Thursday 9th July 2020
1. When Stan Kroenke bought Alisher Usmanov’s stake in Arsenal, KSE UK Inc, the owner of Arsenal, took out a two-year loan of £505m from Deutsche Bank to pay for the remaining shares. That loan matures in August 2020. So we expect the decision to redeem these Bonds is connected with the refinancing of this loan and it is likely that a new arrangement has been made with Deutsche Bank (though it could be another lender). The first Deutsche loan is guaranteed by Mrs Kroenke (from the WalMart dynasty).
2. Stan Kroenke is the sole owner of KSE UK Inc and the sole asset of KSE UK Inc is the Arsenal Holdings Group – Arsenal Football Club and all other subsidiaries.
3. This note the AST produced last month sets out that Arsenal had £144m of remaining debt to bondholders. This debt will now be paid off on 14 August and replaced by another loan which has been taken out from KSE UK Inc. We estimate that the financial penalties for early redemption of these Bonds relating to the fixing of the interest rate for the whole duration of the loans are about £40m. So in total the new loan will be in the region of £184m.
4. So in total the arrangements made today will see Arsenal’s debt increase by about £40m, but it is likely that reduced payment terms have been agreed between KSE UK Inc and Arsenal.
5. A benefit of the arrangement is that Arsenal will no longer have to hold £36m in a Bondholders’ debt service reserve account, which meant that a portion of the cash the club had generated could not be spent. Given the current Covid-19 crisis, this £36m cash holding is likely to be needed to pay salaries. It would for example cover the player wage bills of July and August when no or limited season ticket revenue is incoming.
6. There will also be a saving of roughly £20m a year in capital and interest repayments, as the interest on the bonds was fixed between 5.14% and 5.97% per annum
7. At present the AST does not know what interest Arsenal will have to pay KSE UK Inc for the new loan, but we anticipate that it will be significantly less than £20m. Current market rates suggest it is likely to be in the region of £5 to £10m a year. It may be that KSE negotiated a payment holiday with the ultimate lender to help get through the current financial crisis. This would of course increase the interest payments due in future years.
8. It is most likely that the new loan will have a shorter maturity than the loans that are being repaid (due 2029-2031) and there will be a further refinancing event in the coming years.
AST view of today’s developments
9. It should be stressed that this announcement does not see KSE investing INTO Arsenal. It is a financial arrangement to restructure the debt and it is likely to assist the club in the short term as it grapples with the Covid-19 crisis, but it does place more debt onto the club for years to come.
10. We also note that in the context of revenue reductions of over £100m over this and next season (gate receipts, broadcast income and some commercial revenues) that it’s not going to be a major game changer to the challenge the club faces. But it will provide some immediate benefit.
11. AST would like Arsenal and KSE to provide more information about the new arrangements as they are of material significance to supporters. Good governance is based upon accountability and engagement with fans about how the club is run. As things stand information on the terms of the loan won’t be publicly available until the accounts for the year to 31 May 2021 are filed at Companies House. The deadline for this is the end of February 2022.
12. It is also likely that this refinancing will mean Arsenal are no longer able to access the 12 month “cheap money” available from the Bank of England Covid Corporate Financing Facility, as the debt being repaid is the publicly issued debt that carries the important credit rating that is the primary eligibility criteria. (Tottenham borrowed £175m from this source last month).
13. Of most interest to all Arsenal fans is will the club now be servicing the full costs of the KSE UK Inc loan from the market, which is now likely to be close to £700m, or will it only be responsible for the near £200m costs of the bond repayments?
Join us to gain full access
Become a member from as little as £20 a year