Everton trim losses – but accounts lay bare critical importance of beating the drop

By David Owen

April 3 – The sales of World Cup star Richarlison and Lucas Digne have enabled Everton to report a reduced loss of £44.7 million for the 2021-22 season. This follows three consecutive years of £100 million-plus losses at the pre-tax level.

However, a close reading of the Toffees’ new financial report can have left supporters with few doubts about how dire the consequences of relegation from the Premier League for the 145-year-old Merseyside club – currently 18th ahead of a home game against Spurs on Monday night – might be.

The most detailed exposition of the club’s predicament comes in Note 1(c), where it is explained that directors produced detailed cash flow forecasts based on the survival and relegation scenarios. The paragraphs dealing with the latter, though extensive, are worth reproducing in full (italics are mine).

In a relegation scenario, the club says, it would: “review its costs base, trading strategy and defer other planned discretionary expenditure in the short term to offset any likely reductions in revenue”.

It goes on: “Whilst the club has been able to secure longer term funding facilities during the year end 30 June 2022, some of these facilities include a covenant that assumes the club will remain in the Premier League, therefore the Board have had to consider the scenario of relegation and the availability of these facilities in that scenario. The providers have indicated that they remain supportive to the group under each scenario. However, at the time of approval of the financial statements, there are no contractual commitments in place that would guarantee a waiver of the amounts payable in full or in part and therefore relegation would require a material repayment of debt as per the contract.

“The Club is in advanced negotiations for additional long-term funding which we are confident will conclude favourably, however, the Board have acknowledged as part of their going concern preparations that at the date these financial statements are approved, there is no contractual commitment to this funding, and as such cannot be guaranteed.

“The Club is also in advanced negotiations to secure the next stage of funding for the Bramley-Moore Dock development for the new stadium. Heads of terms have been agreed in this regard and we expect to have concluded in the next couple of months. However, these are not legally binding as at the date of approval of the financial statements and thus also cannot be guaranteed.

“The Club remains reliant on the support of its majority shareholder, who has provided a letter of support to the Board confirming the intention to provide ongoing financial support for a period of no less than 12 months from the date of approval of the financial statements but this does not represent a legally binding commitment by the majority shareholder.

Collectively, the above conditions indicate the existence of a material uncertainty that may cast significant doubt about the Group’s ability to continue as a going concern. The Board are confident that if the Club is relegated funding will be secured or refinanced and that they will be able to achieve the levels of revenue and savings to allow the Group to continue in operational existence for a period of 12 months after the date of signing these financial statements. However, whilst the Directors acknowledge these uncertainties may cast significant doubt on the entity’s ability to continue as a going concern, they still feel it is appropriate it is to prepare the financial statements on a going concern basis.”

The accounts put the proportion of share capital owned by Blue Horizon Investments, an Isle of Man-incorporated entity wholly owned by Farhad Moshiri, at 94.1%. A share issue involving the capitalisation of £100 million of shareholder loans from another Moshiri-controlled vehicle Bluesky Capital was conducted during the year, resulting in 33,333 new shares.

Also worth reproducing is a paragraph of the auditor’s report, dated 28 February 2023. This states: “We draw attention to note 1c in the financial statements, which indicates that should the club be relegated, it will require additional financial support from its majority shareholder, who themselves are reliant on support from their majority shareholder, who have indicated they are supportive of the group but the support is not legally or contractually binding. These matters indicate that a material uncertainty exists that may cast significant doubt over on the Group’s ability to continue as a going concern. Our opinion is not modified in respect of this matter.”

During the year, the club’s majority shareholder was said to have provided interest free loans of £230.5 million, “included in equity, with no agreed repayment date”. The balance of shareholder loan outstanding at year-end was put at £380.75 million. Since June 30, the club’s majority shareholder is said to have provided further interest free loans, also treated as equity, of £70 million with no agreed repayment date.

Progress on the new stadium has resulted in a substantial increase in assets under construction, from £20.3 million at 1 July 2021 to £168.4 million at the latest year-end.

The club said it had “successfully secured an increase of £50 million to the existing five-year credit facility with Rights and Media”. This had “the same repayment profile as the original £100 million facility”. This appears to be the five-year facility totalling £150 million referred to in a separate Note. This is said to incur interest “at a market value rate”.

There is also a Government-backed covid-related loan whose year-end value was put at £26.25 million.

Everton’s net debt position was said to have risen to £141.7 million, from £58.2 million a year earlier, as a result of investment in the playing squad and the new stadium.

The club recognised an “operating exceptional cost” of £10.5 million for “amounts payable in relation to a change in coaching staff” – presumably the departure of Rafa Benítez in early 2022.

The accounts also disclose that the club is involved in a “contractual dispute with a third party”. Amounts to be recovered are said to be “subject to on-going litigation processes, with the club believing it has a good prospect of recovering up to £10 million in damages”.

Last but not least, Bill Kenwright’s chairman’s report discloses that the Premier League has decided to refer the club to an independent commission for “an alleged profit and sustainability breach”. According to Kenwright, the club is “confident it remains compliant with all of the Premier League’s financial rules and regulations” and will robustly defend its position.

Contact the writer of this story at moc.l1716118177labto1716118177ofdlr1716118177owedi1716118177sni@n1716118177ewo.d1716118177ivad1716118177