Financial StrategyThis section sets out a framework for the long term financial management of the RFU, particularly regarding the setting of the levels of investment in the game going forward. We intend that these ratios will be used in a similar fashion to the Treasury’s ‘Golden Rules’ and be used in our annual budgets and eight year projections to provide a framework within which we take the key financial decisions.
Objectives
Maintain a minimum level of reserves of £7.5m and grow reserves by a minimum of 2.5m each RWC cycle
453 In the first RFU Strategic Plan we set a Return on Capital Employed Ratio as one of the
key financial planning ratios. It has become clear that a ROCE target is not generally relevant to the RFU as a whole since the basic modus operandi of the RFU is to reinvest the majority of its financial surpluses back into the game rather than to generate the maximum return to our members/shareholders. There has been acceptance over the last year or so that planning and budgeting based on an incremental approach over the prior year is not appropriate for the RFU because of the uneven match programme combined with the current financial arrangements for RWC.
454 As a result, the Management Board and Council have agreed that we need to adopt a four year planning and budgeting cycle and set a the minimum level of balance sheet reserves to be maintained over this cycle. This minimum level has been set at £7.5m for June 2005 onwards, a level that would allow us to absorb the loss of one major international (all revenue streams, not just match day) or the loss of two major sponsorship properties or a major downturn in the TV markets. We will set our cost levels in any one year so that the planned level of reserves never falls below this level.
455 As the RFU’s total net worth increases going forward, the minimum level of reserves needs to grow in tandem and we have set ourselves the target of increasing reserves by a minimum of £2.5m in each four year RWC cycle (subject to a minimum of RPI increases). In practical terms, with the projections showing a loss in 2007/08 of £2.7m, we need to produce a profit in the three non-RWC years of the current cycle of approximately £5.2m.
456 Adopting the minimum level of reserves as our key financial planning parameter helps us avoid the rather unhelpful and unproductive debate that we have had in recent years over the appropriateness of our cost levels, a question to which there is no right or wrong answer. If costs are set at such a level that we are achieving our agreed reserves objective, then the debate can focus more helpfully on the most appropriate allocation of our scarce resources amongst the various programmes, given the agreed objectives and strategies.
Maintain minimum cash balances of £10m
457 In addition to a minimum level of reserves, we should also plan to maintain a minimum level of cash balances to cushion us against an unexpected long term decline in projected revenues or a major change in our cost levels (such as insurance premiums, for example). A minimum level of cash means that we will have sufficient cash balances to ensure that we do not need to resort to short term crisis measures should we incur an unexpected significant profit and loss account deficit in a particular year. This will enable us to respond to any change in our financial situation in a planned and well-thought through manner.
Maximise the RFU’s gross profit to fund investment in all levels of the game
458 Since the RFU does not exist to maximise shareholder/member returns, a bottom-line profit measure (e.g. profit before tax, profit after tax or retained profit) is not really appropriate. Notwithstanding this we need to introduce a ratio of ‘pure’ financial success, with the objective to maximise this ratio in order to increase the level of investment in the Elite and Community game. The measure that we have adopted is ‘gross profit’, being our net revenues after ‘cost of sales’ items which include all direct costs and the costs of the England senior team.
Achieve a minimum interest cover of 5 times and maximum debt/equity ratio of 2:1
459 In the first Strategic Plan we adopted, in common with many business organisations, control ratios for the amount we can borrow and the consequent interest burden as a ratio of profit. The key ratios are interest cover (the ratio of profit before interest and tax to interest payable) of five times and a debt/equity ratio (the ratio of net debt to shareholders funds) of 2:1. The Rules of the RFU set out our current borrowing powers, in particular Rule 4.2 which sets our borrowing limit at £50m. At this stage the £50m limit is not unduly restrictive (because of our high cash balances) but it is not best practice or indeed prudent to fix absolute levels for borrowings irrespective of the net worth position of the balance sheet. We therefore believe that it will be appropriate at some stage to move away from the absolute borrowings limit and replace it with the maximum debt/equity ratio of 2:1.
Minimise RFU’s effective tax rate
460 Tax continues to be a major financial issue for the RFU evidenced by the fact that in most years we have an effective tax rate significantly in excess of the statutory tax rate of 30%. Accordingly, we have set ourselves a specific financial objective of minimising our effective tax rate.
Achieve an annual distribution to members of a minimum of 50% of profits after tax
461 In the first RFU Strategic Plan, we adopted a policy of a minimum distribution of after tax profits to member clubs, similar to a dividend policy practiced by quoted companies. We set this minimum distribution level at 50% - half the profits being distributed to members and half retained for investment in the future of the game and our business activities. Because of the year to year fluctuations in the RFU’s profits, due to the bi-annual impact of the home Italy match, this ratio needs to be averaged over two years to ensure that clubs receive an annual distribution that does not fluctuate. The objective sets a minimum level of distribution. In practice we have distributed well in excess of these levels (for example, 68% in 2002/03 and 60% in 2001/02). We believe that we should continue with this policy as it provides a clear signal to our members that all clubs share in the financial success of the Union.
Maximise the impact of club revenue and capital funding to drive participation levels
462 ‘Investment based funding’, which was the generic term used to include the
introduction of conditional revenue funding and the establishment of the Capital Fund was implemented in 2002/03 with 2004/05 being the third year of the scheme. There have been some criticisms of the Conditional Funding scheme as being too bureaucratic and complicated. Our objective should now be to simplify the scheme and to ensure maximum impact and leverage of our funds, both revenue and capital.
Secure an appropriate financing package for the SSDP
463 The redevelopment of the South Stand is the largest project undertaken by the RFU and it will be vital to the success of the project that it is financed with the most appropriate package, by an institution that understands sport, NGBs and the financing of stadia construction.
Strategies and Plans
Establish operational reporting ratios to report on the health of the organisation
464 In addition to the key financial planning parameters included in the Objectives above, we have developed supplementary financial ratios which, together with the planning parameters, give us a snapshot of the financial performance and health of the organisation. These are described briefly below.
i) Revenue growth rate percentage This measures the Union’s success in generating top-line revenue growth. We have adopted a two-year rolling average in order to smooth out the “spikes” caused by the Italy match. The occurrence of the Rugby World Cup every four years and a New Zealand game every three years still produces an inconsistent pattern. It is, nevertheless, one of the key commercial objectives of the Plan to develop alternative revenue sources to smooth out these peaks.
ii) Business and administration costs expressed as a percentage of contribution This measures the efficiency of the management and organisation structure in generating business profits.
iii) The effective tax rate This measures the tax efficiency of the Union’s affairs and structure. Although it is subject to many influences outside our control, the Union’s current tax rate has historically been unacceptably high. The Plan assumes the implementation of the recommendations from the Mazars Strategic Tax Review and the tax rate is now forecast to be close to the statutory level, apart from years when we are close to break-even.
iv) Distributions to profit ratio This measures the ratio of distributions to profit after tax, against our target minimum of 50%.
v) Net worth growth This measures the overall growth in the Union’s financial strength. It is a good measure of the health of our finances.
465 Together with the financial planning parameters, these financial ratios make up a comprehensive financial scorecard, as set out in Table 11
Click here for Table 11: Financial Scorecard - P&L and Balance Sheet Ratios
Implement main recommendations of the Mazars Strategic Tax Review
466 Mazars have completed a thorough review of our corporation tax position and have produced a report with a set of recommendations which have been accepted by the
Management Board. We intend to implement the recommendations in the Mazars Report commencing in July 2005 with a view to minimising our effective tax rate over the period of the Plan. We believe tax savings of around £15m can be made over the Plan period.
Regularly review effectiveness of game funding mechanisms
467 Given the need to produce the maximum leverage from our direct funding to clubs, we need to review regularly the effectiveness of the funding mechanisms, including the optimal mix between revenue and capital funding. The current funding scheme was introduced in 2002/03 when we established the Community Rugby Capital Fund to be administered by the Rugby Football Foundation and introduced Conditional Funding, whereby revenue funding to clubs at levels three and below became conditional on meeting key game development criteria. Subsequently, conditional funding was adopted by FDR for season 2004/05 onwards, in accordance with the RFU/FDR agreement of May 2002. Concerns have been expressed by the game regarding the bureaucratic nature of the Conditional Funding scheme and this needs review and simplification.
Capital funding
468 It is widely acknowledged that the RFF has been a major success, giving clubs at levels five and below access for the first time to RFU funds for the development of facilities. The RFF gives grants and interest free loans, currently capped at £5k and £100k, respectively. The RFF has received grants from the RFU in its first two years of £600k p.a. and has allocated this as to £400k for grants and £200k for interest subsidy. Up to September 2004 the RFF has approved a total of £743k grants and £2.6m loans.
469 The RFF is managed by a Board of Trustees which is independent of the RFU. We believe that this arrangement provides a robust and independent approach to the grant approval process and prevents any interference in this process. It also provides us with an independent and ring-fenced distribution vehicle, which often can be important in securing Government funding. We believe the present arrangements regarding the RFF are working well and should continue.
470 Given the huge demand for capital funding by our member clubs, we believe that the majority of any increased distributions to clubs at levels three and below should be directed to the RFF. How this split is to be deployed is at the discretion of the trustees, but we should encourage extending the interest free loan scheme and the requirement for grant matching by the clubs. Grants must be matched on a 50:50 basis by funds raised by the club itself and this, combined with the loan element, provides a strong ‘self-help’ mechanism which ensures we get maximum leverage from the funds deployed. Given the large disparity between the demand for capital funding from the game and the funds available, this is an important feature.
Revenue funding
471 With respect to revenue funding, there are three different schemes, recognising the different requirements of clubs at different levels and, to a certain extent, the provisions of the legal agreements with FDR and the NCA. These schemes are for FDR clubs; for clubs in National Divisions II and III; and for clubs at levels five and below.
National Leagues
472 For FDR clubs, Conditional Funding was introduced for season 2004/05 onwards, as agreed in the RFU/FDR/PRL agreement of May 2002. The main weighting in the criteria is to facilities (50%), followed by coaching (14%), youth development (12%) and adult participation (12%), reflecting the role played by National Division I clubs. Assuming that the funding per club for National Division I clubs remains at current levels, RFU funds will, in future, be used for the following purposes:
- facilities improvements
- reasonable team travel
- coaching
- fulfilling ‘Beacon Club’ status
473 This new scheme effectively moves the emphasis of the conditions of funding from what clubs need to do to earn funding to what they actually must do with the funds. This would mean that the Conditional Funding scheme as currently operating would cease and be replaced by provisions governing how the club spends and accounts for central funds. In order to implement the new scheme, FDR clubs would be required to open a separate bank account to deal with central funds and provide an annual plan (in summary form) as to how the club proposes to spend the funds. At the conclusion of each financial year the club would provide a simple auditor’s statement certifying the use of the funds.
474 NCA clubs first implemented Conditional Funding in 2002/03. The weighting of the criteria is somewhat different to that for National Division I clubs, being more heavily geared to adult participation (20%) and youth development (20%) in addition to physical facilities (20%); this reflects the expectation that National Division II and III clubs should play a more active role in rugby development in the community than their National Division I counterparts. A significant issue regarding NCA conditional funding is that because of the commitment given during the approval process of the first Strategic Plan that no club would receive less than season 2000/01, very little of the NCA funding is effectively conditional; for example, total funding received by National Division I clubs will be £72k but the minimum amount receivable by each club is £67k.
Clubs at level five and below
475 For clubs at level five and below Conditional Funding was introduced in 2002/03 and has been revised slightly in the subsequent two seasons. The total amount distributed under the scheme is currently £1.9m. There has been a certain amount of debate as to whether Conditional Funding is achieving its objectives, both because of the relatively small amounts per club involved and because of the large number of criteria/questions involved.
476 In conjunction with the debate on the future direction of Conditional Funding, a task group has been looking at the crucial and difficult issue of insurance for the Community game. Because of the occurrence of (thankfully very rare) catastrophic injury and the associated liability issues that go with this, together with the general increase in public liability claims, insurance is now a very important issue for the game and it is realistic to assume that it will remain a major issue going forward. Currently the clubs’ compulsory scheme covers all players for catastrophic (and other serious) injury and referees and coaches for public liability arising from their actions. The total cost of this is £2.4m, of which the RFU pays £1.4m (being the total cost of all youth, mini and school teams plus a subsidy of senior teams of c17% of the total) and the clubs pay £1.0m.
477 The Insurance Task Group is examining three major issues:
i) Increasing the maximum benefit for catastrophic injury from its current level of £500k. As a guide, each £100k of extra benefit costs c£300k in premiums;
ii) Closing an unintended ‘loophole’ in the current policy by which those who do not have a ‘normal occupation’ (i.e. schools and students players) do not qualify for certain benefits. The preliminary estimate of the cost of this is in the region of £100k to £200k, depending on the level of benefits, excesses, etc;
iii) Exploring the feasibility of whether public liability insurance for clubs and club officials could be provided centrally. This is in the process of being costed.
478 Based on the above, we believe that there is merit in Council exploring whether revenue funding for clubs at level five and below could be provided by paying all insurance centrally in lieu of direct cash payments. The difference between the cost of £1.9m of Conditional Funding and the £1.0m paid by clubs in insurance premiums could be used to close the loophole described above and either increase the benefits for catastrophic injury, probably from £500k to around £700k, and/or cover any increase in net cost due to the centralisation of public liability insurance.
479 There are two features of this approach worth pointing out. Firstly, it provides the greatest subsidy/funding to clubs running the most number of teams (irrespective of league levels or whether teams play in the leagues), which, in its simplest form, is the aim of Conditional Funding. Secondly, there is a reasonably significant amount of administration involved with both the current Conditional Funding scheme (particularly regarding the requirement for CBs to audit 25% of clubs annually) and the insurance scheme. This administrative effort would no longer be required if the above scheme were to be adopted.
480 Notwithstanding the comments in the above paragraph regarding the possible elimination of the administrative burden associated with the current Conditional Funding scheme, it should be made clear that this is NOT the same thing as the Club Questionnaire which is important for a number of different reasons.
481 Insurance is an issue of strategic importance to the game and the best way for this to be taken forward is for the proposal to be discussed at the strategic level by the Finance Director, Community Rugby Director, the Chairman of Finance and Funding and the Chairman of the Community Rugby Standing Committee, as a task group of the Management Board. Any changes to the current arrangements would, of course, require the approval of Council.
Corporate Status
482 The requirement to raise significant external capital raises the issue of the best corporate vehicle for the RFU to adopt. It may be that a limited liability company (under the Companies Acts as opposed to the Friendly & Industrial & Provident Societies Acts) may be required or be more beneficial since this is the corporate structure better understood in the capital markets and could be a pre-requisite to raising capital cost effectively and with the minimum of conditions. In addition, if a securitised bond were the chosen route for raising capital, we would need to establish a commercial entity with all the revenue and cash flow generated within it for use as security.
483 In addition to the possible need for a corporate entity to access the capital markets, there are other considerations that we may need to take into account in considering any changes to our structures, as follows:
i) The increasing number of commercial ventures identified in the Plan will create a number of corporate entities along the lines of TEL. An Industrial and Provident Society may not be a suitable vehicle for owning these entities. For the purpose of commercial management and corporate governance, a limited liability company structure may be preferable;
ii) It may be advantageous to separate the commercial side of the RFU’s business from the governance and grass roots management side since, in many ways, the two do not sit comfortably together. Under a separated structure, the commercial arm would fund the governance and grass roots arm as happens today, but on an arms-length and transparent basis;
iii) The review of our tax structure may lead to the need to separate out various parts of our business and organisation into separate entities to improve our tax position; iv) Under a corporate structure, we could take the opportunity to restructure our balance sheet and reclassify the ‘new format’ debentures as a form of equity. This would negate the disadvantage of having a large long-term debt balance accumulate in the balance sheet over time.
No changes to our structures would be considered or proposed if they changed in any way the democratic control of the membership through the Council of the RFU. The issue of the most appropriate corporate structure, taking into account the above caveat, will be pursued with our financial advisors and tax advisors once the Plan is finalised and approved. Improving our tax position will, almost certainly, be a key consideration in any final proposals brought to the Management Board and Council for consideration. Any decision on changes to our corporate structure would require the approval of Council and the game in general meeting.
Financial Projections
484 Financial projections have been produced for the eight year Plan period, from 2005/06 through to 2012/13. The projections consolidate the South Stand project (as it has now been approved by the Management Board and Council) with the base projections for the RFU’s current activities. Clearly there will be many new projects/initiatives that will be approved over the Plan period. These projections show the scope for such investments based on our growing financial strength.
Profit and Loss Account Projections
485 The financial forecasts contain Profit and Loss Account have been prepared in both management account and financial statement formats in order to aid comparison and analysis. The commentary in this Plan is based on the management account format as that is the format we use for budgeting and monthly financial analysis.
486 The summary Profit and Loss Account projections are shown in Table 12. It shows a bottom line retained profit (our key measure, in accordance with the description in the Financial Planning Parameters set out above) of between £3.5m and £11.4m in non-RWC years, a £2.7m loss in 2007/08 and a £1.5m profit in 2011/12. For the two RWC cycles (taking the RWC year as the end year in the cycle) projected retained profits are £8m and £21m, in accordance with the objective of increasing our retained reserves by £2.5m each RWC cycle.
Click here for table 12: Profit and Loss Account £ms
Total Contribution Projections
487 Total group contribution projections are shown below in Table 13. Each individual contribution line (i.e. the RFU’s share of the net profit delivered by each of the main income streams) is explained in the following paragraphs.
Click here for Table 13: Total Contribution £ms
Ticket income
488 International match revenues are based on the new IRB Tours Schedule with two SANZAR and one non-Foundation Union match each autumn, except in 2009/10 when we are currently scheduled to play only one SANZAR nation, the other two matches being against Tonga and Argentina. In RWC years, it is assumed that we will play two warm-up matches at home equivalent to a non-SANZAR match. It is also assumed that we play the Barbarians each year in May as currently.
489 For ticket pricing, we have assumed that we will implement in full the premium price strategy approved by Council and introduced in 2004/05 and in the projections the price for the premium ticket band is increased by £5 each year throughout the Plan period until it reaches ‘market value’. Thereafter they should increase in line with inflation. For all other ticket price bands we have assumed a 4% p.a. price increase, which is significantly less than the price increases recently implemented.
490 The Six Nations and SANZAR matches are assumed to be sell-outs, whilst, for the non-SANZAR autumn internationals and the RWC warm-up matches, it is assumed that we achieve attendances of between 75% and 90% of a full ‘A’ match, depending on the strength of the opposition. For England v Barbarians we have assumed that the total match surplus grows by 7.5% p.a. from current levels as there is scope for increasing ticket yield because a significant proportion of the current ticket sales are discounted.
491 The construction of the South Stand is scheduled to commence in July 2005 and we have assumed that the lower tier will be completed in time for the 2006 Six Nations matches. This results in a net loss of 8,000 seats with a consequent loss in ticket revenues of £1.0m budgeted for 2005/06. Once the stand is completed, by autumn 2006, an extra 8,400 seats will be available and it has been assumed that these will be sold for the two SANZAR autumn internationals and Six Nations matches, generating in excess of a further £3m of revenues in a year with a full match programme. We have received approval from the IRB to stage an opening game and this has been assumed to take place in 2006/07 against a SANZAR country with total budgeted revenues of £4m (including TV, sponsorship, etc - but included in ticket revenues for the sake of simplicity).
Broadcasting
492 The current Sky TV contract expires at the end of 2004/05 and we have recently concluded negotiations for a new five year agreement, through to the end of 2009/10 at £10.4m p.a. The projections assume that we achieve a £1m p.a. increase on renewal in 2010/11 and that this continues for the balance of the Plan period. At the point of writing, the new deal with terrestrial broadcasters, for autumn international highlight rights and the senior cup rights, has not been concluded. At this stage we have assumed that there will be a drop in the rights fee achieved to £0.5m for the autumn international rights and that this continues for the Plan period. For the cup rights we have assumed that we will achieve £1.0m for 2005/06 and thereafter for the rest of the Plan period.
493 The new BBC Six Nations contract for £29m p.a. commences in 2005/06 and runs through to the end of the 2009 championship. The contract provides for £4m to be paid upfront by the BBC so the actual cash received will be £28m p.a. We have calculated our share of this income in accordance with the new revenue sharing arrangements and have assumed this stays flat throughout the Plan period.
494 Based on the above assumptions, total gross TV revenues are accordingly flat at £20.5m until 2010/11 when they increase to £21.5m. Under the LFA, PRL share in the ‘upside’ of TV revenues for international matches over and above those projected in the first Strategic Plan. This arrangement continues until the expiry of the LFA agreement in June 2009. The upside share declines over the LFA contract period from £1.6m in 2005/06 to £0.5m in 2008/09 and this accounts for the increase over that time in net TV contribution in the RFU Profit and Loss Account. After 2008/09, it is assumed that there is no upside payment to PRL as, if the arrangements were extended under a new agreement, we would have to exceed the new projections for there to be any entitlement.
Sponsorship
495 We have taken a conservative approach to sponsorship revenues, assuming no major increases in contract values and no new major sponsorship property sales. For the three main sponsors, Nike, Tetley’s and O2, we have assumed that each sponsor will renew at the end of 2007/08, with increases of 5%, 10% and 10%, respectively. For the Six Nations, we have based the projections on the new RBS contract values which means that revenues revert back to close to their value when Lloyds TSB was the title sponsor. For Investec, we have assumed that there will be no change from current values over the life of the Plan, and similarly for the National Cup sponsorship. The net result of this and the upside arrangements is that RFU sponsorship contribution does not change to any material extent over the eight years of the Plan, remaining at around £12m to £13m.
Twickenham Experience
496 TEL revenues and profits have been projected in detail by TEL management. TEL revenue patterns are similar to those of RFU ticket revenues in that they are driven largely by the match programme, particularly ticketed package revenues, TEL’s most important revenue stream. It is assumed that TEL continues to have 4,000 tickets available, as per the current arrangements, until the opening of the new South Stand facilities, at which point an extra 838 tickets will be available in accordance with the approved SSDP plan.
The projections are based on the assumption that TEL achieves a sell-out for the two SANZAR autumn internationals and the two main Six Nations matches in respect of the current allocation of 4,000 tickets and that the extra 838 packages are sold for three matches (i.e. an extra 2,500 packages per season). Conference and banqueting revenues are projected to grow significantly over the Plan period due to the new facilities provided by the South Stand, from current levels of £1.4m to £3.5m by 2011/12. Income from the Official Licensing Scheme introduced in 2003/04 is projected on the basis of the figures presented to Council on the approval of the scheme.
Merchandise and Licensing
497 Following the very significant increase in merchandising and licensing revenues in 2003/04, we have assumed that these revenues will grow only at the rate of inflation over 2004/05 projected levels, taking into account variations caused by the match programme, the RWC and the biannual launch of the England shirt. For merchandising, we have assumed that underlying match day, non-match day, internet and mail order sales grow by 3% p.a. at the current gross margin of 46%. In RWC years we have projected an additional £2m of sales. For licensing revenues we have assumed an underlying growth of £25k p.a. (c2%), with a £200k increase every second year due to the launch of the new England shirt and a £500k increase in world cup years. Once the new store in the South Stand is opened, which is projected to be in July 2007, match-day sales are projected to increase by 9% and non match-day sales by 32%, generating in total a further contribution of £0.2m. The net result is that merchandising and licensing profits grow over the Plan period, excluding RWC years, from £1.9m to £2.4m.
Stadium
498 The stadium is shown as a profit centre in these projections as in the management accounts. The main revenue stream is the rental income from boxes. The projections assume underlying growth at 3% p.a. from 2005/06 budgeted levels, based on the current split of boxes on lease agreements and those used for match-by-match sales. In 2005/06 we will lose c£0.9m of box revenues due to the South Stand project and from 2006/07 onwards the new South Stand boxes contribute £0.3m p.a. The other main stadium revenues are from hire charges and the projections assume the continuation of the current match programme, including a SANZAR/Barbarians type autumn match. The projections also assume that we host one ‘medium-sized’ concert each year from 2007/08 onwards (i.e. after the South Stand project is completed), at a net surplus of £250k plus inflation. This is a conservative assumption as our net profit from the two Rolling Stones concerts was c£1m.
499 The figures in Table 13 are net of stadium costs, which are mainly international match costs, depreciation and stadium fixed costs. International match costs are based on current levels and are driven by the match programme. Depreciation on the existing asset base is calculated on the current asset cost plus a ‘normal’ capital expenditure programme of £1m p.a. on assets with an average life of 15 years. Depreciation on the new South Stand will commence in 2006/07 at the rate of £1.2m p.a. For fixed costs the main assumptions relate to rates. We have assumed a compound increase in rates over the Plan period of 20% because, following the rating exercises in 1995 and 2000, the true rateable value of the stadium is well in excess of that on which our rates are calculated. However, increases in rates are limited to c20% per annum under current legislation and we have assumed that this will continue. Over the Plan period the 20% CAGR takes our annual rates bill from £0.8m in 2005/06 to £2.7m in 2012/13.
Hotel
500 The projections for the hotel are based on the projections contained in the Deloittes’ report which in turn are based on the detailed projections agreed by the RFU and Whitbread Marriott during the negotiations of the management contract, in conjunction with PKF and Deloittes. The hotel will contain 150 bedrooms and six VIP suites and the key revenue assumptions are an occupancy rate of 76% and an average room rate (in current prices) of £90. It has been assumed that the hotel opens in July 2007 and that there is a three year build to the projected occupancy rates. Operating cost figures are based on Whitbread Marriotts’ projections and follow industry standards. The depreciation on the hotel element of the construction costs of £22m is projected to commence in 2007/08 at the rate of £1.5m p.a.
Leisure Club
501 The projections for the leisure club are based on the projections contained in the Deloittes’ report which in turn are based on the detailed projections agreed by the RFU and Virgin Active during the negotiations of the management contract. It has been assumed that the leisure club opens in July 2007 and that there is a three year build to the projected membership. Operating cost figures are based on Virgin Active projections and follow industry standards. The depreciation on the leisure element of the construction costs of £10m is projected to commence in 2007/08 at the rate of £0.7m p.a.
Community Rugby
502 Community Rugby costs are now shown gross, with revenues from sponsorship and Government sources shown separately in contribution, instead of being netted off costs. This shows a truer picture of the total investment into the Community game. In the projections it has been assumed that revenue from Sport England via the Whole Sport Plan will continue for the Plan period at £0.6m p.a., the recently announced level of funding for rugby union (excluding the RFUW). It has also been assumed that revenues from PESCL, Community Sports Coaches, the Approved Coaching Centres and the UK Coaching Certificate will continue for the Plan period. In addition, the projections assume that the funding from R&SA continues throughout the Plan period at the rate of £150k p.a. To the extent that these specific funding schemes are discontinued, the expenditure in these areas would be reviewed accordingly.
Other revenues
503Other revenues comprise mainly perimeter advertising of c£0.4m per annum together with the net revenues from hosting the IRB World Sevens Series leg at Twickenham. This currently incurs a net loss of £0.4m, including the payment to PRL under the sevens/week end of rugby JV agreement. The projections assume no improvement from this position over the life of the Plan although there is scope to increase revenues so that that the tournament at least breaks even. In 2007/08 the RFU will move into the new office space in the South Stand and the projections assume rental income from the surplus space (c 10,000 square feet) of £0.2m p.a.
Revenue mix
504 One of the benefits of the South Stand project is the impact on revenue mix. Table 14 shows the revenue mix over the Plan period. The figures shown are from the Profit and Loss Account in statutory format and revenues are therefore gross.
Click here for table 14: Revenue Mix %
Operating costs
505 Total operating costs (which are those costs required to generate revenues and contribution - equivalent to cost of sales in a mainstream business) are shown in Table 15 . Cost projections are based on the proposed (2005/06) budgeted levels, inflated at 3% per annum, together with increases in strategic programmes in areas where further investment has been identified and contractual increases where relevant.
Click here for table 15: Total Operating Costs £ms
England Senior Squad
506 England Senior Squad includes the cost of the England team, the A team, the Specialist Coaches, Fitness and Notational Analysis. The projected costs of the England Senior Team reflect a number of major factors. Included from 2005/06 is the cost of the proposed new arrangement for the paying of players for international duty. This is estimated at £0.1m in 2005/06, increases to £0.5m in 2006/07 and then settles at £0.3m for the rest of the Plan period. The years 2007/08 and 2011/12 include the impact of participating in the RWC. This comprises players and management bonuses of £2.7m in RWC 2007 and £3.0m for RWC 2011, offset by savings of £1.5m in 2007 and £1.6m in 2011 arising from insuring the net bonus exposure. The preparation costs for the tournament are projected at £1.0m for 2007 and £1.1m for 2011 but this is offset by the agreed £3.0m contribution from the IRB, which the IRB are currently proposing is paid to each Foundation Union. The net result of the above is that the costs of the England Senior team actually reduce in RWC years compared to non-RWC years. The costs of the England team also include the cost of one Rugby League player, at a net cost to the RFU of £0.2m p.a., between 2005/06 and 2007/08.
507 The costs of the England A team include players’ fees at £0.4m per annum, following the agreement with PRL that the RFU would reassume liability for paying ‘A’ team fees, and the preparation costs of the Churchill Cup at £0.1m each year. The total projected costs of the ‘A’ team of £0.6m in 2005/06 assume a return to a full match programme of four Six Nations or Autumn games, plus the England v Barbarians fixture and two games in the Churchill Cup.
508 The costs of the other departments comprising the England Senior Squad increase in line with inflation with no major areas of new expenditure.
Elite Club Funding
509 Elite Club Funding includes all payments to PRL, ERL, FDR and the PRA. The payment to PRL is projected at the contracted amount of £5m p.a. (plus an extra £1m in RWC seasons) and this has been assumed to continue for 2009/10 beyond the term of the LFA. It has been assumed that the funding of FDR continues at the current rate of £1.65m p.a. for the whole of the Plan period. This will be changed to reflect any new funding proposals agreed by the National League task group. Elite Club Funding also includes payments to Premiership clubs in respect of the senior knockout cup and this is projected to continue in accordance with the current arrangements of 75% of the match fund.
Business and Administration Costs
510 Business and administration comprise the main ‘back office’ departments at Twickenham, including marketing, communications, IT and the secretariat, which includes the costs of Council. All costs are assumed to increase at 3% with no areas identified as requiring further resources. Over the Plan period, Business and Administration costs increase from £10.2m in 2005/06 to £12.3m in 2012/13.
511 Depreciation, comprising depreciation on all assets except the stadium and South Stand development not allocated directly to departments, is based on the assumption that non-stadium capital expenditure is £1.7m p.a. over average asset lives of five years.
Performance Department costs
512 The Performance Department includes the costs of the Sevens, U21 and U19 programmes, the England Rugby Academies, Elite Coach Development, Elite Referees, Elite Support and Performance Services. All costs are assumed to increase at 3% p.a. except for those items discussed separately below.
513 The costs associated with the Performance Director include the costs of the students RWC, at £0.1m in each of 2008/09 and 2012/13.
514 The projections assume that the U19 World Cup continues on an annual basis throughout the Plan period, but that that the U21 World Cup switches to a bi-annual basis after the 2006 competition, as agreed by the IRB. The costs of participating in the tournaments, of £0.1m each, are not, however, material.
515 The Sevens department includes the net costs of participating in the IRB World Series 7s. Included in the projected costs is team sponsorship revenue of £0.3m throughout the Plan period. The net costs stay consistent in the eight year projections at £0.2m to £0.3m, except 2010/11 when it is assumed we compete in and win the Commonwealth Games at a cost of £0.2m.
516 Elite Coach Development includes all the Academy and age-group team coaches. The full headcount will be completed in 2005/06 with the addition of two new coaches and a coach educator. Thereafter costs increase only by the 3% inflationary factor.
517 For Elite Referees, it has been assumed that one more FTR is added to the current compliment of five in 2005/06 and a further one in 2007/08, to give a total at that point of seven, and that these positions are jointly funded by PRL. All other Elite Referees costs increase by 3% p.a..
518 Having stabilised the funding for the England Rugby Regional Academies, it is assumed in the projections that the total cost remains at current levels plus 3%. If a new incentive-based funding scheme is introduced, as is the plan, it will be funded from this ‘pool’. Departmental costs are budgeted to increase to £0.3m in 2005/06 with the recruitment of an additional senior resource but thereafter there is no further increase.
Community Rugby Costs
519 Community Rugby costs include the costs of the Twickenham infrastructure, the field-based workforce, ‘funded’ projects (i.e. those programmes funded by either third party sponsors or Government/Lottery sources), CB funding and all payments to non-elite clubs, including direct cash distributions to clubs at levels three and below which were formerly shown in the Profit and Loss Account after profits after tax. All costs are projected to increase at the annual rate of 3%, except where described otherwise below.
520 The Game Investment Department includes the cost of the Community Rugby medical facility/resource, projected to continue for the life of the Plan at £0.2m p.a. It also includes the current cost of distributing Touchline, post E-Day, of £0.1m p.a. and this is assumed to continue despite the move towards electronic distribution. The proposed budget for 2005/06 includes two additional Finance and Funding Executives to complete the compliment at four.
521 The costs of the Community Rugby Referees area increase by £0.1m in 2005/06 with the addition of an Education Officer and thereafter by 3% in line with inflation.
522 The Rugby Development department includes the cost of the RRDMs and RDOs. It is assumed that these costs remain at current levels plus 3% p.a. growth and that any restructuring following the RDO review will result in a reallocation of costs rather than any material change in cost levels. Funding for the core CBRDP programme is projected to remain level at £0.3m p.a. based on the experience gained on the commencement of the programme in 2004/05.
523 Coach Development costs are budgeted to increase by a net £0.2m in 2005/06 to fund the implementation of the new Coach Development structure, with a proposed four new Coach Development Officers.
524 As discussed in paragraph 502, it has been assumed that a number of major Government and sponsor-funded programmes continue for the Plan period and consequently the appropriate expenditure programmes also continue. The two major projects are PESCL and Community Sports Coaches.
525 The line in the profit and loss accounts entitled ‘CB funding’ includes the costs of direct cash funding, County Championship support and the costs of the England Counties XV. Direct cash funding is projected to increase at 5% p.a., as it was in the first Strategic Plan. The England Counties XV costs, currently £0.1m p.a., are projected to continue over the Plan period. Other items of CB funding are included in the relevant department’s cost lines. The major items are CBRDP funding (paragraph 522) and Active Sports support, both of which are projected to continue over the life of the Plan at £0.3m and £0.1m p.a. respectively. Further increases of CB funding for specific projects and/or extra responsibilities will be budgeted as necessary in the annual budget process.
526 Community Rugby Club Distributions include all payments and payments-in-kind to clubs at level three and below. Direct cash funding has been projected to increase at the compound rate of 5% p.a. from the current level of £4.0m in 2004/05 to £5.9m by the end of the Plan. Depending on the approval of the revised funding arrangements for these clubs discussed earlier in this section, this increase would fund increased insurance benefits together with increased capital grants and interest-free loans via the Rugby Football Foundation. The policy of the RFU is to distribute a minimum of 50% of after tax profits. The amounts included in the Profit and Loss Account actually result in a distribution ratio of 44% over the eight years of the Plan and so, assuming we hit the projected profit levels, we would increase club distributions to reflect our policy.
Net interest
527 Net interest comprises in most years interest receivable as the RFU is debt free, except for the years 2006/07 to 2008/09, and is based on the significant cash balances that are built over the Plan period. The only year when there is net interest payable is in 2007/08 when net cash is at its lowest. Interest on the South Stand bank loan has been projected at 8%. Other interest payable is a small amount on the club loan scheme which is borrowed from the bank on a favourable basis as part of the agreement with the current bankers, Natwest.
Taxation
528 As described in the Strategies section, tax has historically been a major problem for the RFU, with our effective tax rate usually significantly in excess of the statutory rate of 30%. We have now an agreed solution whereby the RFF will take over responsibility for delivering the charitable elements of the Community Rugby programme. This should ensure that our tax charge is close to 30% of our book profits and it can be seen from the table of Key Ratios that this is the case in all years except for those where we are close to break-even when, as in all taxable organisations, non-deductible expenditure has a disproportionate impact on the effective tax rate.
Cash Flow Projections
529 Table 16 contains the summary cash flow projections. It should be emphasised, as set out in paragraph 484, that these are based on current activities only. They show the scope that we have for future projects and initiatives over the Plan period.
Click here for table 16: Cash Flow £ms
530 The RFU’s operating activities are strongly cash generative because of the relatively high depreciation charge on the stadium and because all of the RFU’s main income streams are received in advance or, in terms of the main TV and sponsorship contracts, according to a payment timetable that is front-loaded for the season.
531 Payments to clubs and CBs represent the direct cash payments to clubs at levels three and below and to CBs and follow the main Profit and Loss Account assumptions.
532 ‘Normal’ capital expenditure is forecast at £2.2m p.a. (including £0.2m for TEL) for the years when the South Stand is being constructed as it is likely that during the main construction period we will not incur significant expenditure on other stadium projects. Once the project has been completed ‘normal’ capital expenditure is projected to increase to £2.7m p.a. which has been the approximate running rate in recent years.
533 The current debenture programme operates on a ten year cycle notwithstanding the fact that the actual debentures have a 75 year term. There will no debenture renewals in the years between 2006 and 2009 and the programme will restart in 2010. The projections assume a 75% renewal rate with a 5% increase annually in pricing.
Financing of South Stand and Use of ‘Premium’ Tickets
534 All national stadia rely on the use of a certain proportion of their tickets for ‘premium’ usage in order to achieve financial feasibility. This is necessary because of the relatively low utilisation of such stadia. The RFU has historically used debenture seats to achieve this ‘premium’. In the approved project plan we have allocated 50% of the tickets to the clubs and 50% for ‘premium’ use tickets.
535 The total estimated increase in capacity is 8,427 of which 50% (4,214) would be available to the clubs. The agreed allocation of the premium tickets is as follows:
Debentures 3,375 TEL corporate hospitality packages 838 Total 4,213
536 The main use of premium tickets is for debentures. The agreed project plan assumes that we will sell 3,375 South Stand debentures and the design of the stand includes debenture holders’ lounges which will be available to them on an exclusive basis in order to increase the attractiveness of the debenture offer. The projected split is 2,875 individual debentures at £5,500 each and 500 business debentures at £12,000 each, raising a projected total of £21.8m in 2005/06.
537 The SSDP financial projections show that, with the strength of the RFU’s cash position, we should have the opportunity to finance the project in a relatively traditional and straight-forward manner. The project plan shows that the project requires a total funding package of £81.8m, being the total capital cost of £85.9m less £4.1m provided by the project cash flows in the early years. It is projected that a total of £61.8m of this requirement can be funded by internal sources, comprising £40m of existing cash together with £21.8m from the issue of the South Stand Debentures. This leaves an external financing requirement, based on the SSDP projections, of £20m. It should be noted that this is based on annual projections which do not take into account day to day fluctuations in cash requirements and the total external funding needed will, in all probability, change because of this.
538 We have had a number of discussions with potential financing partners (our current bankers, RBS, together with a selected group of other institutions who are active in the sports stadia market) with a view to ‘sounding out’ the market before deciding how to approach the financing of the project. These discussions have been relatively informal but the most appropriate way forward is fairly clear and our conclusions, now approved by the Management Board and Council, are discussed below.
539 It is very unlikely at this stage that we would use the approach which has been in vogue in football recently, commonly known as ‘securitisation’. In such transactions, the lending (which is in the form of a corporate bond) is, essentially, made against certain specific and discrete revenue streams, usually broadcasting or ticket income. A special purpose vehicle is then created to separate out and ring-fence the appropriate revenues which are used to service the debt. The rationale for such financing structures is that they safeguard lenders against the financial instability of football clubs whilst at the same time providing access to capital that, without these mechanisms, would not normally be available. We do not believe that they are appropriate for the RFU (being expensive, complex and restrictive), due to the strength of our balance sheet and our overall credit worthiness.
540 We believe that, given the proposed size and nature of the transaction, the most likely route will either be a typical bank loan or a privately placed bond or a combination of the two. The short-term nature of the funding requirement (i.e. the funding is projected to be needed in year two of the Project and to be fully repaid by the end of year six) would tend to favour the traditional bank loan route since corporate bonds, inter alia, are typically for longer, fixed terms. Bonds, however, have been issued with relatively short maturities and do have certain key advantages (notably fixed interest rates) so the appropriate mix will be explored in depth during the financing process.
541 Based on preliminary discussions (and at interest rates prevailing at the time of writing), the likely interest rate that we could achieve on a fixed rate bond would be in the 7% to 7.5% range (we have used 8% in the projections). The bank market generally lends on a floating rate basis (based on LIBOR) so, whilst the interest rate at the commencement of the loan would be materially similar to that achievable on a fixed rate bond, we would need to explore the option of an interest rate swap to fix the interest on some or all of the debt.
542 In addition to the interest rate the other key terms of the financing will be the covenant package and the security required. It is important that the covenant package does not impose undue restrictions on our ability to manage the business in the future, especially given the objective in the Strategic Plan to develop business ventures. The previous loan with RBS (formerly Natwest) had extremely restrictive and penal covenants, mainly due to the lack of credit worthiness of the RFU at that time. Whilst this was not generally an issue as the covenants were not strictly enforced (mainly due to the size of our cash balances) it did cause us difficulty for the TEL transaction.
543 The security required by the lender will depend, crucially, on the size of the debt. We believe that, if the total amount borrowed was restricted to £20m we might avoid having to grant security if there is a robust covenant package, including a negative pledge. As the potential level of borrowing grows, the more likely it is that physical security will be required, almost certainly over the stadium itself, as was the case with the previous loan.
544 Our plans at the time of writing are that, since the loan will be required in year two of the project and repaid by year five, interest rates could be hedged at at around 7.5% to 8%, security may not be required and the covenant package should be light, a traditional bank loan looks the most appropriate funding route.
Balance Sheet Projections
545 Click here for Table 17 which contains the Balance Sheet projections for the Plan period
546 Fixed assets increase very significantly in the first two years of the plan as the bulk of projected expenditure on the South Stand of £86m occurs in 2005/06 and 2006/07. From 2008/09 onwards the annual depreciation charge of c£9m to £10m is significantly in excess of the projected capital expenditure of £2.7m and fixed assets consequently decrease by c£7m p.a.
547 Other net current assets, comprising current assets except cash less current liabilities, are negative in the first half of the Plan period and then move into a positive position due to the debenture programme.
548 As discussed above, we are assuming that we will need a loan of £20m for the South Stand project and this is taken out in 2006/07 and repaid in 2008/09 and 2009/10, once the majority of the expenditure on the construction is completed. It should be noted that net cash never actually falls below zero (i.e. we never go into net debt) with the low points being July 2007 and July 2008 when net cash is £6m. This means that we do not strictly speaking need the loan (although one of our key planning parameters is that we should maintain minimum cash balances of £10m) but it is prudent to project this due to day-to-day cash requirements during the main construction period
549 Long term creditors comprise mainly deferred tax which remains fairly constant during the Plan period at between £6m and £8m.
550 As described above the balance on the current 75 years debentures will remain flat in the early years of the Plan as there will be no renewals between 2006 and 2009. The South Stand debentures totalling £21.8m are projected to be issued in 2005/06. Thereafter, the cycle resumes and the balance reflects the nominal value of the debentures issued.
551 Retained reserves change each year by the amount of the bottom line retained profit or loss. As described in the section above on Financial Planning Parameters, the level of retained reserves is our key financial measure, with the target to have a minimum level of reserves of £7.5m and to grow reserves by £2.5m each RWC cycle. With projected reserves at June 2008 of £14.9m and £36.0m at June 2012, it can be seen that this target is projected to be comfortably achieved, although, as in the past, we would not expect to achieve these levels as, assuming we hit the gross profit targets in the projections, we would seek to reinvest a substantial portion of this back into the game.
552 The Minority Interest is projected to remain flat during the Plan period as, for the sake of simplicity, it is assumed that all of TEL’s profit after tax is distributed in dividends.
Back to RFU Strategic plan 2005/06 - 2012/13 contents |
