We need to come to some arrangement! Wasps retail bond 6.5% due 2022

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; the deal was intended to  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

Founded as Wasps FC in 1867, the Telegraph was in the vanguard in questioning the wisdom of the club saddling itself with such a high level of debt at the time it was dropping the ‘London’ part of its name and heading for Coventry’s Ricoh Arena; servicing the bond alone costs the club £2.1m a year.

Now the club has been 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.

The rugby club and Ricoh Arena group of firms wants bondholders to agree to waive a breach in the ratio of earnings to costs; the group also failed to deliver its audited annual financial statements and the independent auditors report on time which represents a further breach of the covenants of the bond.

The problem arose when auditors Pricewaterhouse Coopers noticed that a £1.1million cash injection from Wasps’ ‘ultimate shareholder’ Derek Richardson, was not accounted for properly, with the effect that the club had effectively overstated its profit by £1.1m by classing shareholder contributions as income.

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.

The effect of this was that Wasps failed to keep its EBITDA to finance costs ratio at the 1.5:1.0 for the year required by the covenants agreed with its bondholders.

Now Wasps Finance plc has issued the request for agreement to bondholders and has set out a series of revised terms which would allow shareholder contributions to be treated as income in the future and the breaches would be waived.

It is hoping bondholders will agree to the revised terms at a meeting on Jan 19^th but if bondholders vote against them, Wasps will enter into a period of negotiations with those holders

One measure of profit in its accounts for the year ending June 30^th 2017 showed the group profit fell to £800,000 from £3.8million the previous year; another showed an increased operating profit at £2.4m compared to £2.2m, while one measure of operating loss decreased markedly from £6.2m to just £800,000.

In announcing the accounting irregularity, chief executive officer of Wasps Holdings Limited, Nick Eastwood, said: ‘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.’

What does the trading statement say?

A statement in Wasps’ trading statement said: ‘Wasps Finance plc announces that it is requesting the Bondholders of its Retail Bond to authorise certain waivers and modifications in respect of the terms and conditions of the Bonds and provisions of the trust deed, summarised in the RNS announcement made today titled ‘Wasps Finance plc Launches Consent Solicitation in Respect of its £35,000,000 6.50 per cent. Secured Bonds Due 13 May 2022’.

‘Wasps is making this Consent Solicitation as a result of a reduction in Consolidated EBITDA for the financial year ended 30 June 2017 from £3.5million to £2.4million, which has been identified by the statutory audit of the Group by PwC.

‘The over-statement of Consolidated EBITDA was attributable to the improper accounting as income under IFRS of and certain accounting irregularities relating to a £1.1million cash contribution received by Wasps Holdings from its ultimate shareholder, which was incorrectly accounted for as income under IFRS in respect of the financial year ended 30 June 2017.

‘Due to the timing of receipt, the board of directors of Wasps Holdings and its auditors have also concluded that the cash contribution should be accounted for as a capital contribution made in the financial year ending 30 June 2018.’