £ 557 pounds from Deutsche Bank.

    This is in addition to the £45 million cash he managed to stump up!

    Kroenke total indebtedness to banks is therefore is £1. 3 billion, just on Arsenal and LA Rams.

    These guys really know how to play with the money.

    I would be interested to see what develops with the Kroenke family, with CD19, he had no alternative but to free up some cash for wages and other operating costs.

    However Kroenke treats Arsenal as a business, with some £1 billion pounds invested buying all the shares cannot allow the business to fail or the value of his investment to reduce.

    If you also factor in his original share purchase, his indebtedness to the banks, could be a lot more, I am uncertain how the first £500 million or perhaps higher was raised, presumably other bank loans.

    Whilst generally Kroenke does not interfere with the running of the club. I am not convinced he would put a lot of additional funds, to buy more players on a short term basis, to really make bid acquisitions to improve the team.

    Most of his sports franchises roll along, but don’t enjoy spectacular success.

    Kroenke core business is real estate, sport appears to be a vehicle to consolidate this business.

    Time will tell with Josh Kroenke at the helm, if he shows more commitment for the success of Arsenal on the field!

    Like

    Reply

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