F1 'debt' to scare teams back to table?

The ten Formula 1 teams are rumoured to be seeking new meetings with the sport's commercial rights-holders after it emerged that a vast proposition of income is being used to service interest payments on debts.

According to the UK's Guardian newspaper, team principals have been angered by the revelation that the sport's owners - private equity firm CVC Capital - are carrying a $5bn (?3.2bn) burden that accrues around $230m in interest a year. That figure is roughly equivalent to half of the total annual 'payout' received by the teams and, with the FIA attempting to force through cost-cutting measures such as the highly controversial standardised engine, has raised more than a few hackles in the paddock.

The Guardian reports that CVC - which bought F1 from a consortium of banks in 2006, before setting up Delta3 to run it - loaded more than $2.4bn of bank loans onto it during the leveraged buyout, with an additional $2.6bn in loans which it states it will not enforce to be paid back since it acts merely as a standard tax-reduction mechanism.

"There is anger felt from many teams," revealed one insider from the Formula One Teams' Association (FOTA). "We have had banks, oil companies, financial institutions and pharmaceutical companies with us as sponsors. We have raised this money. Why do we have to keep cutting costs? The sport earns a lot of money, so let's look at our share."

With nearly $500m in interest between November 2006 and the end of 2007, last year Delta3 registered a loss after tax of $458m on a turnover of $938m, leading to accountants arguing that the company will only be a 'going concern' if CVC - which, having recently invested $20bn in funds that are committed for ten years, insists it is a long-term investor - continues to support it 'to meet its liabilities'.

With teams again starting to display itchy feet only five years on from F1's famous if ultimately unsuccessful 'breakaway' threat, CVC has underlined that the constructors receive a greater share than ever before of the sport's profits under the terms of the current commercial agreement, with the prize fund having doubled from $250m a year.

Whilst that benefits the teams, though, it conversely means Delta3 has racked up further debt, but CVC director Nick Clarry contends that despite the credit crunch currently sweeping the globe, F1's revenues in 2008 have risen by almost 40 per cent to $1.3bn.

"There is a lot of headroom," Clarry reasoned. "Our revenues need to go down $400m before we have any pressure from the banks."

The Guardian adds that 'CVC must repay the majority of the $2.4bn loans on expiry in 2014', but the company says it is ahead of schedule on this count thanks to the 'excess profits' F1 generates.

The teams now want to re-open negotiations with Ecclestone and CVC, with still no formal commercial contract in place. Whilst Ecclestone points to the higher revenues produced by the greater number of races held in 'exotic' locations such as Bahrain, Abu Dhabi and Singapore, the teams are equally quick to stress the extra costs and logistics of travelling to such places too.

"What's changed since [2006] is the teams have seen how much debt CVC has put on the sport," urged one FOTA insider. "We thought CVC's interest was to get income from running the business - but not to such an extent that the sport has to perform to its maximum ability for five or six years just to recover the debt. This is why there is interest in new negotiations."

"The logistical costs are so high now," added another source. "[The championship] used to be twelve races, then a maximum of 17. There used to be 80 per cent of the races in Europe and now 80 per cent are across Asia - the costs to the teams are much higher now."

With no Concorde Agreement in place since the last one expired last year, F1's commercial rights-holders are getting increasingly edgy about FOTA's growing power. Delta3 recognises that the need to get a new agreement signed is its 'principal business risk', but following a meeting between the commercial rights-holders and the teams' finance directors, both Delta3 and Ecclestone are confident consensus can soon be reached.

"It provided a view of what the next few years have in store," said Duncan Llowach, a director of Delta3. "The numbers they will receive are well in advance of what was anticipated."

"For two years I've had a Concorde Agreement available for them to sign," added Ecclestone, "but the problem is they have so many smart-arses in the teams - doctors, lawyers, masseurs..."