Auditors' fears are a bomb in Liverpool's books
Auditors are paid to scrutinise accounts, not grab headlines, so it will have been with great reluctance that KPMG inserted a small bomb into Liverpool's books. It went off on Thursday morning as the club accounts and those of its holding company were published revealing a "material concern" about the viability of the businesses. "There is a material uncertainty which may cast significant doubt upon the group's ability to continue as a going concern," KPMG warned. Related ArticlesDossena wants Liverpool exitLiverpool to miss out on Silva'Concern' over Liverpool debtFootball images of the yearSport on televisionPaper View: Liverpool in financial dire straits; Cristiano Ronaldos £26m bonusWhile club sources and those close to the owners insist that the basis for the auditor's opinion is technical and the underlying reason common knowledge, the concern identified is real. Auditors are required to assess whether a company can remain a "going concern" for the next 12 months. These accounts were signed off on the last day of July 2008. On July 24 this year meanwhile Liverpool owners Tom Hicks and George Gillett are scheduled to repay a £350m loan to banks RBS and Wachovia. The accounts of the holding company, Kop Football (Holdings) Limited, also revealed that servicing the current debt cost Hicks and Gillett £36.5m last year. That is more than the football club recorded in profit before depreciation and other deductions, and three times the pre-tax profit figure of £10m. In simple terms, the football club is not making enough money to cover the interest incurred by the owners' acquisition loans, leaving them to pick up the shortfall. Hicks and Gillett are also underwriting Liverpool's competitiveness in the transfer market. The pair poured more than £21m into Rafa Benitez's transfer kitty last season on top of £12m in 2007-08, a commitment to the club that came in the form of an inter-company loan from another holding company, this one based in the Cayman Islands. Given the underlying business model, the absence of a refinancing agreement this time last year and the uncertainty in the credit markets, KPMG had no choice but to attach their caveat to the accounts. If that answers the why, the more important for Liverpool supporters is whether the Americans will be able to refinance, and whether the terms they agree will impact on the club's ability to compete for talent. Club sources are adamant that the club will continue to compete for the best players. Telegraph Sport understands that a transfer budget was agreed with Benitez before the end of the season and that the manager, notorious for his uncompromising demands for cash to strengthen the squad, is content with his resources. The owners' strategy for keeping him happy depends on successfully renegotiating the terms of their bank loans and wringing more profit from a club that, they believe, has underperformed commercially for a decade. Negotiations with RBS and Wachovia over the £350m loan began in January and the search for fresh investment from a third party continues, with Hicks and Gillett insisting that they will secure a deal. The Americans point to the football club's improved performance –commercial, broadcast and merchandise revenues were all up in 2007-08 – as evidence that the fundamentals of the business are sound. They are searching for a chief executive to continue that progress and there is confidence in commercial director Ian Ayre and finance director Philip Nash. They have already provided £185m in personal guarantees to satisfy the banks, but may be pressed for more, particularly as RBS's circumstances have been transformed since they last negotiated. The bank is now publicly owned, and while there will be no appetite for a government-backed institution discomforting a much-loved sporting brand, their terms have tightened. Whether the American's can meet the bank's terms remains to be seen, and evidence of their ability to do so lies beyond the accounts filed this week. What is certain is that Liverpool is now the most valuable sporting asset in either man's sporting portfolio and they will do all they can to hang on to it. Both are attempting to sell some of their US sports assets to provide them with ammunition should RBS require it. That fact, more than anything revealed this week, indicates their determination to remain in control at Anfield.
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