Lancashire County Cricket Club 2022 Accounts

 In this post I looked at Lancashire County Cricket Club's (LCCC) for the period to 31 December 2019.  Where I reached this conclsion:"Lancashire certainly seems to have the potential to join Surrey as a consistently profitable enterprise.  But even assuming coronavirus can be put behind us there is a challenge for the club to ensure it's new found financial strength isn't dissipated on payments to executives and the cash drain of keeping its hospitality business up to scratch."

So now that the LCCC accounts for 2022 are available it's a good time to see if, post covid, Lancashire remain on the path to financial stability.

And it seems as if Lancashire have come through the covid crisis in good financial order.  The county still has a large amount of debt but the amount of debt has declined from £26m in 2019 to £22.5m in 2022*.  That's a good result, particulalrly given the disruption caused by coranavirus and it seems that the hotel built on the Old Trafford site is a big part of LCCC's financial success.  The accounts show hotel income of £5.4m but just £2.1m of associated overheads.  The resulting operating surplus from the hotel of £3.3m is before allowing for depreciation (An accounting apportionment of the cost of building and fitting out the hotel) and finance costs but even taking this into accout it seems likely the hotel business accounted for much of the £2.4m profit made in 2022.  

Counties such as Yorkshire and Warwickshire which are comparable to Lancashire have struggled to make money from their improved grounds once depreciation and interest costs are factored in.   But the hotel gives LCCC an additional source of income and of course being right next to the footballing Old Trafford helps.

Alongside the hotel revenue another element of LCCC's 2022 profit was a £1.6m gain on an interest rate cap owned by the county.  The accounts don't provide much information on the cap but what I think has happened is this.  Lancashire's debt post the 2019 refinancing is with Metrobank and is at variable rates of interest, bringing with it the risk that interest rates go up and erode profitability.  Somebody at Lancashire saw the risk and went out and bought an interest rate cap, putting the risk of interest above 3% with the counterparty.  Whoever made that decision deserves a medal.  It looks as if the cap was bought in 2021 for £0.2m but as inflation and interest rates started to rise the value of the cap increased to £1.8m by 2022 year end.  The profit of £1.6m is included in the profit and loss account and makes up a big slug of the total profit of £2.4m**.  As interest rates continued to rise in 2023 I expect the value of the cap will have further increased although it's not clear if the terms of the cap protect LCCC from all future interest rate rises.  

Lancashire's redeveloped Old Trafford ground is an aesthetic disaster.  But it has been well managed financially.  Yes a lot of debt was taken on and refinancing in 2019 was a stroke of luck, but the assets bought with the debt seem to be able to generate enough revenue to cover both interest costs and debt repayment.  Taking out the inteest rate cap shows the board can manage financial risk.

Of course financial risks still remain.  Although the total profit for the year was £2.4m, £1.6m represents the increase in the value of the interest rate cap and will be matched by additional interest payments due in the future.  The "true" profit excluding the cap revaluation is £0.8m, relatively slim pickings on fixed assets of £50m.  In my previous post on LCCC I identified what I thought might be long term risks to the county's financial performance. These were:

1.  The need to refurbish the hotel.  So far this doen't seem to be factor, in 2022 LCCC spent £0.4m on furniture, fittings and equipment compared to the accounts based replacement measure of £0.9m.  But this may be a problem in future years as the hotel will need to be kept up to scratch.

2.  Increased costs, particularly senior managment remuneration swallowing up increased revenues.  Payments to key management personnel (KMP) were just above £1m for the year not low for an organisation that makes low single figure million profits and Lancashire will be at or close to the top of the league for payments to senior management. But the total KMP payments for 2022 are lower than 2021, we aren't seeing the egregious levels of compensation characteristic of the ecb.

To these 2 risk factors I'd add a third - a potential interest rate squeeze dependent on the terms of the interest rate cap derivative.  And a fourth, hubris.  Lancashire hasn't stopped rebuilding Old Trafford, a new stand is in the course of construction.  The 2022 accounts disclose that as result total debt will peak at £33m.  That seems a lot and presumably the new borrowing will be at a higher interest rate.  Clearly management can say "well we've managed well so far" but that can sometimes blind people to the risks of an unknown and unknowable future.

*I measure debt as current assets (that is excluding fixed assets such as stands and hotels) less laibilities, but from liabilities I exclude accrued income (as it will be released to income in future periods) and grants to build stands (A piece of accounting silliness requires these to be disclosed seprately as liabilities rather than knocked of the cost of the buildings they have financed, so as I'm leaving out the buildings I need to leave out the associated grants.)

** Not clear whty not disclosed as an exceptional items as it is a one off.