According to several reports in the financial sector, the investors behind Dorna Sports S.L. are readying themselves for another sizable payout from the media rights holder for the MotoGP and WorldSBK Championships.
Using a bit of financial finesse, the move would see Bridgepoint Capital and the Canada Pension Plan Investment Board (CPPIB) – the two major investors in Dorna Sports – taking roughly €889 million off the books of the Spanish media company, according to Reuters.
As such, today’s news would make this the third time that Bridgepoint and the CPPIB have raided the piggy bank for motorcycling’s premier racing series, having done similar deals in 2011 (€420 million) and 2014 (€715 million).
The money being taken in this scenario is made accessible by what is called a dividend recapitalization, which is a way for investors to raise capital from an investment they own, without having to offer stock or securities from the business in exchange for the money.
The payout made from a dividend recapitalization is generally generated by the company taking on a loan or some other kind of debt, which is then used to pay the company’s investors or owner, in cash.
So, in the case of Dorna Sports, the media rights company will assume a debt from an unnamed creditor, and the money loaned to Dorna will be passed onto Bridgepoint and the CPPIB, to the tune of nearly a billion euros.
The effects of this transaction see Dorna Sports likely burdened with having to make payments on this new debt, which will affect not only the company’s creditworthiness, but also its operating capital for racing series like MotoGP and WorldSBK.
The move is however a strong one for Bridgepoint and the CPPIB, as they will have effectively secured a large sum of money, without presumably being on the hook for its repayment.
These investors also benefit from using Dorna Sport’s credit, and its ability to borrow money against the profits it generates from running racing series like MotoGP and WorldSBK.
This isn’t necessarily a bad thing, if Bridgepoint and the CPPIB can make returns on the €889 million that are larger than the interest rate that Dorna Sports must pay to cover the loan, then the net-deal comes out in the positive.
The downside of course is that Dorna Sports is the entity that gets left holding the bag if the debt amount goes into default (Bridgepoint and the CPPIB would likely bail out Dorna, but aren’t necessarily obligated to do so).
This also means that instead of using its free capital to re-invest into its business, Dorna must instead use those funds to pay down its new debt. Depending on the financial state of the Spanish firm, which is rumored to make thin profits on its sizable revenue each year, this can have consequences of varying degrees.
Welcome to the world of high-level leverage financing in the business world.