F1 loans accelerate in popularity
A safe investment in F1 sounds like an oxymoron in the current economic climate. Three car manufacturers walked out on the sport over the past year due to the spiralling cost of competition and with team budgets averaging $159.4m this year one characteristic still required of F1 investors is courage. The alternative is innovation.
Renault is one F1 team which couldn't rely on the former attribute. The car manufacturer made a net loss of €3.1bn last year and to say that its F1 team has suffered setbacks is an understatement.
In February 2009 Dutch bank ING announced it would stop its estimated $65m annual sponsorship of the team at the end of the year to make cutbacks. This was followed by the team’s boss Flavio Briatore being banned from the sport in September when it was alleged that he fixed the result of the 2008 Singapore Grand Prix. Its lead driver Fernando Alonso was next to jump ship when he fled to Ferrari and the departures culminated in December with Renault itself selling an undisclosed stake in the team to Luxembourg-based Genii Capital. However, Renault's financial involvement didn't stop there.
One of Renault's aims was to avoid the mistake made by Honda which got no exposure through the success of Brawn GP in 2009 despite the team being funded largely with its money. Accordingly Renault kept a stake in its team, gets branding on the car and continues to supply its 2.4 litre V8 engines at an annual cost of $60m according to F1's industry monitor Formula Money. However these aren't the only connections the French car manufacturer has with the team.
In March this writer revealed that Renault has given a $27m loan to its F1 team in a deal equivalent in nature to a mortgage on a house. Just as a bank can repossess a house owned by someone who defaults on mortgage repayments to it, Renault can take over the assets of the team and its F1 grid slot if it fails to repay the loan.
According to documents filed by Renault's legal adviser Clifford Chance on 5 February 2010, the loan is secured on the team's commitments under the Concorde Agreement and all of its assets which had a net book value of $51.5m at the end of 2008. It isn't clear how long the team has to repay the loan, or if it bears interest. If the team ends up back in Renault's hands because it fails to repay, the car manufacturer could then either retain it or sell the assets and pull out of F1 entirely.
The loan was crucial to keeping the team on track due to its lack of a title sponsor and given the huge losses Renault itself has racked up it isn't likely that it would have agreed to simply provide cash in return for on-car branding. The loan is far easier for the board of the car manufacturer to justify since under this agreement it can expect to get its money back or secure assets which can be sold to raise it. In contrast, money spent on advertising or promotion gives a non-tangible return.
Funding deals involving loans are a growing trend. Contrary to many reports, Indian billionaire Vijay Mallya does not fuel his Force India team by putting cash directly into its bank account. In 2008 Mallya's Kingfisher airline directly invested $3.7m in sponsorship with a further $1.5m coming from Whyte & Mackay, his Scotch whisky company. However, with an after-tax loss of $48.8m in 2008, Force India needed more than this sponsorship to make it through the year.
In 2008 Force India's ultimate parent, Orange India Holdings which is co-owned by Mallya and former Spyker Cars chief executive Michiel Mol, gave the team a loan of $40.3m. Even this was not enough to see it through the year. Force India also needed a $21.8m bank loan but getting it was far from simple.
The team started 2008 with a battered balance sheet. In its accounts to the end of the previous year, the team's auditor Grant Thornton stated that its net liabilities of $93.3m “indicate that the continued support of the group's parent, Orange India Holdings Sarl is necessary if the business is to continue as a going concern.” It hardly made Force India attractive when it came to trying to secure a bank loan. However, the team had an ace up its sleeve and this was down to a loan.
One of the reasons that Force India's balance sheet was in tatters at the end of 2007 was that it owed Orange India $95.3m for a loan it had given the team to get through 2007. However, in 2008 this money owed was changed to equity and on its restated accounts for 2007 this reduced net liabilities from $93.3m to a surplus of $2m. Suddenly its balance sheet didn't look so bad and as an additional sweetener, the bank loans were also secured on the team's freehold property with Mallya giving a personal guarantee. The upshot is that it secured the $21.8m from the bank and the team is now enjoying one of its best-ever seasons.
Reports already suggest that Virgin's financial involvement in its eponymous team is in the form of a loan and it seems likely that BMW may have also taken this route with Sauber though we may never find out due to the lack of publicly filed documents for the Swiss company. Time will tell whether the loans pay off.