“No Champions League for You!” UEFA Threatens Debtor Clubs

By: Laurie | October 9th, 2008

Imagine life without one of the following: Liverpool, Manchester United, Arsenal or Chelsea. The English FA says it could happen.

The FA is guessing that current debt for all of English football is £3bn, with the top four clubs accounting for a third of that. But there’s no way to tell for sure because English clubs aren’t required to make their finances public.

Now, though, with the global financial systems in free-fall, the footballing powers-that-be are suddenly reaizing that allowing clubs to finance operations by borrowing huge amounts of money in secret may not be a great thing after all. FA Chair David Triesman is saying that one or more of the big four could go under if something doesn’t change.

UEFA agrees. In a move that could profoundly alter the club football landscape, UEFA came out yesterday and said that “in future teams carrying excessive debt may be banned from taking part in European competitions.”

“There would be forms of communication, even warnings, even reprimands before one would ever get to a situation of exclusion but it’s absolutely possible,” said Taylor. “We are looking at strengthening the minimal financial criteria and other forms of self regulation that may impose greater standard on clubs that want to compete in European competitions and beyond that club football.”

A decision like this could change European football in a huge way. For an example of how, let’s compare England to France.

In France, as opposed to England, debt is considered bad and clubs are required to regularly prove their financial stability. Great for France, right?

For stability, yes. For ability to compete internationally, not so much.

The problem is that because clubs in other leagues (and specifically clubs in the EPL) aren’t held to the same standard, the other clubs can borrow massive sums of money to pay high salaries and transfer fees that lure the French players to England. This can give the large, high-debt English clubs a huge advantage in competitions like Champions League.

Was last year’s three-of-four EPL clubs in the CL semis related to the skill of the league? Just a fluke? Or a result of clubs recklessly taking on of debt in hopes of the big payoff that comes with a Champions League win? We can guess, but we can’t tell for sure because English teams aren’t required to go public with their financials.

(And no, I’m not just saying this as a bitter Lyon fan who is practically bald from ripping her hair out every time Lyon goes out in the CL quarterfinals. No. Really.)

But there is definitely an uneven playing field here, and it’s possible to say that the clubs who operate prudently suffer at the expense of the clubs who take on excessive debt.

So how does the EPL feel about limits on debt? They’re not fans, probably because there is a lot to lose.

Triesman’s strident opinions met with a hostile reaction from other leading figures within English football, with Premier League chief executive Richard Scudamore having a swipe at Triesman and UEFA president Michel Platini.

“We’ve also got to be very careful we don’t somehow adopt Mr. Platini’s and the French view of debt, which is debt is bad,” Scudamore said. “Debt is inevitable. Debt to a degree is healthy. You’ll end up with a situation where no one is allowed to go on holiday to France with a mortgage.

“What is important is that the level of indebtedness is proportionate to the income … The FA themselves are one of the most indebted football organizations in the world with their Wembley (stadium) debt at something like 350 million with a turnover of about 300 million.”

Believe it or not, I am actually in agreement with Mr. Scudamore. “What is important is that the level of indebtedness is proportionate to the income.”

The thing is, with financials not made public, how can we know whether it’s proportionate or not? Or are we just supposed to wait until the teams collapse under their financial burdens?

Mr. Scudamore would have a lot more credibility if he were to require clubs to operate in the open rather than simply dismissing UEFA’s concerns.

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Category: English Premier League, World Football

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Shazback

I don't think it'll be an easy ride, but I think Man U are a long way from doing a Leeds Utd and suddenly turning around and saying "sorry, no more money, gotta sell half the squad". Also, if they had a debt with an Icelandic bank, they have no more debt, since said banks have gone bankrupt! So the problem is very complex. I'm just stating that Man U are not yet close to going under. Arsenal (thanks to the long-term views of Wenger) and Chelsea (thanks to Abramovich's deep pockets) also seem to be reasonably safe. However, Liverpool don't seem to be so well off, between Hicks and Gillett's infighting and the failure before the credit crunch to get the money to build a stadium...
Laurie

Shazback, much of what you say is true.

Correct me if I'm wrong, though -- my understanding of ManU's debt is that they are accumulating additional liabilities at an extremely high rate(14.25% of a £135mloan) that is not necesssarily reflected in current income statements. All that's required on income statements -- at least all that I'm seeing -- is current interest due. And with PIKs, that's not an accurate reflection of liabilities. As stated in the article above:

PIK notes are debt on which lenders are not entitled to get regular interest payments until a company is sold or refinanced. Interest instead rolls up annually, often at exponential rates.

And the fact that they were already paying 14.25% (basically what they could be paying for a credit card) before the liquidity crisis means that credit institutions aren't necessarily considering them a good financial bet.

Add in the fact that they tried to refinance under more favorable terms last summer but weren't able to, and I'm thinking there is a lot more going on than is reflected on the financials.

Again, it's been years since I've sat down and analyzed financial statements, so I'm not saying this is accurate. I'm just saying that I'm not sure that what's on those financial statements is the full picture.
fab

the economy is built on debt if there was no debt there would be no money
Shazback

Laurie, although Chelsea, Arsenal, Liverpool and Manchester United are not obliged to release financial information, they often do. Without even searching really, I can provide a link to the 2007 statement by MUFC : http://soccerlens.com/files/re...

As you can see, after repaying interest on their debt, MUFC made 87 million GBP between June 2006 and June 2007 (page 8). Also, the club's assets amount to 827 million GBP (page 6, notes 9-12)...

Having 1.32 billion GBP debt IS a lot of debt. But when you have 827 million GBP in assets and 87 million in annual profits (post-interest), it's less risky.

Sure, the credit crunch can mean a lot of things (for instance, will Man U still be having a 300+ million euro turnover?), but so far the debt level Man U has is not very dangerous. The EPL just signed new media deals, Man U can cash their cheque for winning the champion's league, and even after cashing out to sell Berbatov it's hard to imagine Man U needing more money than, say, selling Ronaldo would provide...

Your comparison with the French league is misleading, to say the least... English clubs can only take out loans against existing assets (much like a French club). However, whilst the vast majority of English clubs -have- assets other than their employees/players (stadia, training grounds, sometimes merchandising brands, so forth), almost no French clubs have such assets. The only Ligue 1 club that owns their stadium is Auxerre. A stadium is typically worth several million pounds, more often tens or hundreds for top league stadiums! French clubs can't loan money because they have very small assets. It's like looking at someone without a house, and saying it's strange he can't get as good a loan as someone with a house (both similarly employed, so forth). The Stade Velodrome, the Parc des Princes, the Stade Gerland... Even the Stade de la Route de Lorient are worth a large amount of money. But they are assets that are owned by the city councils, and not by the clubs. Thus meaning that the clubs can't use them to broker a loan. French clubs aren't all in the black all the time (Marseille are a club that regularly rely on their president's deep pockets, as did PSG under the Canal+ era), but when your total assets are your squad... Well suddenly having a five-ten million loss is a big problem. Not only because it probably means you're losing assets (bad financial results often go in hand with bad sporting results), and when your total assets are perhaps only fifty million... Well, ten million in losses is 20% of your worth. It's not at all the same thing when a club like Man U with 870 million in assets (plus players) has a 10 million deficit... In their case it's less than 2%!
Jan

"Its there any club in the world that belongs to itself or isn’t owned by someone or an entity."

This is the case for Bundesliga clubs with the exception of Leverkusen and Wolfsburg, where there is the special situation that the clubs were founded by companies, and as such the companies were allowed to "own" them, though they aren't allowed to sell them as a whole.
Laurie

Jan says: But do the leveraged takeovers of Liverpool and Manu really pose such a problem? If the clubs can’t finance them, the owners might back out of their investment and someone else jumps in. Due to the level of debt the clubs might be available at a bargain price??

Jan, interesting point. Chris and I were talking about this earlier today, and he said that's just what happened in Italy in the 90s -- the owners defaulted and the clubs were sold. It looks at least somewhat likely in the case of one or more of the highly-indebted clubs as well. The question is what a club which has been through this kind of restructuring -- and which lacks the ability to rack up more debt -- will look like. My guess is it won't look much like the clubs as we know them today.
Lissette Evil Blue

Its there any club in the world that belongs to itself or isn't owned by someone or an entity.
“What is important is that the level of indebtedness is proportionate to the income.” this reminds me of something my gradnma says "don't buy chit U can not afford, AKA If U dont have the money dont buy it. Its sounds pretty convenient & reasonable to say that the debt shouldn't be bigger than the profit. Cus obiuosly that ain't aint good people. As I have read in Soccerlens an article about the Bundesliga. It is very importatnt 4 the clubs to have stability in order to participate. It doesn't talk about debt or a perfect financial status. Stability
frem

actually manU is in quite a bit of danger. They have very high debts and very high interest with no real way to make the money back easily.
Arsenal and liverpool both have debts but its due to stadiums and expenses which will be reduced by selling the old stadium(like buying a house for 300,000 while still owning your old one and when you move out you sell your old one for 250,000 reducing the debt considerably)
Chelsea is a special case, they are closer to ManU in terms of type of debt and size but they dont need to make payments of 100million in interest or whatever every year.
Wenger is super smart with arsenal, he know he can spend but every year he keeps the 30million pounds inside the debt means a smaller interest rate and that means they can pay it off faster, selling players for a profit then means he can make it back even faster. When arsenal's is repaid they will begin to spend again and truly start rebuilding their team.
mele419

As others have said, Chelsea doesn't count, thanks to their Roman and his billions...
I also think Utd are pretty safe, but Arsenal and L'pool would seem to be the most in danger.
Thats just me though.
Jan

This is a good point. It has been common in Spain, that the real estate boom helped clubs refinance themselves a lot. Real Madrid were able to sell their training ground for hundreds of millions of Euros, wiping out their debt and allowing them to build a new training center elsewhere, which in turn rose sharply in value very quickly. This would be quite a bit more difficult now. I think Valencia plans to do something like that with their old stadium. This could not be quite as profitable as they originally thought it would now...
Laurie

Thanks, Diana. Even basic numbers are helpful. Still, though, an item for concern from even the little bit of information they've released:

Arsenal's overall debt rose to 318.1 million pounds but that figure is expected to fall sharply in the current year as the bulk of the flats built in the redevelopment of Arsenal's old home, Highbury, come up for sale.

I think I read that the British housing market is down 13% in the past year. I'd love to know the status of this debt right now.
Jan

Laurie, interesting links on Manu's takeover. Though I was completely lost when trying to wrap my head around PIK notes. But do the leveraged takeovers of Liverpool and Manu really pose such a problem? If the clubs can't finance them, the owners might back out of their investment and someone else jumps in. Due to the level of debt the clubs might be available at a bargain price?? Manu with massive debts can't be worth as much as the Manu without debts that the Glazer bought? Dubai Investment something is already keen to own Liverpool and I'm certain there are other crisis prove rich people or entities around the globe who would love to have Manu in their trophy cabinet? Instead of paying €1bn for Manu, they pay less and use the rest of the money to reduce the debt.

Too big to go down.
diana

Laurie, not sure if this is of help to you but last month, Arsenal released their financial statements for 2006-07. I got the report from my local MSN service (MSN Singapore).

http://sport.sg.msn.com/footba...
Laurie

One more, much more recent article on the debt crisis as it relates to Manchester United: http://www.telegraph.co.uk/fin...

In essence, PIK notes are debt on which lenders are not entitled to get regular interest payments until a company is sold or refinanced. Interest instead rolls up annually, often at exponential rates.

Manchester United is currently rolling up interest of 14.25pc on £135m of PIK notes after a planned re-financing that would have paid them off had to be pulled when the credit crisis hit last summer.

[...]

An American import, PIKs have been used by private equity for many years, but between 2005 and 2007, they mutated into a particularly risky form of debt.
areallaticfromthesouth

Arsenal are in 'debt' to their stadium, thats why they haven't brought any decent players in years - why did Henry, Viera, Flamini, Gilberto all leave plus the rest and the rumour is Cesc is going to Barca.

Liverpool are in 'debt' to the Yanks, Gillette and Hicks, Man Ure are in 'debt' to the Yank double glazing family and Chelsea are 'just in debt' to the gotta buy me another boat with the utlimate pirate protection.
Laurie

Jan, again, I'm not saying you're wrong. But I'm not finding a lot of detail for the "financial statements" I'm seeing. Maybe I'm looking in the wrong places -- if so, can you point me in the right direction?

What I am seeing are things like this, from a sports blog in 2007:

As they are now a privately held company, Manchester United is not required to publish financial statements, but it seems that they certainly want to leave the impression that their financial house is in order.

All seems well, except for the issue of interest payments on the debt that the Glazer family has assigned to the club. You may remember that in July 2006 the Glazer family secured a refinancing deal that saw the interest payments dropped from hundred and $180 million a year to $124 million a year - a substantial saving.

However at the same time, the overall borrowings of the club increased from $1.16B to $1.32B an increase of $160 million. So how come borrowings went up so dramatically?

Without detail financial statements it is impossible to say what exactly was done so I freely admit to a bit of speculation. Could it be because the Glazer family opted to capitalize the interest payments incurred during the first year of operations? (It is the equivalent of opting to not pay interest on your mortgage but rather adding it to your principal - so you pay interest on interest).

We can't tell for sure from the results released, but it would certainly explain why interest payments of approximately $180 million don't appear to have shown up in last year's financial results.

http://community.foxsports.com...
Jan

Laurie, Liverpool, Arsenal, Manu etc. release annual financial statements. They are all profitable, even though most of the profit is eaten up by interest and debt payments. And Chelsea does indeed owe the money to their sugar daddy and not a bank. Since Mr Abramovich recently purchased an anti missile radar for his yacht he's probably rather expecting to be the only person with money left on this planet after the financial crisis. So I wouldn't worry about him. That a club like Chelsea, which is generating huge yearly losses, makes it difficult for clubs who have to earn the money they spent is another issue of course. But that's also the case with e.g. Inter Milan and Moratti.

I generally don't like this type of arms race. It's time someone developed a Furby type of ultraexpensive-toy for billionaires, so that they lose interest in football clubs and get their "mine is bigger than yours" fix with that thing.
Laurie

Jan,that's the thing. With finances private, we can all make assumptions but not informed judgments. Everything I say is hypothetical, because we just don't have enough information.

I was shocked by the £1bn figure for the top four, but that number by itself is meaningless. As you say, we don't know anything about the debt -- is Chelsea's held by Abramovich himself, or by a cash-strapped bank? -- or how it's collateralized, or what kinds of revenues are offsetting this debt. Or how debt payments affect cash flow, and whether or not things like the ability to pay salaries will start being affected by the credit crunch.

Even your statement that Ligue 1 can't compete because EPL generates €1bn more in revenues -- while factually accurate -- doesn't tell the whole story. How much of that €1bn results from quality that is artificially generated by unsustainable debt? I'm thinking particularly of teams like ManU marketing to overseas viewers. That's dependent on their being able to afford the Cristiano Ronaldos of the world. Would removing the high debt remove this ability? And how would it affect revenues around the world among other teams?

All reasons for more disclosure.
Jan

How is the debt of the big four in the EPL such a problem? Chelsea doesn't count anyway, since those debts are interest free and probably only declared as debts to Mr Abramovich for some bookkeeping reasons. And the other three can so far easily service the debts and none of the money was borrowed to finance the wage bill or something. There's either the stadium development or leveraged takeover responsible for the borrowed money. Maybe the situation is different with the other teams in the EPL. It's certainly problematic down in the Championship.

Painting a picture of the EPL being solely irresponsible with its finances is a bit of a laugh though, if you compare it to La Liga and Serie A. Those clubs (not all of course) have much more problems with debts in various forms including large amounts of unpaid taxes.

Ligue 1 couldn't compete with the EPL financially this way or the other, since the EPL generates €1bn more than Ligue 1 each year. You should rather look elsewhere at leagues which aren't that much ahead for people distorting the playing field.
Ronald

Life would be tough without Arsenal and Liverpool...

Manchester and Chelsea, not so much.
diana

'In France, as opposed to England, debt is considered bad and clubs are required to regularly prove their financial stability.'
Laurie, the UEFA general secretary David Taylor reacted to the FA chairman David Triesman's comments and was saying - "In some countries like Germany and Switzerland, stronger requirements are put on clubs in terms of bank guarantees and having no negative equity." So, not only in France.

http://www.sportinglife.com/fo...

For now, we can only see how all these works out.
lefutur

excellent article. its kind of taken for granted that the EPL has a lot more money to spend on players than every other league but now we are starting to see the price that the clubs, and the league as a whole, are starting to pay for this type of reckless spending.

It will be interesting to see how this develops.