Doubts about 777 Partners’ proposed takeover of Everton have grown after it was confirmed that a significant source of its funding is about to be turned off.
A-Cap, a New York-based financial services and insurance company, has provided 777 with hundreds of millions of dollars in loans and reinsurance business over the last three years but is now “exiting” its relationship with 777’s reinsurance subsidiary, 777 Re.
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Insurance industry rating agency AM Best downgraded the “long-term issuer credit rating” of two of A-Cap’s insurance subsidiaries last week and placed both ratings “under review with negative implications”, which tends to signal a further downgrade is coming. Companies with high ratings are considered to be safer bets, which helps them attract more business and borrow money at lower rates, with the opposite being true for companies with low ratings.
A-Cap’s downgrade came after AM Best dramatically dropped 777 Re’s financial strength rating to C- this month, having downgraded the Bermuda-based firm from A- to B- in November. A C- rating is considered to be “weak” and means the company is “unrated” for investment purposes.
This is significant for Everton because 777 Re has been one of the few companies in 777’s portfolio of businesses to make serious money in recent years. 777 also intended to use a large proportion of the insurance premiums it collected via companies such as A-Cap to invest in other assets in the 777 portfolio, including its stable of football teams, of which Everton would be the jewel in the crown.
But 777 Re’s downgrade has meant A-Cap has been forced to withdraw all of its reinsurance business from the Bermudan firm in order to protect its rating, which will have a damaging impact on 777 Re’s prospects.
And with AM Best applying pressure on A-Cap to quickly sever ties with 777 Re and increase its own cash reserves, questions must be asked about A-Cap’s ability to continue lending money to other parts of the 777 Partners portfolio.
In a webinar arranged on Thursday to address customers’ concerns about the company’s downgrade, A-Cap boss Kenneth King said: “777 Re has been disruptive to A-Cap, in the sense that they went from an A- rating in November to a C- rating published just the other day.
“That’s unfortunate for a lot of reasons. One of them being that (777 Re) wasn’t being managed in the way it needed to be. But secondly, it’s created an emphasis for the ratings agencies to punish insurance companies who use unrated reinsurers.”
King added he disagreed with AM Best’s decision to downgrade A-Cap, and suggested it may have been an overreaction based on the agency’s embarrassment at rating 777 Re so highly only three months ago. He also tried to reassure the 200-plus people on the conference call that A-Cap’s own “rainy-day” reserves were adequate for its exposure to risk, with more than $400million (£316m) in capital.
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He then explained that A-Cap was in the process of trying to raise an extra $400million in capital to grow the business and boost its credit rating. He said this process was underway but admitted that the “noise” generated by the downgrades had made it more expensive.
The analysts, customers, investors and journalists listening to the call were invited to post written questions, with several asking for more clarity on how A-Cap intended to distance itself from 777 Re, which is now operating under the close supervision of the Bermudan financial authorities.
King said A-Cap had come under “significant amounts of pressure”, including from AM Best, to “recapture” all of the insurance policies it had passed on to 777 Re but had chosen to take a more “methodical” approach. This was because he felt A-Cap was not at risk, but 777 Re could have run out of cash if A-Cap had withdrawn too fast.
However, he said A-Cap would fully withdraw from 777 Re within 60 days and then cede those policies to reinsurers with A- ratings.
He was then asked to clarify A-Cap’s wider relationship with 777 Partners.
“A-Cap and 777 are not affiliates, by any definition,” he said. “A-Cap is a lender to 777 for businesses outside the reinsurance relationship, and A-Cap is a ceding company to 777 Re as a reinsurer. Those are the relationships, there is no affiliation.”
Formal affiliation or not, A-Cap holds a lien (a form of security) over the holding company that 777 co-founder Josh Wander uses to hold his 74 per cent stake in 777 Partners, making King a very interested party in the Miami-based private investment firm’s future.
It remains to be seen whether that future includes Everton or not, as it is now 24 weeks since the Premier League club’s owner Farhad Moshiri announced that he had agreed a deal with 777 to sell them his 94 per cent stake in the club, subject to regulatory approval. He and 777 originally said the approval process would take a maximum of 12 weeks.
The Financial Conduct Authority and English Football Association have given their assent to the takeover, although they are minor players in the overall process, with the Premier League recently sending 777 a raft of new questions about how the prospective new owners intend to fund the club going forward.
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In the meantime, 777 has already lent Everton £190million for the club’s running costs and to finish the construction of their new stadium at Bramley-Moore Dock. These loans have come on top of the huge sums Everton owe Moshiri and its previous lenders Metro Bank, MSP Sports Capital and Rights and Media Funding.
Moshiri will almost certainly have to completely write off the £450million he is owed by the club but that would still leave £550m in third-party debt, which is getting close to what most experts believe the club is worth, once the rest of the new stadium bill and cash to cover the club’s annual losses are factored in.
It is with this in mind that the league and 777 have agreed to hold face-to-face talks to find a resolution to the stalled takeover. No date has been set but it is hoped they can start in the next fortnight as 777 has signalled that it does not want to lend the club any more money, although it has done that twice before.
777 has declined to comment on the downgrades to its reinsurance business or A-Cap but has always dismissed any concerns about its ability to fund Everton or any of its other investments.
It has been dismissive of suggestions that there are credible rival bids waiting patiently for it to move aside, pointing out that Everton were for sale for at least a year before they agreed a deal with Moshiri.
Several names, mainly prominent U.S. sports entrepreneurs, have been linked with a bid for the nine-time English champions but The Athletic has not been able to find any evidence that any new bidder will emerge unless all of Everton’s creditors are willing to agree significant discounts on the amounts they are owed.
Everton are 15th in the Premier League having just reclaimed four of the 10 points they were docked in November for breaching the league’s spending rules in the rolling four-year period to the summer of 2022. However, they are still at risk of another points deduction for overspending in the next rolling period to the summer of 2023, with a verdict on that case expected before the end of the season.
(Top photo: Josh Wander, centre, at Goodison Park in January. Alex Livesey/Getty Images)