Friday, 6 March 2009

The Reykjavik Reckoning

It is a sign of the times that the immediate future of West Ham United will be decided not in E13 but 1175 miles away during a bankruptcy hearing in Reykjavik municipal court, writes Owen Gibson in this morning's Guardian. Today is the day an Icelandic judge will decide if Bjorgolfur Gudmundsson has more time to sell the club and thus prevent creditors – in the form of banks in his homeland – from seizing its assets and forcing the club's sale. Even if things go to plan for the club's beleaguered Icelandic parent company, Hansa, and its lawyers manage to secure another three months' breathing space from creditors, it will be the last such deal they can strike, writes Gibson. It would, in effect, require them to sell the club by June, leaving only a narrow window between the end of the season and the new deadline.

Gudmundsson, who held a 41% stake in the stricken Icelandic bank Landsbanki that has since been nationalised, was unusual among those badly burned by the collapse of the economy in his homeland in that many of his investments were in his native country. West Ham were the exception and, when he paid £85million for the club in 2006, it was considered something of a rich man's toy in his homeland. Ironically, it is now the only asset staving off bankruptcy for Hansa. For Gudmundsson, the situation appears dire. For West Ham, there is still hope – provided he can find a buyer in a difficult market.

The court must now balance two competing forces. Logic dictates it would be unwise to force Hansa into a fire sale of West Ham at a knock-down price, because creditors would be unlikely to get a decent return, especially as the club's debt to its own banks of around £40million would have to be paid first. But it will also want to pressure Gudmundsson to speed up the process. With Hansa in administration, court documents from the last hearing in December stated it owed more than 19.5billion Icelandic kronur (£120million) to creditors with no obvious means of paying them back beyond a share swap and selling its main asset – West Ham Holding. Reports in Iceland have put the true debt figure at closer to 38billion kronur (£238million). In December, the company won a three-month payment cessation despite the insistence of MP Bank, one of its creditors, that it would be plunged into bankruptcy.

The club's owners are confident of securing another extension to the repayment cessation granted in December, when it argued that it would have a better chance of meeting its debt obligations if it was given the breathing space to conduct an orderly sale of the east London club. At that time, the court rejected the arguments of MP Bank, which is owed 5.4% of the total debt, because other creditors, many of which have a connection to Gudmundsson, agreed to give Hansa more time to sell West Ham. Following a recent meeting of creditors, MP Bank reiterated its opposition. Hansa's lawyers will have to show that serious progress is being made towards a sale. Yet even if the court did force Hansa into bankruptcy, West Ham executives are convinced the football subsidiary could avoid being placed into administration.

Asgeir Fridgeirsson, a longtime associate of Gudmundsson's who is now West Ham's vice-chairman, promised this week the outcome of the case would have no impact on the club. "Hansa believes that the progress that the club has been making shows the importance of continued stability," said Fridgeirsson. "There are alternatives and options. It will in no way affect the club." Gudmundsson is not putting any more money into West Ham but its banks are understood to be willing to continue to extend credit at least until the summer. If there is no obvious progress by then, their stance could harden too.

Meanwhile, the sale process overseen by Standard Bank continues. In December, it sent data on its debt levels, income, expenditure and salary ratios to potential buyers. The club is believed to have signed five non-disclosure agreements with interested parties but none has yet progressed to full due diligence. The stand-off may last until the summer, with prospective purchasers waiting for Gudmundsson to drop the price as the sale deadline nears.

They are also hoping for one other sizeable question to be resolved, namely the outcome of the tortuous Carlos Tevez affair. Sheffield United are understood to have put forward an updated £45 million claim to the independent Football Association arbitration panel which ruled in their favour last year as compensation for the cost of relegation from the Premier League in 2007. However, West Ham are ready to argue that the true cost of relegation was no more than £5 million once the associated savings have been factored in.

The tribunal, which is due to reconvene on March 16 to consider the size of damages to Sheffield United, came to the conclusion that Tevez had made a decisive difference in preventing the London club from being relegated two years ago, after being signed in breach of the League’s rules on third-party ownership. Led by Lord Griffiths, it also found that West Ham had been guilty of a further rule breach even after admitting breaking rules at the Premier League's initial independent disciplinary commission. That allegation is now the subject of a separate joint Premier League and FA investigation which is not expected to reach any conclusion until after the end of the season.

Sheffield United had initially argued for around £30 million in damages, based on a range of lost revenues, but are understood to have increased their claim following a second season outside the Premier League. West Ham have been granted access to the Yorkshire club's accounts and, following a line-by-line review, will argue that Sheffield United's claim largely relates to lost revenues. Having endured relegation in recent seasons, West Ham are aware that, as well as lost income, there are related savings in outgoings, notably clauses in player contracts that significantly reduce salaries. West Ham believe that they should be held liable only for the losses suffered by Sheffield United, rather than the overall impact on turnover.

However, while communication between the two clubs is expected over a potential settlement ahead of the March 16 hearing, a difference of around £40 million in their estimations of the claim would mean that significant compromise was required. Still, the possibility of an out-of-court settlement - always the likeliest end-game scenario in a situation like this - remains. It is an open secret that Sheffield United have been willing to negotiate for some time, providing West Ham first admitted liability by coming to the table. Now, for the first time, there are reports - thought to have emanated from Upton Park - that the Hammers are ready to talk.

Lawyers representing the two clubs are thought to have already been in private dialogue. Sheffield United are said to be convinced they have a strong case for a very substantial figure and will look to West Ham accepting a 'moral responsibility' for the Yorkshire club's relegation of 2007, over which the Premier League stood accused of neglecting one of its member clubs. How and when the money would be paid - with the Hammers in financial turmoil - is another question and a big one. Still, despite the potential cost, the imminent resolution of the damages claim will help in pushing through the sale of West Ham as the risk of a big payout to Sheffield United has necessarily complicated that process. If the settlement is sizeable, it will further hasten the need for an urgent sale.

Although of more immediate concern is the court date this morning. The Guardian reveals that whatever the outcome of the hearing today, a Premier League spokesman confirmed that any points deduction would only apply if West Ham United plc, itself a subsidiary of West Ham Holding Ltd, was plunged into insolvency. Any bankruptcy ruling against Hansa would not automatically invoke a nine-point penalty. However, if Gudmundsson himself were later to be declared bankrupt, under the Premier League's fit and proper persons test, he would be forced to stand down as a director and sell down his stake to less than 30%.

Club insiders argue that in many ways it is in better shape than it was 12 months ago, writes Gibson. Things are looking up on the pitch, with European qualification a genuine possibility. Despite fevered speculation, the club was able to negotiate the choppy waters of the January transfer window. Only Craig Bellamy was sold, at a good profit, and other key players were tied to new contracts. "The club continues to function well as a going concern," said a West Ham spokesman. "We're very pleased with the progress we've made this season."

Yet City sources say the hoped-for £250million sale price quoted by Hansa in Icelandic court documents in December is "highly unrealistic" in the current climate. That was based on the £230million paid for Manchester City plus a premium because the club is based in London. According to the court papers, Hansa told MP Bank that West Ham was worth "at least £200million". In a buyer's market where a clutch of other Premier League teams of a similar size are also open to offers, Gudmundsson may have to settle for less than half that figure. Assuming he and his executives make good on their promise to insulate West Ham from the fallout, there is still light at the end of a tunnel. The big fear for West Ham fans, argues Gibson, is not how much Gudmundsson raises but rather that he finds a buyer at all. As Liverpool fans are finding out again this morning, the once seemingly never-ending conveyor belt of prospective Premier League club owners is coming to a juddering halt.

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