Breuer: “Hertha is about to crash”

According to sports economist Christoph Breuer, Hertha BSC is “about to crash”.

IMAGO/Christian Ender

Hertha BSC is fighting at full speed for the license and cites the planned extension of the 40 million euro corporate bond as the central building block. It has been known since Monday that the club wants to postpone the repayment by two years to November 2025 – with an interest rate increase from 6.5 to 8.5 percent. A call for help, a last cartridge or a well thought-out move to use investor 777 Partners’ millions elsewhere – how does this plan affect you, Mr. Breuer?

It’s just part of the final cartridge for the license next season, albeit a necessary one. According to the half-yearly balance sheet, Hertha BSC has to repay 88.5 million euros of its total debt of a good 90 million euros this year, but only has cash assets of 1.3 million euros and receivables of 26.4 million euros to cover these short-term to service debt. There is currently a payment gap of a good 60 million euros. Added to this are possible losses from the entire 22/23 season. Sufficient revenue cannot be generated from player sales either. In addition to a capital injection from 777 Partners, it is therefore essential to stretch short-term liabilities in order to keep Hertha alive. The bond in the amount of 40 million euros is of central importance. However, there is still no talk of financial recovery. On the contrary, the capital costs for the bond increase. And it’s not yet certain whether this move will work. But from my point of view there is no alternative move. At the same time, however, negotiations must also be held with other creditors about extending loans.

“Investors also know that repayment is uncertain even in two years”

In the disclaimer, the Nordic Bond Investors Update sent to the bondholders on Monday, the club lists possible scenarios as a total loss for the investors and the withdrawal of a license if the bond is not extended. This puts pressure on the bondholders. In your opinion, what are the chances of success with this approach?

The clear indications are probably also due to the special information requirements of the financial market. Institutional investors should be aware of the risk of total failure even without this warning. Nevertheless, they also know that – as of today – the repayment is uncertain even in two years. In my opinion, the reference is therefore less about increasing the probability of approval for the extension.

“777 also faces the risk of losing a large part of its investment.”

Prof. Dr. Christopher Breuer

In order to be able to implement the extension, investor approval of at least two-thirds of the nominal amount is required. Is it realistic to get the necessary approval?

Yes, we know from research on financial behavior that there is something called loss aversion among investors. One wants to avoid losses and especially total losses as much as possible. However, this will not be a sure-fire success.

Plan A for the repayment of the bond was a bank guarantee from the new US investor 777 Partners in the past few weeks. So far there are none. What does that say about the strategy of 777 and the balance of power in the alliance with Hertha BSC?

It is clear that in the current situation, lenders have the upper hand and are more likely to dictate terms. However, 777 also faces the risk of losing a large part of its investment. You’re already sitting in the same boat to a certain extent. For 777, it’s about hedging its risks. And that would increase with a bank guarantee, especially since it is likely to become active when the bond is repaid with a certain degree of certainty. From my point of view, an extension of the bond is much more expedient.

According to reports, 777 Partners paid around 120 million euros to the former investor Lars Windhorst for the purchase of his Hertha KG shares and transferred the first tranche of around 25 million euros to the club when the contract was signed in March. Should 777 do everything possible in their own interest to secure the license for Hertha?

So-called “sunk costs”, i.e. investments that have already been made, usually tempt people to throw in more money. In fact, this does not necessarily make sense from the investor’s point of view. 777 should at least be relatively certain that further investments can actually contribute to the financial turnaround at Hertha. In case of doubt, it could make more sense for 777 to accept the previous investments as bad investments and not throw more money into a vat if there is no bottom in sight.

777 Partners is currently holding back completely in public. Is that a good sign?

I think that at least this doesn’t have to be a bad sign. The situation is complex and negotiations are likely to be intense.

“Hertha has bet on staying up for a long time”

Hertha writes in the investor update that the bond was “not refinanced earlier due to the lengthy negotiations with the new majority investor 777 Partners”. Has the club put off the 40 million problem for too long?

The liquidity bottleneck in 2023 was foreseeable, albeit not as clearly. The repayment date has been known for a long time, but one certainly did not expect such heavy losses to continue in recent seasons, which cost a lot of equity and liquidity.

“It is unclear whether Hertha will reach the saving branch and whether and how long it will last.”

Prof. Dr. Christopher Breuer

Schalke redeemed its 2023 bond early in October 2022 by exercising the call option. Has Hertha relied on the investor for too long?

The situation is not entirely comparable, as Schalke had just been promoted to the first division and had better refinancing prospects than Hertha now that they were relegated. The league membership already plays a central role for the refinancing possibilities of a club. So I would rather say that Hertha relied on their sporting success for a very long time, or at least placed a bet on staying up in the league. But this problem is pervasive in the football industry and is encouraged by the competition in the league. In addition, of course, one can often hope that investors or patrons will give another financial injection. You know that from Schalke 04 or HSV. We also know the so-called soft budget constraint. The state helps out when nothing else helps. Due to the popularity of football, local authorities or the state will step into the breach if necessary and provide bank guarantees, for example. Unfortunately, right now Berlin would be prominently represented in the football circus even without Hertha…

With a view to Hertha’s balance sheet figures, the sporting relegation that has been fixed since Saturday and the open license question: How close is the club to the abyss?

Hertha is on the brink, about to fall, but trying to reach the saving branch, through which she wants to avoid a total crash. It is currently unclear whether it will reach this branch and whether and how long this branch will carry.