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Finance in Football - Heading for Crisis...

Over the past season, clubs’ finances have come under increasing scrutiny throughout the divisions. From Portsmouth and Manchester United in the Premiership, down through the likes of Cardiff and Southend, Notts County to Chester, there have been increasing instances of clubs struggling under the burden of debt. English fans look enviously toward either the Germany’s 50+1 model of ownership or the fan-ownership style at Barcelona. However, it is not simply the actions of owners that have led clubs into the situation that they currently find themselves in.

This issue has come under major scrutiny this year, but it has been lurking for many years. During the past decade, the economy has been booming. This has meant that it has been very easy to borrow money from banks, and so very easy to finance takeovers in this manner. Furthermore, if you ran into trouble, it would have been very simple to sell it on to the next buyer. However, then the recession hit. Suddenly, borrowing was no longer a simple matter and banks did not want to renegotiate existing loans – they needed their money back. This scared off new buyers, meaning that club owners that had run into trouble could no longer offload the club so easily. The situation with Mike Ashley at Newcastle was an excellent example of this.

In a report looking at the 2007/08 season, UEFA revealed that the combined debt of 18 of the Premiership clubs was just under £3.5bn. This figure does not include the debt of either Portsmouth or West Ham – two clubs that have had financial difficulties recently. This makes the Premiership the most indebted league on the planet, more than four times the figure of the next most indebted league – Spain’s Primera Division. Indeed, the debt held by Manchester United is greater than all 36 Bundesliga clubs combined. These figures begin to give an idea of how heavily Premiership clubs were in debt.

Commercially, the Premiership is by far the most successful league on the planet. It has recently sold the overseas broadcasting rights for 2010-13 for around £1.4bn, following a year after selling the domestic rights for £1.8bn. These figures are staggering and it is little surprise that it is the most indebted league. Debt is generally proportional to income – the most you make, the more banks will allow you to borrow. Being the highest earning league in Europe, we would expect the Premiership to have the highest debt.

Since this report, Premier League debt has actually fallen by around £1.5bn. This is partly due to the lack of availability of further credit, rising asset values, but a major part is the changing approach of clubs and owners. With the upcoming UEFA regulations potentially prohibiting clubs from competing in European competitions if they have outstanding debts, owners have been converting soft loans that they have made to the club into equity. This wipes out the debt that the club owes their owners. This approach has been taken by both Roman Abramovic at Chelsea and Sheikh Mansour at Manchester City.

However, it is important to note that debt is not always bad. So long as you can meet the repayments, then the debt is sustainable, and there are no problems. Arsenal fell into debt in financing the new stadium, but the solid business model that they follow has meant that they are easily able to meet the repayments on the loan without it severely impacting the business as a whole. It would be difficult to argue that there is anything wrong with this.

Over the years, two out of three football league clubs have gone into administration at some point in their history. It has almost become a strategy of football clubs and their owners. The insolvency law in this country makes it relatively easy for companies to write off their debt, paying 10p in the £1, then set up again the following day under a different name. Indeed, football particularly looks after itself in this respect. If a club goes into administration, the players will still be paid, and any other clubs that are owed money will receive the money.

Clearly, something has to be done to regulate finances in football more closely than they currently are. Pressure is building on the Premier League, UEFA and FIFA to introduce new measures to achieve this. However, in the most general terms, all of these organisations are simply football competition organisers. They must all work within the legal and regulatory frameworks that are provided by the governments of the countries’ that they work in.

On the 1st March, 2010, the Premier League’s new sustainability measures came into force. These were voted in by league chairmen back in September and set new guidelines and rules for clubs. Clubs have to submit future financial reports, and if the league does not believe that they will be able to meet their liabilities, they can impose sanctions, ranging from transfer embargoes, a moratorium on future contracts or even the forced sale of players. Clearly if the Premier League tried to impose these sanctions, it would be a controversial move, but it would be interesting to see how clubs react to these changes.

The debate over the style of ownership has become almost synonymous with the discussion into football finance recently. With the influx of foreign owners – 9 of the Premier League clubs are foreign-owned, and 7 of the top 9 – questions have been raised over the motivation of these owners. The Premier League itself reiterates that it is ownership-neutral. In other words, the actual style of ownership, whether it be an individual, a leveraged buyout, a fans trust, etc, is not important to them. Rather they are concerned over the sustainability of how the club is run.

The situation at Manchester United has been in the news recently with the growth of the ‘Red Knights’ movement to buy out the current owners – the Glazer family. The Glazer takeover was a leveraged buyout, and has saddled the club with a debt of over £700m. A recent £500m bond sale was pointed to as proof that the club is struggling to service their debts. The sale was over two times oversubscribed, and the Glazers have pointed to this as vindication of their business model. It shows that investors globally looked over their accounts and were still happy to buy the bond, showing their confidence in the future financial stability of the club.

Further uproar was seen when it was revealed that the club is paying a 14% interest rate on some of their PK loans. However, an interesting point that is not widely appreciated is that this increased spending on interest payments actually takes them into a lower tax band. As a result, the club actually saves money by paying this slightly higher interest rate, than it would by paying a lower rate. Whilst fans may dislike the style of Malcolm Glazer, he is a highly successful businessman, and it is unlikely that he would knowingly jeopardise the financial future of the company.

Despite this, there is a growing feeling that traditional English ownership by a single individual on whom the club is completely dependent is no longer sustainable. In Germany, there are regulations restricting any single owner to a maximum of 50% of the ownership of the club. Furthermore, a majority of the club must be German-owned. This is designed to prevent football from becoming divorced from its cultural and local roots and run purely as a business operation. In the USA, there are regulations restricting the purchase of a franchise based on a set amount of debt.

Under the new regulations that are expected in the coming years, patience will be required to build a club. It is possible to build a successful club, whilst also ensuring solid financial management. If we look at the Championship, there is relatively little correlation between the wage bill of clubs and the points accumulated over the course of the season. Indeed, clubs will small revenues are able to achieve success through good management – Burnley had the 23rd lowest revenue in the Championship last season, yet still achieved promotion to the Premiership. It may take longer than a quick-fix spending spree, but it will reward greater management skills in the long run.

There are a number of strategies and regulations that could be brought in to try and promote good financial management. Taking one example from the banks, there is no real bonus culture in football. In the banks, employees receive their salary, but a large proportion of their earnings come from bonuses, dependent on success. For example, the highest paid director of HSBC receives a salary of £800k per year, but received a bonus of £9m last year. On the other hand, footballers are generally paid the same, whether they win, lose or draw. So, a system could be introduced that pays a lower basic salary, but has the potential to reward players for achieving success. It is noticeable that a lot of the highest paid players in the Premier League are both at loss-making clubs, and under-achieving clubs.

Another suggestion that has been discussed by UEFA is that club spending on wages should be capped at a certain percentage of either revenue or gate receipts. Indeed, they have announced that this will be introduced in the coming years. Originally intended to be in force by 2012/13, it has recently been pushed back by three years. However, there are a number of problems with this. They need a legal way to ensure that it does not disadvantage European clubs against other global clubs. Secondly, and more importantly, they need to try and ensure that it does not simply lock in the current order of the clubs. The likes of Manchester United and Liverpool with their high revenues would always be able to pay higher wages than other clubs, meaning that they will always be challenging at the top. There is a worry that this would bring a guillotine down on 120 years of football development.

We now have an overview of the financial situation in English football. A clear example of financial mismanagement has been Portsmouth, and yesterday they released a document laying all of their debt bare to the public. The overall figure of the debt stands at £105m - £91m to unsecured creditors and £14m in secured debt to their owner, Balram Chainrai. They actually owe £119m in debt, but are owed £14m by Inter Milan, Liverpool and Tottenham from the transfers of Sulley Muntari, Glen Johnson and Jermain Defoe.

The document itself details all the debt that the club owes to various parties. The club owes £17.3m in unpaid transfer fees to a variety of clubs, including £1m to Chelsea for Glen Johnson and over £3m to Udinese for Sulley Muntari – players who have both already left the club. Tottenham are owed a further £3m for the transfer of Kevin-Prince Boateng, and £1m in a sell-on clause for Asmir Begovic, a player who never even played for Spurs.

They also owe £1.9m in unpaid bonuses to their players, including £280k to Peter Crouch, £265k to Glen Johnson and £338k to Sylvan Distin – again, players that have all left the club. They owe almost £10m to agents and scouting agencies, including over £2m to Israeli super-agent, Pini Zahavi, who was involved in the multiple sales of the club this year. Furthermore, over £38m is owed to former owners of the club.

Finally, the club owes £17.1m to HMRC in tax, NI contributions and VAT, whilst there are a huge number of other creditors to whom money is owed. The likes of St. John’s Ambulance is owed £2701.91, a local school is owed more than £40k, whilst some of the more bizarre debts include 20p owed to Qatar Airways, £4.34 to a local printing agency and £1725 to a local firm that design individual fruit cases, aimed at increasing children’s consumption of fruit. These are amongst a few of the over 400 trade creditors that the club has.

The next step for the club is a meeting on 6th May, coincidentally the same day as the General Election – a deliberate ploy by Andrew Andronikou, the administrator, to try and bury the news. At this meeting, he will set out his offer to creditors, expected to be between 20p and 23p to the £1. He will need to agree a deal with creditors holding 75% of the total unsecured debt within a month to allow Portsmouth to emerge from administration, and be reborn in the Championship next year. If he is unable to secure a deal, the club faces a serious risk of beginning next season with a points deduction, making an immediate return to the top flight a distant dream, and a relegation battle more of a priority.

All of this has hopefully provided an overview of football finance and mismanagement, including the most obvious example from this season. It is difficult to see how the future will pan out – the Premier League can only implement what its twenty member clubs want it to do. There is a growing case for an independent regulator to provide the leadership and drive for the change that football needs. Perhaps, the shock of what has happened to Portsmouth will lead chairmen to introduce the change that is required. Either way, something has to change, but how that will be achieved is unclear for now.

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