The Worrying Parallels Between Liverpool and Richard Petty

You buy a well known sports franchise, borrow heavily onto the company and put the team in financial meltdown, sounds familiar doesn’t it? George Gillett bought Evernham Motorsports Nascar racing team back in the summer of 2007 and the last few years has seen the team’s fortunes fall dramatically. Gillett bought the team with a loan from Wachovia (the same American bank that is involved with Liverpool) and a Uniform Commercial Code document filed with the state of Delaware where the team is based states that the “collateral” as being “all assets of the debtor” meaning the team rather than Gillett personally were responsible for the loan. If they were to default on their loan repayments the team would take the cost with the team’s garage assets and revenue from sponsors being repossessed by the bank.

When the economic crisis hit in 2008 then, all hell broke loose. A piece of misfortune started the troubles for the team now called Gillett Evernham Motosports. Chrysler who had backed the team with engines had to pull out due to their own bankruptcy proceedings, something which was happening throughout Nascar as the Big Three car makers Ford, GM and Chrysler cut costs and withdrew their backing for racings teams. Since, Gillett Evernham has gone through two mergers, early in 2009 with Petty Enterprises which renamed the team Richard Petty Motorsports after the stock car racing legend, and then late last year with Tate Racing, bringing with them backing from Ford which kept the team running.

The bank crisis meant that Wachovia, and the 12 other banks which had loaned money to Gillett to buy the team, demanded strict repayments on the $90million owed to them. Before the credit crunch, banks like Wachovia weren’t so strict on debtors breaking loan covenants but since they have clamped down significantly on debtors, including Richard Petty Motorsports. Covenants require debtors to keep a certain cash flow to keep up with debt repayments but Gillett and the team failed to do so, and have defaulted on the loan. Gillett is still in conversation with the creditors about the loan and continues to insist Richard Petty is in healthy shape, and that the default is down to “technical” issues rather than being late on payments, although rumours abound that payments are really the issue.

In Liverpool’s case, Wachovia even demanded last July that the loan should be paid back, rather than refinanced, but RBS renegotiated the deal so that the Reds had to payback £100million of the debt by 31st June 2010. Aware that they couldn’t afford to pay this, Gillett and Hicks have been trying to find an investor to pay back this much of the loan in exchange for a stake in the club. With the valuation too high and the lack of interest in getting involved with the two warring factions at the club, investors were not forthcoming. With the deadline looming, Hicks and Gillett have been forced to talk to RBS and Wachovia about different options.

Rather than defaulting on a loan like Richard Petty, Gillett and Hicks have decided to sell the club outright. To show RBS and Wachovia that they are genuine, they have allowed RBS to appoint Martin Broughton as chairman to work as an intermediary between the owners and potential investors. It also means that the American owners will have to step down as co-chairmen, leaving them with one vote each on a reshaped board that consists of people that RBS feels comfortable with, including Broughton, Christian Purslow and Ian Ayre, meaning the co-owners can be outvoted. They have also had to hire Barclays Capital to demonstrate their seriousness in finding a buyer and giving this search up to an independent company who will search for the best deal not only for Hicks & Gillett but also for the creditors RBS and Wachovia. All of this is in exchange for a six month refinancing of the loan so as to give the American owners and Barclays Capital time to find new investors. It is a significant development which will see Liverpool never having to go down the road Richard Petty Motorsports is already on.