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.