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Derby County Deal : Who’s funding it and who will control the Club

There is a lack of clarity over the nature of the rescue of Derby County from administration. This should be a source of great concern for the fans.

The involvement of Chris Kirchner, and the prospect of a deal being signed very soon, offers hope however the future is very opaque. The only way to save Derby County is by the involvement of somebody who has considerable wealth to lose – is that Kirchner?

Based on figures in the Administrator’s report, Mel Morris will need to write off around £124m owed by the companies in administration. The stadium which was bought by one of Morris’ companies for £81m, 4 years ago, may only fetch £20m resulting in a further £61m write off for Morris. £36m is required to pay debts owed to HMRC. Paying the minimum of a few million pounds to unsecured creditors is small change, but necessary, to avoid a further 15 point deduction next season.

According to the latest trading figures issued by the Administrator then an annual £15m loss will need to be funded by the new owner. The English Football League’s Profit and Sustainability rules only allow an average loss of £13m pa before points are deducted.

The spectre in the shadows, that is little mentioned, is MSD UK Holdings Ltd. A company formed on 29 June 2020 with shareholders in the US and Cayman Islands. £20m was borrowed in October 2020 secured on the Pride Park Stadium, car park, and the Moor Farm training ground; a further £3.5m was borrowed by the Administrators in November 2021 to keep the club afloat secured on the same properties.

In November 2021, Mel Morris’ company (Gellaw Newco 202 Ltd) that owns Pride Park stadium, borrowed an undisclosed sum from MSD UK Holdings secured against the Stadium. The debenture (security document) also refers to the Administrators.

Unless the Kirchner deal pays off these loans fully, then MSD UK Holdings will be a stakeholder in the future of Derby County and will have to consent to any takeover arrangement; a stakeholder whose corporate position on the long term future of Derby County Football Club is not public.

Background

In June 2018 Morris restructured the group to remove a number of legacy dormant companies and to create 2 new companies, Gellaw Newco 202 Ltd and Gellaw Newco 204 Ltd. These were formed simply to own the Stadium.

Structure established in June 2018

The Stadium was sold for £81m resulting in a £40m profit boost to Derby County Football Club Ltd ‘s accounts.

Extract from the 2018 accounts – Sevco 5112 Ltd (P&S – Profit and Sustainability)

This financial manoeuvre was deemed necessary as the annual losses being generated would have breached the EFL’s Profit & Sustainability threshold of an average of £13m per year. Failure to contain losses results in a points deduction.

In addition to this scheme, the Club changed the policy with respect to the writing-down (amortisation) of player registration rights and transfer fee levies. The consequence as described the in the EFL’s “Agreed Decision” was :

As a direct result of such breach, “the Club significantly reduced its costs in the years in question compared to other Championship clubs, which had the effect that, because of the FFP restrictions, they were potentially able to increase their spend on player purchases in those years compared to what would have occurred had they adopted the straight-line treatment which other clubs adopt”.

FFP – Financial Fair Play Regulations

It was this breach in particular that resulted in the 9 point deduction – this was in addition to the 12 point deduction for entering administration.

Losses

Mel Morris was appointed a Director on 19th August 2015; by June 2016 the Club owed him £73m. Each successive year until 2018 ( last published accounts) he provided further funding of £20-£25m pa. The Administrators report showed that the total amount, due to Morris, had increased to £124m owed by Gellaw Newco 203 Ltd, and £74m from Gellaw Newco 204 Ltd making Mel Morris a £200m unsecured creditor.

This does not take into account the monies owed to the range of other creditors of the Group. Depending on the nature of the final deal then this will be offset by the amount paid for by the new owner for the ground. Figures have been mentioned of around £20m which is £60m less than the original sale price in 2018.

Even though Derby County has significant gates for each home match, this, together with the other trading arms of the Club are insufficient to cover the cost base – how Kirchner would turn this around is a critical question.

Who is MSD UK Holdings Ltd (MSD)

MSD has made £23.5m of loans to Derby County which is secured on the Pride Park Stadium, car park, and training ground. A separate loan for an undisclosed amount is secured on the Stadium. This makes MSD a secured creditor ahead of preferential creditors ( e.g. HMRC, Administrator’s fees) and therefore a substantial stakeholder in the future of the Club.

MSD was formed in June 2020. Its shareholders are 3 other MSD related companies based in the US and Cayman Islands. The MSD Corporation was established over 20 years ago to invest the wealth of Michael Dell, the billionaire owner and CEO of Dell Technologies.

MSD received $208m in loans from its “Offshore funds”, in the 6 months to 31 December 2020, which it has subsequently leant to football clubs in the UK at an interest rate of 7.9% – 9.5%. MSD has no banking licence.

Bob Lyddon an International Banking Consultant has asked the question as to why MSD would risk over £20m on Derby County’s assets and continues to lend when the group is in administration and haemorrhaging money. He comments :

“Our understanding, gained from verbal discussions with people who have in turn had discussions with the administrator, is that MSD enjoys a further block of collateral backing the entire loan, and interest, and that it includes a property in Sandbanks in Dorset and two properties in Chelsea, which belong to the club’s former owner. If that is true, it betokens that MSD sees this collateral as its primary security for the loan it has made, and that the charge it has on Derby’s assets is held for the benefit of its former owner, on what might be known as a fiduciary basis: MSD are acting for someone else. What is the true version?…. MSD demonstrates characteristics of a shell company, with connections to two known tax havens.”

In the event that the Club couldn’t make the interest payments, MSD would be able to recover the loans by selling the Club’s assets.

The 1st 6 months of Administration

The whole group made a trading loss of £6.5m in the 6 months to 31 March 2022 ( this is before paying the Administrators/ creditors etc). This reported loss was reduced by a loan from MSD of £3.75m ( shown elsewhere in the reports as £3.5m). The wages were ~£9m which is around 60% less than the 2018 bill.

The consequence of this is that a further £2.8m of creditors will probably not be paid.

The Future

Any deal moving forwards will need to address:

  • Secured creditor – MSD ~ £23.5m + interest. MSD may decide not to call in the debt.
  • Paying off the preferential creditors , principally HMRC, totalling £36m
  • Paying at least 25p in the £ ( necessary to avoid a 15 point deduction) of the unsecured creditors. At present this is around £1m but could rise to £2-2.5m.
  • “Ownership” of the Stadium to meet EFL rules. If it’s sold, numbers have been mooted around £20m which is a significant reduction from the £81m paid by Mel Morris. This could be bought by a 3rd Party/MSD?
  • The structural recurring trading loss that the Club generates. This must be sustainable at less than an average loss of £13m pa to avoid further points deductions.

Comment

Mel Morris supported Derby County with £200m of his personal fortune; Chris Kirchner’s personal wealth is not well documented. Sportsmail reported regarding Kirchner’s attempt to buy Preston North End:

Sportsmail has been told he never proved the source of his funding but did provide a bank statement showing a balance of over £60million. It is claimed Kirchner said he made the money from bitcoin investments.

It is also understood that Preston had to write the buyer’s business plan, needed to satisfy the EFL he could finance the club for the next 18 months. As one source said: ‘Preston never really knew if he had the money or where it came from.

‘It should not be from his online logistics company, because he has raised external finance to support that.

‘There was no ability to show he had a long-term, sustainable plan. Preston soon realised he was very unlikely to buy the club.’

Sportsmail 9 April 2022

Any deal must rely on significant 3rd Party funding. Given the current level of security then a potential candidate is MSD. They could buy the Stadium, and clear the preferential creditors and enough of the unsecured creditors to avoid a points deduction. Undoubtedly the loan would mean that they effectively “control” the club.

Understandably Derby County fans will want any deal that saves the Club. At this late stage it is unlikely to involve a wealthy philanthropist who will fund the losses without return. This inevitably means that Derby County will rely on a funder who’s motivation is strictly “commercial”.

In this environment there is no obligation on those funding the Club to explain their financial objectives, expectations, future plans, where the true influence lies, or how they will make the Club sustainable. However, the fans deserve to know where the money is coming from and who is actually controlling their historic Club.

Post Script

L to R : Paul Stretford, Chris Kirchner, Garry Cook at Pride Park during the QPR match. ( (Image: Nathan Stirk/Getty Images)

Kirchner’s recent foray into the purchase of Preston North End included Paul Stretford – Wayne Rooney’s career long agent, and Garry Cook, the ex-CEO of Manchester City. Tweets from Kirchner have stated that Cook would run the Club if he was able to close the deal.

Stretford is a Director of Triple S Sports and Entertainment Group Ltd which is 49% owned by his wife, and 51% by Shepherd Offshore Ltd. Shepherd Offshore had a 16 year association with Newcastle United from the early 90’s with Freddy Shepherd being pivotal in the Club’s successes. A funding option?

Stretford’s involvement sheds some light on why Rooney would stay as manager of Derby. Did he even have a choice?

Categories: Uncategorized

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