My Worlds Collide

I am obsessively interested in two things -- bankruptcy and Formula One auto racing. I feed the first interest through this blog. The second interest is tended to by watching way, way too much Formula One on television. Indeed, the best way to wind me up is to ask me if Formula One is the same as Nascar.

This weekend, my worlds collided when two Formula 1 teams -- Caterham and Marussia (shown to the right) --were placed in administration in the U.K., a procedure akin to chapter 11. I was going to resist doing a post, but now that Pat Fitzgerald over at Bankruptcy Beat has posted a story, I feel enabled.

On the business side, a lot has been written about how the cost model of Formula 1 is unsustainable. It probably is. A low-end budget just to go racing in Formula 1 probably pushes $100 million with top end teams like Mercedes, Ferrari, and Red Bull spending $300 - $500 million. Everything is private such that no one outside knows the finances for sure.

For teams like Caterham and Marussia which have seen little success, the financial payouts from the governing body and the sponsorship dollars do not cover costs. U.S. television commentator, Will Buxton, has a very measured and intelligent review of the situation, which includes the insight that in the 64-year history of Formula 1 there have been 164 teams of which only 11 survive today. The sport is Darwinian in the extreme, and gives meaning to the old saying that the surest way to make a small fortune in auto racing is to start with a large one.

On the bankruptcy side of things, the administration proceedings for Marussia and Caterham provide some evidence that the U.S. way of doing things is not uniformly bad. In a U.S. chapter 11, management would have remained in control of the racing teams as debtors-in-possession. The U.K. procedure has resulted in administrators being appointed to run the companies. Sitting from afar, it appears a main problem is that the administrators know nothing about the rarefied air at the elite end of international motorsport. A few F1 specialty blogs have said as much.

Marussia and Caterham are set to miss this weekend's U.S. Grand Prix -- 3:00 PM ET, November 2, on NBC -- as well as the Brazilian Grand Prix the following week. Both teams' futures are questionable in their present forms, and the likely best outcomes here are buyers, if buyers can be found. The value of the teams (and hence payment to creditors) will be maximized only if these teams can get back on the track pronto, at least for the season-ending race in Abu Dhabi. The U.K. administrators know this, of course, and have said as much in their public statements. At the end of the day, however, the administrators are not managers of international racing teams who have the knowledge and contacts to get this done. One wonders if the flexibility of a U.S. chapter 11 would produce different results -- indeed, one wonders whether the next insolvent Formula 1 team might want to find a jurisdictional hook for U.S. bankruptcy courts.

Formula 1 image courtesy of Jeff Schultes / Shutterstock.com.

Comments

[Mason]

I wouldn't complain if you made an entire blog about the intersection between credit, finance, bankruptcy, and Formula 1.

Spanish banking was as exciting as BrawnGP back around 2008.

Keep up the great work!

[Jim A.]

NASCAR is like figure skating....they are both named for things that have NOTHING to do with the current "sport" There is nothing stock in a stock car and they no longer skate figures in figure skating. I really don't understand why they there is an entire racing series where they bolt a farby plastic imitation family car on top of a custom made race car.

[Ginger Yellow]

Just got this in my inbox. Not what I expected from this insolvency:

Administrators of Caterham Sports Limited (in administration) work with Crowdcube to inject funds to propel Caterham F1 team to race at Abu Dhabi

Followers of F1 can pledge funds at #RefuelCaterhamF1 to help get Caterham F1 team on the grid on the 23rd November

£2.35million is target figure, with £10 the smallest amount which can be pledged

Productive discussions continue with a number of credible long-term investors in the company

Finbarr O’Connell, joint administrator of Caterham Sports Limited (CSL) and a partner at Smith & Williamson the accountancy and investment management group, said:

“This is the first time, to the best of my knowledge, that a restructuring process has used crowd funding as a step forward in getting a business back on its feet. We are really excited about this which we feel is an entrepreneurial approach and optimistic of a positive outcome.

“Our priority as administrators is to maximise the opportunity of a stable and long solution for 1MRT and have a better outcome for the creditors of CSL and other stakeholders. Meanwhile, the opportunity for reward through crowd funding should appeal to millions of fans and followers of F1 and sport generally all over the world.

“We are particularly indebted to members of the staff from the Oxford Leafield site. They are working without a salary to make this possible. Together with suppliers they are a phenomenally strong force behind the race team who are committed to helping to find a long-term solution for the company.

“Those who pledge support could see their name on the Caterham F1 car over the entire weekend of the final Grand Prix of the season. There are a range of unique benefits designed to appeal to keen F1 followers.

Henry Shinners, joint administrator for CSL and a partner at Smith & Williamson, added:

“We are working with Sara Thompson and our Corporate Finance colleagues within Smith & Williamson and remain in productive conversations with genuine and credible parties regarding the long term future of the broader Caterham F1 team. We are doing everything we can to secure a positive result for all parties.

“We believe that seeing the historic Caterham F1 team back on the grid will evidence the commitment of everyone involved and help to advance discussions with potential long-term investors in the business. It could be a momentous weekend.”

Finbarr O’Connell and Henry Shinners are restructuring and recovery specialists at Smith & Williamson.