Slavia football stadium: bankruptcy or another murky buyer?

HOT TOP|Politics & Policy|Companies
István Léko | 13.06.2012

E Side Property, which owns the Eden stadium in Prague, is in trouble — virtually bankrupt and with no money to pay off its debts. It faces insolvency proceedings, bankruptcy or the sale to another investor.In terms of uncovering the murky past of E Side Property, the Czech public would welcome either of the first two scenarios.

But an equally opaque entity could also step in to buy it, motivated by a desire to ensure that past dealings between earlier owners and proprietors of the stadium — and high-ranking politicians involved with the dodgy brokerage Key Investments stay hidden. The politicians concerned could then in turn arrange for public contract allowing the buyer to recoup operating losses.

Vladimír Kroužecký, the former E Side Property owner and one-time key stakeholder in Key Investments (which is under investigation by the central bank and has lost its license), evidently is again is trying to gain control of it — with help from various Czech financial groups. The equity group Natland took over control last October, but Kroužecký retained a 20 percent stake, apparently as part of a broader settlement with Natland that did not result in him getting cash for the stadium.

According to Czech Position’s sources, fundamental decisions about the fate of E Side Property will be taken shortly. In this regard, representatives of Natland, the majority stakeholder, held inconclusive talks with creditors in early June. Politicians in Prague 6 and Prague 10, districts that together hold bonds in E Side Property nominally valued at Kč 170 million, have little choice but to sit idly by and hope for the best.

Hopes, plans and a shocking result

Financiers of Natland regret having done business with Kroužecký. When the deal was sealed last autumn, everything looked promising, and the group had big plans for the most modern sports stadium in the Czech Republic, home turf for the Slavia Prague football club. Kroužecký even talked of preparing for a listing on the London Stock Exchange, a pipedream confirmed at the time to Czech Position by Natland’s joint owner, Tomáš Raška.

When asked why controversial businessman Kroužecký was still on board with a 20 percent share in E Side Property, Raška had said the financier had good ideas about how the stadium and business connected with it, even though he was not in the past able to fulfill them.

Natland also clearly said E Side Property would not remain the Slavia grounds’ owner, as that would be transferred to a new entity, apparently to a fund that will come under the regulatory scrutiny of the Czech National Bank (ČNB). Neither did Raška rule out the possibility of the two clubs using the stadium for home games, Slavia Prague and Bohemian 1905, being able to take a stake in that fund. But this, too, did not come to pass.

The reality became clear to Natland this March after new leadership came to E Side Property and carried out an extensive analysis of the business. Managers found there was no money even to pay the interest on the bonds, amounting to just Kč 11 million. So Natland brought in a professional advisor to look address the situation, hired the auditing firm BDO, the consultancy PricewaterhouseCoopers and the legal services firm Salans. What they uncovered came as an unpleasant shock: instead of an expected Kč 3 million profit, there was a Kč 159 million loss. And that wasn’t the end of it.

In early May, BDO refused to make a pronouncement, for a number of reasons, among the most serious of which being the discovery of an overvaluation of assets by roughly Kč 1 billion — in the overvaluation of the purchase price of Eden stadium, for example, there is the risk that the real value of the structure is less than the book value.

Stated capital reserves, reported claims (against Hochtief) and liabilities (to Strabag) were also problematic, while the value of the Eden and Multifunctional arena Eden were estimated at around Kč 611 million though the stadium had carried the name Synot Tip Aréna (linked to the sports betting company) before Eden.

Working on the valuation was the Czech legal expert Otto Šmíd, who in January 2008 had put the theoretical maximum insurable benefits from the life insurance policies of Slavia football players at Kč 618 million. (According to the UK’s company register, the basic capital of E Side Property was increased by £21.1 million (Kč 611 million) on Feb. 14, 2011 — previously, the firm’s basic capital amounted to just £100). A general meeting of SK Slavia Praha– footbal, the company behind the team, decided to increase the registered capital to Kč 1.04 billion. The greatest in-kind contribution was made by Key Investments.

Šmíd’s finally made use also of Prague 10, which in 2010 had wanted to buy a 34 percent stake in E Side Property. No prizes for guessing who recommended him to the district and that it purchase bonds for Kč 117 million.

E Side Property as of early May 2012 owed a total of Kč 750 million. The largest insured creditor, the savings bank Česká spořitelna, was due Kč 323 million and at a high interest rate. Uninsured creditors include bondholders, especially Prague 6 (Kč 52 million) and Prague 10 (Kč 117 million), but also other municipalities. The debt service (interest on bonds and bank loans) is about Kč 40 million per year. In addition, E Side Property is involved in 35 lawsuits, the outcome of which cannot be predicted.

Despite these findings, Kroužecký rejects talk of irregularities in the books. As he told the daily Mladá fronta Dnes, Natland did well to buy E Side Property. (Incidentally, the Ministry of Finance is currently the only entity with which this “financier” communicates; he did not respond to Czech Position’s questions.)

Still, the equity group will only incur a minor loss for its misadventure. The creditors will have a harder time of it. Česká spořitelna, an insured creditor, has pledged cash flows to the stadium, so any variation in development will not result in great losses. In the event of insolvency proceedings, it would lose at most one-quarter of its investment. Bondholders Prague 6 and Prague 10, on the other hand, are the worst off, and would have to write off at least 70 percent; if the company fell into receivership, they would lose everything.

A report in the business daily Hospodářské noviny giving some hope to the districts that the bonds would be converted into shares of E Side Property appears not to be grounded in reality; they were issued in Slovakia, where such a transaction is virtually impossible. And even if it were, a return on the investment is not forthcoming.

Therefore, the high-ranking politicians that have or have had links to Key Investment are most inclined to see E Side Property in the ownership of another opaque company that would not dig into past transactions. In return, they will no doubt find a way to allow the new owner to tap into public funds, and the losses will disappear in due course. E Side Property bonds ultimately come due at the end of 2024, at which time the politicians responsible for and benefiting from the mess will no doubt be long out of office. 

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