How clouds are gathering again for the Sky Blues
They say the way to make a small fortune in football is to start with a big one. Football, you see, is an expensive business.
It seems the private-equity fund Sisu Capital overlooked that old truism when they took over Coventry City in 2007. With another season in English football’s third tier now on the cards after their failure to overcome relegation-threatened Bristol Rovers left the play-offs out of reach, it is plain Sisu did not see what it was getting itself into.
But it is not as if the warning signs were not there for all to see when they took over the club. Sisu clearly thought the Sky Blues, who had spent 34 consecutive seasons in England’s top division by the time of their relegation from it in 2000, were an undervalued asset. But they were not a typical football club.
The 32,600-seat Ricoh Arena that Coventry have been calling home, a state-of-the-art venue that no doubt wowed Sisu when they were kicking the tyres over their purchase, is more a millstone than a keystone for the club’s financial fortunes.
The problem is, unlike other Premier League and EFL clubs, Coventry do not own their stadium. This causes a multitude of problems, chief among which is that the club does not own a valuable asset to anchor long-term borrowings (more on this later).
But while that is the biggest issue, it is not the only one. Being the tenant and not the owner of the stadium also creates a cash commitment. When Sisu bought Coventry, the stadium-rental agreement with its landlord amounted to £1.3 million a year. Even 20 years ago that might have worked, had they been a top-division club, since the Premier League’s valuable TV rights deals would have made it pretty much incidental.
But despite the football doldrums the club were drifting in, the cost to Coventry and Sisu began to rise year in, year out. As can be seen in the graphic below, which demonstrates rental payments in thousands of pounds, in 2013 – the final season before they were relegated to League One, the third tier of English football – the stadium rent had risen an incredible 35% to £1.7m.
On a turnover of £10.8m, it meant that 15p in every pound the club generated in revenues was being paid out to the landlord. This compounded the financial difficulties Coventry faced.
This rentier attitude of turning the screw on a distressed tenant might be typical of a slum landlord, but it is harder to understand given the identity of the stadium’s owners at the time. The stadium operating company, Arena Coventry Limited, was a 50-50 joint venture between the Alan Edward Higgs Charity and Coventry City Council. That those two community custodians should have offered no clemency to a community club at a time its revenues were collapsing – indeed that their terms became harsher still – made the management of the club’s financial situation all the more difficult for Sisu.
It was ultimately the fans who suffered most. Faced with a shrinkage in annual revenue of almost £10m from what it had been in 2011 to what it became upon relegation to the third division in 2013, Sisu took drastic action and moved Coventry’s home games to Northampton’s Sixfields stadium, a 68-motorway-mile round trip from the Ricoh.
Coventry supporters understandably mounted furious protests at the ownership taking their club out of its city, which no fanbase should ever have to endure. The club spent three years away from the Ricoh but from Sisu’s position it had the desired effect. When they returned the stadium rent had been cut in half from the 2012 level.
Sisu themselves have, to a certain degree, been victims too, with Coventry having sustained £85m of losses during their ownership, issuing tens of millions of pounds in loans to cover the club’s cash-flow issues. In 2012 they sold their sole-ownership interest in the ProZone football-analysis product to the US-based firm Stats Sports.
Although this generated £4.67m in a one-off cash transaction from the sale, it meant losing a cash-generating asset that had contributed £2.7m to Coventry’s financial position in just one season in 2008-9, while also providing cutting-edge data insights to the club’s football operation for free.
But while Sisu-issued debt caulked holes in some areas, Coventry continu to spring cash-flow leaks. It was following that relegation to League One that Sisu advanced £9.2m of facilities from its Cayman Islands-based subsidiary, Arvo Master Fund Ltd. This mixture of debt and equity, known as convertible preference shares, have been advanced on terms that might make Wonga wince.
Because although no cash is being paid in relation to this debt, the interest is rolling up against it at an alarming rate. In 2012-13, the first financial year the loan account with Arvo Master fund was opened, Coventry City received £2m from Sisu’s Cayman fund. Since then the club has accrued interest equivalent to £6.84m on those Arvo loans.
The upshot of this is perhaps not too dramatic, since it seems that the worst that can happen in the event of Coventry defaulting on the repayment of the capital is for 12.5% of the shares in the club to pass to Arvo Master Fund. And since this belongs ultimately to Sisu Capital, it looks like there should be no net impact in the end.
Which is a bit like the £9.2m cash Advanced by the loan itself, which appears to have been spent without returning Coventry any discernible benefit at all. It certainly has not returned them to the Championship.
Not only that, but in an attempt to make ends meet in the third tier, Coventry have sold a succession of players, such that across the six completed seasons following their relegation from the Championship the Sky Blues have made a net transfer profit of £9.24m in cash. That amounts to an average of £1.54m, year-in, year-out.
Five years after they fell out of the Championship, these degradations meant football performance had suffered to the extent that another ignominious relegation, this time to the EFL’s bottom division, League Two, would ensue.
With Coventry languishing in the bottom half of the English professional-football pyramid, what Sisu has now begun to do is worrying. Coventry’s owners seem resigned to the club never restoring its former top-flight status, dramatically shrinking the spend on wages while reducing player investments to almost zero. It is of course any owner’s prerogative to cut a club’s cloth to meet its means, but the way they have transformed Coventry into a cash cow for themselves will no doubt upset Sky Blues fans.
As their financial plight has worsened over the years, Coventry have run up £37.5m in debt to the investment funds associated with Sisu, a material sum even for a multimillion-pound private-equity firm.
As mentioned previously, the absence of a stadium in the club’s name means Coventry have no assets to secure those loans against. And here is why this is a major problem for the club. Without a stadium as security, the loans carry a higher risk to the lender. And, as is the case for all loans, the interest charged by the lender reflects that risk.
The interest rate on Coventry’s loan payments to all the funds connected to Sisu is now running at an effective rate of 5% a year, and it is being paid in cash. What that means is: while Coventry generate only around £6m a year in turnover, in each of the past two years the interest bill payable to the club’s lenders, which are connected to Sisu, has been £1.9m.
That accounts for 31p in every pound the club has generated in turnover and swallows up all the savings made on the reduced Ricoh rent – and more. What is most galling about this is that as an otherwise-successful financial institution in a zero-interest-rate world, Sisu is very likely to be able to borrow funds from its own lenders at considerably lower coupons, perhaps 2.5% a year.
And if that is the case, then the spread on that so-called arbitrage – the practice of buying one financial commodity while selling another and pocketing the difference – is not being passed on to the club but being pocketed by its owner. If so, and Sisu’s interest payable is 2.5% against the interest receivable from the club of 5%, then it is trousering cash profits of just under £1m a year from Coventry.
As Sisu engages in yet another stand-off with the local council, threatening once more to quit the Ricoh, and as the fans brace themselves for another season away from Coventry next season, this is the depressing backdrop.
Although it might have been possible to have some sympathy for Sisu’s victimhood at the hands of the City council and the Higgs charity six or seven years ago, the way it has itself since become a drain on the club’s financial resources seems self-serving.
Perhaps the old adage is wrong after all. Because it certainly looks like Sisu has found a way of making a small fortune from football.