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How Standard Chartered Can Rescue Its Disastrous Deal With Liverpool F.C.

Pity poor Standard Chartered (STAN.L), the investment bank that paid £80 million to sponsor Liverpool F.C. At the time, the deal set a new benchmark for top-flight football sponsorships and StanChart's money was welcomed as a warchest for Liverpool to use for new players. Success seemed assured.

A year later, and the deal is looking like a disaster: The club is mired in debt; it's engaged in a civil war with American owners Tom Hicks and George Gillett; the team crashed out of the League Cup to lowly Northampton Town F.C. and have won only six points from the first six games of the season: Technically, StanChart have hitched their flag to a club that's fighting relegation to the second rung of English professional football (although that fate remains unlikely).

Worse, fans have started selling protest shirts with "Standards Corrupted" on the chest and the bank's logo -- two intertwined ropes -- represented as snakes. American reporters' in-boxes are being flooded with Liverpool fans' email demanding the ouster of the club's owners:

How would you like it if a British "businessman" came over to the USA and destroyed the New York Yankees. Or the LA Lakers. Or the Washington Redskins?
None of this is StanChart's fault, of course; it's merely the sponsor. But the bank could execute a solution that might rescue its investment: It could help force Hicks and Gillett to sell the club at a loss.

Some background: Hicks and Gillett bought the club in 2007 with a £237 million loan from the Royal Bank of Scotland, and used the club itself as collateral to secure the note. That loan, plus interest and penalties, is now due. Hicks and Gillett would like to refinance it -- or better yet sell the club to new owners at a premium. (The club was bought at the height of the asset bubble and is currently classified as a "toxic asset," so selling it at a profit is highly unlikely.) RBS also knows that extra debt incurred either by the current owners refinancing or by new owners taking out a mortgage will only worsen its position and increase the likelihood of Liverpool going into "administration," a sort of structured bankruptcy. (The English Premier League imposes a nine-point penalty on any club that does this; Portsmouth F.C. was relegated from the league as a result of that maneuver last year.) It would also increase the likelihood of RBS having to take possession of the club to recover its loan -- and banks don't generally want to be in the business of sports franchise ownership.

The alternative is for StanChart to quietly encourage RBS to enforce an Oct. 6 deadline that -- absent new funding from Hicks and Gillett -- would allow the Scottish bank to take over the club and sell it at a loss on the value of the loans outstanding. All parties concerned would lose money on the deal, but they might lose less money than if they refloated the club on more loans.

If StanChart were feeling especially brave, it could suggest to RBS that Hicks and Gillett's ownership be divided into 10 tranches, and that each tranche be sold off separately in a sequence of share offerings to fans who wanted to own the club. (There's already a group of fans with banking counsel who want to do something like this, and other clubs such as F.C. Barcelona and Real Madrid are already owned by their fans.) That way, each offering would only need to raise £24 million or more from buyers before the bank could move to the next one. If more fans wanted to buy shares, then RBS could charge a premium on each tranche and actually make a profit on some parts of the defaulted loan or it could add an 11th and 12th tranche as demand required.

At the end of the day, such a scheme could transfer Liverpool into ownership that has the bottomless pockets necessary to run a club -- its fans. RBS could get its money back and maybe even profit. StanChart could even handle the public/private offering, and take a fee, and emerge as the bank that rescued the club. Everybody wins.


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