Sting in the tale for holders of Wasps’ retail bond?

Holders of Wasps’ 6.5% retail bond due 2022 could be excused the odd nervous glance at their screens today (May 4th) as its bid price in the secondary market on the Order Book for Retail Bonds fell to a low of 85.5p from its previous level of 102p; this indicates a heightened fear that investors may not get their money back, something that has never happened before on the specialist exchange.

The woes of the club both on and off the pitch were compounded by rumours of a player revolt because of the lack of a promised training facility and late payments, and in resigning, its independent auditor, PWC said there was ‘material uncertainty’ over whether Wasps can continue as a ‘going concern’ following a series of serious accounting irregularities and concerns over its ability to service its debt.

As previously described by Mr Bond, in April 2015 Aviva Premiership rugby club Wasps became the first sports business to launch a retail bond when it raised £35m with a seven year 6.5% Sterling Bond listed on the LSE’s Order Book for Retail Bonds.

‘a heightened fear that investors may not get their money back’

The deal was intended to catapult the ambitious club to the top of the sport’s rich list rivalling France’s rugby noblesse Toulouse, Toulon and Stade Francaise.

A special purpose vehicle, Wasps Finance Ltd, was established to issue the bonds which are secured against Wasps Holdings and Arena Coventry Ltd (ACL) – more  

However, following an investigation initiated by the Daily Telegraph in May 2017, there was speculation that the debt would have to be restructured because the Wasps group was not generating enough cash to pay the loan back when it matured in 2022 – more 

The club was forced to ask investors to agree to breaches in the financial rules of the deal after a cash injection from the club’s owner was not accounted for properly – ‘Weneed to come to some arrangement; Wasps seeks bondholders agreement aftercovenants are breached’  

Wasps said its earnings before interest, tax, depreciation and amortisation (EBITDA) had been £2.4m in the year ended June 30, not the £3.5m it had previously reported, amid ‘accounting irregularities’

As well as being mis-allocated, the payment came too late to be included in the 2017 accounts should have been accounted for the cash in the financial year to end June 30th 2018.

‘speculation that the debt would have to be restructured’

On March 22nd enforcement action was taken against Wasps Finance Plc for late filing of accounts – a criminal offence – amid problems with its bond scheme and also structural cracks at the Ricoh which could materially impact upon its value.

The bond scheme was set up in 2015 to transfer the Wasps group’s £35million debts into bonds, with lenders rewarded with 6.5% p.a. until the planned return of their money in 2022.

In explaining its late filing, Wasps told the Coventry Observer it had been ‘driven by the requirements of the bondholder meeting held at the end of January’, adding that it had informed Companies House about the bondholder meeting and that the accounts would be filed later as a result of this, which they were happy with.

Wasps Finance Plc also confirmed that it had received consent from its bondholders having defaulted on covenants following its accounting irregularities.

However, Companies House said that the company was subject to ‘enforcement action’, explaining: ‘We are taking appropriate enforcement action to secure the filing of the overdue accounts but this is a matter between Companies House and the company.

Our aim is to secure compliance and bring the filing records up to date and we are taking the appropriate action to achieve this.’

The bonds are secured against the Ricoh Arena, which was recently estimated to be worth £60million, an increase of £12million on the previous valuation. It has now emerged that cracks have been discovered at the stadium, attributed to ‘ground settlement’, but that there will be no disruption to its day-to-day operations while it works with a structural engineer to remedy things.

Wasps also reported in December that, for the year up to June 2017, ongoing operating losses continued, but reduced from £6.2million to £1.4million.

However, the significant rises in annual revenue it has achieved since Wasps moved to the Ricoh Arena, after its 2014 purchase of the stadium management company, has been accompanied by large costs increases, affecting the bottom line.

A statement from Wasps’ Nick Eastwood in December read: ‘We take the events and circumstances surrounding the accounting of the cash contribution extremely seriously and have implemented various steps to strengthen the robustness of the Group’s reporting and accounting procedures.

‘The business has evolved significantly since we moved to the Ricoh Arena in 2015. We have continued to grow the business, reported record revenues and reduced operating losses as part of our strategy to build a stable foundation for our long-term future.

‘We welcome the continued support from our Bondholders throughout this time. We believe the proposals announced today represent important amendments that are in their interest as part of the Group’s ongoing development and commercial success.’

Wasps has continued to attract unwanted headlines on and off the pitch as the Daily Mail ran the rather dramatic headline: ‘Wasps mutiny! England stars Elliot Daly and Joe Launchbury set to leave over ‘broken promises’ on training facilities and contracts’; an exodus of its marquee players and doubts over its future at the Ricoh could hardly be seen as good for business.

Speculation is rife in Coventry, where supporters of Coventry City FC and Coventry RFC have tended to view Wasps as something of a cuckoo in their nest, and it is difficult to believe that in certain circles the failure of the Wasps ‘experiment’ would not be greeted with a large dose of schadenfreude; almost certainly starting in pages of one of Coventry’s newspapers of choice.

PwC provided a ‘Material Uncertainty Relating to Going Concern’ statement accompanying the accounts, dated today, which states: ‘The directors’ financial forecasts for the 15 months from the date of signing the financial statements show that the group is dependent on continued financial support from its shareholder to remain within its committed facilities and to meet the retail bond covenants.

‘There can be no certainty that this support will continue. This condition indicates the existence of a material uncertainty, which may cast significant doubt about the group and the company’s ability to continue as a going concern.

‘may cast significant doubt about the group and the company’s ability to continue as a going concern’

‘The financial statements do not include the adjustments that would result if the group and company were unable to continue as a going concern.’

The auditors’ commentary to the accounts published today, was damning, referencing ‘falsified’ evidence. Its ‘Material Uncertainty Relating to Going Concern’ statement adds: ‘The group and company are financed by a retail bond issued by Wasps Finance Plc which contains financial covenants based on the financial performance of the group.

‘During the year, the group failed to meet one of these covenants following an audit adjustment which resulted from a capital contribution from the group’s shareholder being incorrectly treated as revenue based on evidence which was found to have been falsified following override of certain management controls.

‘This covenant breach was subsequently waived and the covenant amended to allow shareholder contributions to be included in the covenant circulation.’

Wasps say they will strengthen the robustness of the Group’s reporting and accounting procedures.

Wasps responded with the following statement: ‘This was an isolated incident, entirely at odds with our policy of maintaining the highest standards of governance. The matter has been addressed directly and as we announced in December, a number of measures have been put in place to strengthen the robustness of the Group’s reporting and accounting procedures.’

A range of potential outcomes exist, one of which would be a sale and lease back agreement of the Ricoh; another could be that the club decamps despite its fulsome and oft-quoted gratitude for its new host city.

Certainly there are big questions about its ability to service its debt: the bond costs £2m p.a. in coupon payments to bond holders and will require £35m to be found when the bond matures in 2022.

This has led to much speculation that the company will soon seek to restructure the debt, and in the meantime holders of its bonds face a period of uncertainty, particularly if they feel they may have to trudge off before full time.