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The Roar Rugby Project Part 3: Debt, windfalls, lessons learnt, and other myths

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Roar Rookie
17th December, 2021
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Rugby Australia is not supporting community grassroots rugby and consequently lost touch with its supporter base, resulting in falling revenues.

The Roar Rugby Project aims to document the challenges and opportunities facing rugby at all levels across the nation in the following articles. We are looking to Roarers’ experience as players, officials and supporters to find new solutions for the problems that have dogged the game over the last 25 years.

1. Introductory launch – an overview of the challenges facing the game
2. Financing rugby – revenue challenges all community and professional rugby
3. Debt, windfalls, lessons learnt, and other myths
4. The need for constitutional change
5. Supporting community rugby
6. Delivering elite professional rugby
7. Improving refereeing

It is no secret that Rugby Australia (RA) is losing money and is seriously in debt. RA has persistently promoted private equity as the best solution to refinance its debt and invest in community programs to build interest in the forthcoming Lions tour (2025) and the Rugby World Cup (2027).

It seems to me that RA is intending to borrow more money than it needs at an unaffordable cost while there are alternative choices available to borrow sufficient funds.

How a business raises money
Large businesses, like ASX companies, typically use owner equity from the issue of shares and bank borrowings to fund the purchase of their assets and their business operations. Small businesses use a different model where owners typically put up their house as security for a bank loan.


A banker lending money to a business is mainly concerned with how much is to be borrowed, what the funds will be used for, whether the borrower can service the periodic interest and repayments, and will the principal be repaid in full on the maturity of the loan. In most cases banks will take security over assets like property which can be sold if the loan is not repaid.

Traditionally an organisation like RA has not issued shares and is limited by how much it can borrow without security. At the same time, RA is relatively unique in that lenders accept it has a significant amount of goodwill and, to a limited extent, is likely to be bailed out by its support base.

However, the extent of RA’s indebtedness, its continuing losses, it has probably reached the limit that it can borrow without tangible security.

Andrew Kellaway. (Photo by Getty Images)

(Photo by Getty Images)

The value of RA’s goodwill
Goodwill is an intangible asset, it has no legal form, no defined dollar value, and cannot bought and sold. It does reflect future value that will be earned from embedded features of a business such as established contractual and customer relationships, or distribution rights for a popular product.

In 1995, when the game turned professional, rugby had built significant goodwill over the previous 100 years, built on the volunteer efforts of players, coaches and officials and the financial support of the rugby community through match attendance and similar support. This is what made the broadcast rights to professional rugby in the southern hemisphere so attractive to News Corp.

The initial value has been eroded by broadcasters, administrators, and players, over the next 25 years as crowds and support fell away, although no doubt partly due to falling Wallabies and Super Rugby performance.

How the PE structure works
The proposed PE transaction securitises RA’s goodwill, turning it from an intangible asset into a share security that can be bought or sold:
1. The borrower (RA) and lender (PE investor) agree on a calculation of the value of rugby’s future commercial rights.
2. RA sells the commercial rights at the agreed value to a new commercial vehicle owned by RA (‘Newco’).
3. Newco issues an agreed percentage of its shares to the PE investor who pays the amount to be lent.
4. Newco pays the money received back to RA as a part repayment for the commercial rights.
5. In perpetuity, Newco will receive income from the commercial rights and pay it to RA and the PE investor in proportion to their shareholdings.


For example, if the commercial rights were valued at $2 billion and sold to Newco by RA, and if PE was to take a 15 per cent share, then PE would pay $300 million to Newco, which would use the funds to part repay RA, and Newco would then owe $1.7 billion to RA. In the first year if $100 million income was received by Newco would pay $85 million to RA and $15 million to PE.

(Photo by Jono Searle/Getty Images)

Using Newco for a bank loan
Until now RA could not provide property security for a bank loan, like a housing mortgage. However, the commercial rights can now be used as security.

RA and the bank could agree that if the loan cannot be repaid or refinanced on maturity, then a similar Newco structure could be used, allowing the bank to have the right to take control of the income to be received from the commercial rights, until such time as the bank can be repaid. Once repaid, the commercial rights are restored to 100 per cent ownership by RA, far superior to the perpetual ownership of a PE investor.

The advantage of a bank loan is that fixed sums can be borrowed for repayment over fixed terms. With the increasing likelihood of hosting the 2027 Rugby World Cup a bank would consider there are strong prospects for repayment of the loan, or a substantial portion, with the proceeds of the Lions tour and the Rugby World Cup.

Samu Kerevi of the Wallabies is tackled

(Photo by Matt Roberts/Getty Images)

PE risks for rugby
1. RA remains responsible for all rugby operations, expenses and liabilities. Say, for example, the PE investor acquired 15 per cent of the commercial rights, then RA only receives 85 per cent of the income but is still responsible for 100 per cent of the expenses.
2. RA is already making a loss even though it receives 100 per cent of the income and is not investing in grassroots to grow the game.
3. It is important that RA invests the PE funds back into the game to generate increased revenues as soon as possible, and they have no track record of successful investment in the game.
4. It has been publicly announced, there is an intent to apply some of the funds in player salaries to keep big names in Australia. This assumes that keeping a future star players will increase rugby’s revenue, and will not result in general player salary inflation.
5. PE are the experts; they should successfully negotiate the minimum value of the rights and their upfront payment while maximising their percentage of future income.
6. Notwithstanding the minority 15 per cent position, RA has ceded control of its commercial rights to Newco. Newco directors are legally required to act on behalf of its shareholders not just RA.

If RA cannot return to generating cash surpluses it will eventually run out of money, which is consistent with its past performance. In my experience, in the event RA became insolvent, it would be highly unusual if the PE investor did not hold significant control over the commercial rights of Rugby Australia.

Rob Valetini of the Wallabies

(Photo by Will Russell/Getty Images)

NZ Players Association
In New Zealand an alternative has been put forward by the Players Association where Newco is floated on the New Zealand stock exchange. That would envisage the New Zealand rugby community having the opportunity to invest in rugby’s commercial rights.

It would give more flexibility to NZRU to only raise the amount of funds needed, not what PE wants to invest, at a lower cost than would be demanded by PE yet providing an attractive return to Newco shareholders.

I cannot see why a similar structure would not work here in Australia, although there would be higher upfront costs than PE, and directors would need to take responsibility for the accuracy of forecasts and additional public disclosures and accountability.

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Debenture finance
Possibly the most favourable lending terms would be available from the rugby community by way of debenture finance. Repayment could be over the term of five years and secured by the commercial rights has suggested in respect of bank finance above.

The requirements for debenture finance will be more onerous than a bank loan as it will be a public offer to individuals and will require a prospectus (or similar document) subject to various legislative and legal requirements. As for the listed vehicle option, directors would need to take responsibility for the accuracy of forecasts and additional public disclosures and accountability.

(Photo by Getty Images)

Unlearned lessons and windfalls
After moving closer to securing the 2027 Rugby World Cup, we are assured that the lessons of 2003 have been learnt. RA did not articulate what those lessons were, apart from an acknowledgement that the funds were wasted. The solution proffered was that instead, the funds would be transferred into a long-term investment vehicle to ensure the sustainability of the game.

There should be a substantial amount of funds remaining from the PE investment and with the expected returns in 2025 and 2027 there could be a very substantial amount of funds held in this investment vehicle.

What do you think?
1. Should we borrow money and repay it from Lions and Rugby World Cup proceeds?
2. What do you think of fund managers looking after $100 million of rugby money for the future?
3. What investment is needed into grassroots?
4. Should the money be spent on players?
5. What type of facilities should rugby be building?