NCFC Finances (Part One) - a few discussion points (long post)

1) Strategy from August 2004
Upon promotion to The Premier League in 2004, there were two strategy options:

a) Use any surplus cash to pay down debt as fast as possible
b) Use any surplus cash on the playing squad

Given the various announcements that the survival of the club was paramount, I would have thought strategy a) would have been adopted so that the club survival was never put at risk again.

However the club seems to have adopted a third strategy of spending surplus cash on fixed assets and from 05/06 only investing in the team what was raised from sales of players registrations or less (hence the profit on player trading).

Before we examine this strategy further we need to understand that what I am referring to as surplus cash. This is the surplus cash after running the club, player trading and servicing the debt as it was,
I.e., the cash the club had some discretion about its use.

Going back to these fixed assets in 2004 / 2005:

£k.
NU Community (Corner) Stand 2800
Jarrold Stand - 3rd floor fillout 1300
Carrow Rd. pitch (900 - 250 prior year) 650
Plant and machinery 519
FITC - new facilities 260
New press facilities 100
Colney 140
Motor vehicle 10
No detail in the Accounts 1093
Total 6872

Looking at that list based on my knowledge there was one MUST DO / CRITICAL item, i.e., finishing the work on the pitch due to Premier League requirement to avoid postponements due to flooding.
How critical was it to spend money on the other items? Could the spend on these items have waited?

Fixed Assets spend in 2005 / 2006: £k
Assets in course of construction 1497
Freehold land and buildings 2213
Plant & machinery 193
Total 3903

This spend probably related to:
Corner infill (Capital commitments in
the 2004/05 Accounts) 500

Office for rental in the Jarrold Stand
(Capital commitments in the 2004/05
Accounts) 830

Plant & machinery 193

Land bought from Norwich City Council 900

New road, professional fees re the hotel, etc. 1477
Total 3903

Apart from the last two items (900+1477), were the rest MUST DO / CRITICAL items that had to be done that season?

Fixed Assets spend in 2006 / 2007: £k.
New office facilities
(in the Jarrold Stand) for rent 400

Plant & machinery 121

Spaces for sport facility 500
New spine road 1200
???? 335
Total 2556

The new spine road and Spaces for sport facility were probably needed in order to open up
the land behind the Jarrold stand (Phase 2 development) in order to extract the value from it
but was the rest of the spend CRITICAL?

So theres probably £7m - £9m of fixed asset spend that probably (on the basis of the information the public has) could have waited until the club was in a better financial position.

The spare £7m or so (excluding the spend financed by outstanding loan) could have been directed to paying off one of the loan note tranches, say £6.37m. (As at 31/5/07 : £776k + £11958k = £12734k relating to two tranches. £12734k / 2 -> £6.37m.)
Servicing one tranche : £6.37m @ 7.67% interest rate = £488k
Capital repayment due in 07/08 (£776k page 32 of the 06/07 Accounts) / 2 = £388k
So if one tranche was paid off early, the saved cost (budget) of £876k (£488k + £388k) could have been focused on clearing the remaining debt even faster.

Now, why is this important, well if we continue to drift in The Championship then the number of season tickets are likely to fall off (we don’t have the size of waiting list we use to have) and there will be an impact on revenues. In addition I wouldn't be surprised to see an impact on revenues from match day catering, commercial and sponsorship etc. This would make the servicing of the debt harder and in turn impact on the budget for the football squad etc.

Imagine what the financial impact (and how hard it would be to service the debt) would be if we were to get relegated to Division 1!!!

The following point also relates to this one……..

2) Payback on fixed asset spend
With reference to two of the fixed asset items (mentioned in point 1 above) which I would have defined as non critical (unless someone can provide information to suggest otherwise):

a) Corner stand £3.3m (£2.8m in 04/05 + £0.5m capital commitments note in the 04/05 Accounts)
If I remember correctly the club has stated (in the local media) that the revenue from these extra seats would generate an additional £500k. per annum.
Excluding interest, the payback (assuming you can sell all the seats) = £3.3m / 500k -> 6.6 years
If the club can't sell all the seats each season then the payback gets longer.

b) Jarrold Stand offices for Broadland Housing and Connexions , £1.23m (£830k capital commitments note in the 04/05 Accounts and £400k in the 06/07 Accounts)
Lets assume the rental income is £170k per annum.
Excluding interest, the payback = £1.23m / 170k -> 7.2 years
This of course assumes that the organisations renting these offices are committed to a
rental in excess of 7 years. They may not be.

There are also two side points here:
1) Why is it costing so much to fit these offices out?
2) At what point do these offices need refreshing? 8 years? 10 years? So will these offices generate any significant contribution (money) that can be used on the football side of the club?

Was / is it worth the risk to the club to increase its borrowings to finance these fixed assets given the long payback periods?

3) Transparency of figures
I wish the club would produce tables of figures rather than charts (pages 6 and 7 of the 06/07 Accounts). In addition may I suggest that the figure of £5.9m (2006 restated £6.3m.) for 'Other operating expenses' in note 3 (page 23 of the 06/07 Accounts) is just too big not to be analysed further.

Posted By: Financebod, Oct 15, 19:10:06