The SRU’s accounts – Going Concern

Possibly the single most important section of the SRU’s 2019/20 accounts is one of the few that looks forward to 2020/21. It’s likely this was the most challenging area to agree with the auditors given the uncertainty created by the Covid pandemic – the treatment of the SRU as a Going Concern.

Essentially this is an accountant’s way of saying a business has sufficient resources to meet its obligations for the foreseeable future. Practically speaking the ‘foreseeable future’ is likely to cover a period of at least 12 months from the date of signing the accounts but forecasts may well extend far beyond this period.

The auditors would have to have been satisified that the SRU’s projections and forecasts provided sufficient evidence that the entity could continue as a Going Concern. The accounts provide two main scenarios covering the key revenue generators for 2021 – the home games in the Six Nations and the Autumn Tests. Scenario 1 posits 50% attendance at the Six Nations and 100% in the Autumn. Scenario 2 reflects nil attendance at the Six Nations and 25% in the Autumn.

Given where the UK currently stands in the programme of vaccine rollouts, somewhere in between the two options seems most likely right now. Crucially though even under the worst-case scenario there is adequate room in the finances for the SRU to continue and come out the other side of the pandemic. There will be sufficient incoming cashflow from turnover, government grants and bank funding to pay what will probably be significantly reduced cash outflows for much of 2021.

Lost turnover

2020/21 should have seen three Autumn Tests and three home Six Nations matches, providing somewhere in the region of £16m of ticket income and another £5m-£6m in hospitality.

TV revenues should be up with deferred amounts from 2019/20 being paid in 2020/21. The Amazon deal for the Autumn Nations Cup was also far in excess of the normal receipts for November Tests (although may have been reduced slightly by the cancellation of some fixtures).

Income from the pro teams may see almost no ticket revenue which will take in the region of another £3-£4m off what might have been expected in a normal year.

The least easy area to assess is the hit to commercial revenues for the national side and pro teams. Most of the big deals are long-term and news on renewals has generally been positive but there will surely have been some sponsors that have fallen away and advertising revenue will have taken a hit.

Cost savings

Against that the SRU have proposed finding cost savings of £14m. A large element of this will come from salary reductions but there will be expenditure avoided eg costs of having fans attending events, travel for the under 20s to the World Rugby Trophy. Discretionary spending such as on fixed assets (with the exception of the Mini Murrayfield development) are likely to have been frozen and pushed back to later years.

Mark Dodson’s recent comments suggest he believes the SRU will deliver a reduction in costs in excess of that original target.

Government support

Like many businesses, the SRU have taken advantage of the Coronavirus Job Retention Scheme (furlough). The nature of their operations though meant that support was focused across the summer months. With players back in playing the impact of this funding stream will likely be relatively small for the majority of 2020/21.

The recently announced specific package of support for sport will have been very welcome at Murrayfield. The SRU have received £15m of grant funding and will also access a low cost loan of £5m. That compares to £135m for Rugby Union in England (£44m for the RFU; £59m for Premiership clubs; £9m for Championship clubs; and £23m for clubs below the Championship) and €18m for the IRFU. The situation in Wales is still under review but the WRU are looking for between £30m and £40m of support from the Welsh government. So far £13.5m of grants is all that’s been confirmed in relation to rugby in Wales.

Bank funding

During 2019/20 a £2.4m loan was received from the bank in relation to the construction work of Mini Murrayfield. An existing loan balance of of £3m was also outstanding at the year end for a total liability of £5.4m.

After the 2019/20 year end the £3m loan balance was repaid. In a world without Covid this would have been a significant milestone, representing an end to debts which have essentially been being paid down since they started to accrue in the 1990s. Unfortunately in a post-Covid world new facilities have had to be negotiated to get the SRU through a challenging period – although at least with a shorter expected time horizon than the old loans.

A working capital facility of £11.8m has been extended by the bank. With little to no revenue likely to have come into the coffers for a number of months between the Autumn Nations Cup and the Six Nations this funding is likely to be aimed at dealing with short-term cashflow issues.

A further revolving credit facility of £8.5m provides additional flexibility with amounts able to be drawn down and repaid with far fewer restrictions than a term loan. None of this amount had been drawn at the date of signing the accounts and, depending how the second half of the 2020/21 season pans out, it’s possible it may not be required, or at least only deployed for limited periods.

CVC deal

One of the biggest numbers in the 2019/20 accounts was the £8.4m recorded in the Income & Expenditure Account (and the Cashflow Statement) for income from interests in associated undertakings. This represents dividends received from Celtic Rugby DAC – the parent body of the PRO14 – and is the first tranche of monies relating to the league’s CVC deal.

Private equity firm CVC is acquiring a 28% stake in the PRO14 and the related dividends the SRU will receive from this are reported to total somewhere in the region of £30m. An element of this will be retained by the new commercial body set up by CVC and the Unions of Ireland, Italy, Scotland and Wales. This organisation will be responsible for maximising the TV, sponsorship and other commercial rights accruing to the league.

The majority of these dividends, including the £8.4m already paid, will be received directly by the SRU. It won’t lead to a bonanza for player wages and recruitment though. These amounts are effectively advances on future cash flows. Going forward amounts accruing to the unions from the PRO14 will be 28% lower to reflect CVC’s share.

The SRU will need to identify capital investment opportunities that will increase revenue (eg redeveloping Scotstoun, improving facilities at Murrayfield). Only in that way will this deal truly make Scottish Rugby better off than it would have been under the status quo.

The Future

If, as has been stated, the SRU have delivered the proposed cost savings then allied to the funding received from both the Scottish and Westminster governments it’s possible the worst of the damage from the Covid pandemic can be contained in the 2020/21 year end.

Beyond May 2021, the SRU will be carrying forward the £5m loan from the Scottish government – probably to be repaid over 5 years so £1m pa of cash will need to be generated to cover these payments. There will also be any residual amounts due to the bank from the short-term facilities. It’s possible these can be cleared before the year end – potentially by the SRU’s share of the profit from the Lions tour (if it goes ahead). If repayment is expected to take longer this may be consolidated into a term loan and those repayments will need to be factored into any ongoing budgets.

Ultimately, the SRU should be more than capable of weathering this storm. The auditors have signed off the accounts on the Going Concern basis. They have the support of both their bankers and the Scottish government. 2021/22 should see the Lions dividend (hopefully), further receipts from CVC and improved TV deals for the PRO16. There’s also the long mooted deal for CVC to acquire a share of the Six Nations which would provide another potential capital investment that could be transformative in terms of long term planning for Murrayfield without having to rely on bank loans.

In the early 2000s the SRU was saddled with bank debt in excess of £20m whilst generating turnover of just £22m. Even with the impact of Covid there should be no return to days as dark as those for the Union’s finances. Surviving the pandemic without having to resort to redundancies is within reach. The next nine months will show just how quickly Scottish rugby’s finances can return to ‘normal’ – hopefully somewhere in excess of the pre-Covid position.

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