Manchester United’s debts of about £716m and Liverpool’s £240m have led to concerns being raised by, among others, former prime minister Gordon Brown. He said this January that he thought the management teams of football clubs urgently needed “to look very seriously at their responsibilities to their supporters” – and that, while they have high levels of income from supporters, “the debt levels have been at a leverage level that is too high”.
The debts of the two clubs named above in particular may have caused a frenzy, but they are not alone. Last year, all but one of the 20 Premier League clubs had negative balance sheets and combined debts of £3.15bn. That compares with their combined turnover of £1.84bn.
The indebtedness of English football has attracted the attention of Uefa, the sport’s governing body in Europe, which has responded by formulating its Financial Fair Play rulebook. Expected to come into force from the end of this month, Uefa intends to force clubs to break even without relying on debt or cash injections from wealthy owners for survival. The rules will be phased in from 2012 and be fully in force by 2015 and should prevent clubs from gaining a competitive sporting advantage from poor financial management by fielding players they haven’t paid for – buying success without actually paying for it.
The finance directors of English football clubs will be the ones charged with rolling out Uefa’s rulebook and ensuring their clubs are compliant, which will make their jobs even more challenging. But how do their roles differ from their counterparts in other industries? For West Ham United’s finance director Nick Igoe, it is the unpredictability of the game itself that poses the greatest challenge.
“You can have sudden changes that carry hugely significant financial consequences – relegation from the Premier League for example – but even single matches can have a major impact,” Igoe tells Financial Director. “We were looking at the last game of the season and there were three league places up for grabs, which are worth £2.4m because of the step payments of the Merit Award [the amount of money a club is given by the Premier League at the end of the season – which having been increased by five percent in 2010 meant winners Chelsea were handed £16m]. Conversely, you can drop two or three places and no matter how carefully you prepare your budgets, you cannot legislate for that kind of change.”
For Tottenham Hotspur’s finance director Matthew Collecott, it was the penultimate game of this season that carried potentially massive financial consequences. When Tottenham played Manchester City, a Spurs win was guaranteed to land them a lucrative Champions League place by virtue of finishing fourth in the Premier League.
“If we were to qualify for the group stage of the Champions League, we could expect to earn around £20m from it,” Collecott tells Financial Director. [They did]. “And that’s almost all straight on to the bottom line.”
A caveat though, as he points out, is that there is a level of certainty of revenues in football that helps FDs forecast.
“Most of the revenue is relatively stable and even the variables, like the merit award, are reasonably predictable,” he says. “Away from the TV money, other deals such as sponsorship tend be tied down for three years.”
Igoe believes the stability of revenues compares favourably with other sectors.
“We can say that we have received 70 percent of our annual forecast income by the end of July,” he explains. “There is a certain amount of doubt about the last 30 percent, the bulk of which is the Merit Award. That is still a relatively nice place to be. I have worked in some businesses where the lead time on the order book is around a week; you have an expectation of recurring business, but you don’t have forward orders.”
Counting the cost
It is not the revenue side that poses the greatest difficulty for football FDs but the costs, particularly player wages.
“You do have the ability to control your costs as long as you are sensible and put players on reasonable contracts,” Igoe says. “When we were promoted back to the Premier League in 2005, we had about 30 percent of players on performance-related contracts, but that did get eroded after a while. The point is that it is under your control and you can offer performance-related contracts and get in short-term loan signings.”
And he has little sympathy for clubs who overspend. “Clubs that over-commit themselves while knowing what their realistic turnover expectations are likely to be are really being reckless. They have the information at their disposal and if they choose to ignore it, then that is irresponsible.”
The question of whether a player is really worth £160,000 a week comes into sharp relief for financially troubled clubs. In February, Portsmouth became the first Premier League club to enter administration and its administrator, UHY Hacker Young’s Andrew Andronikou, is scathing in his conviction that it was a failure to control player wages that was the cause of the club’s plight.
“The major problem has been player wages exceeding available revenue in some years,” he tells Financial Director. “In 2009 they had revenue of £60m and a wage bill of £65m; over the last five years, they have had total revenues of £247m against wages of £221m. That is 89.5 percent, whereas the accepted industry standard is around 60 percent.”
Andronikou believes that the directors at Portsmouth must shoulder the bulk of the responsibility for the club’s financial collapse, but also blames player power.
“[Former chief executive] Peter Storrie and the other directors have to take responsibility because they made the executive decisions, so the buck stops with them,” he says. “But they have had to work in an industry where the workers are incredibly powerful and the players’ union is one of the richest and most powerful in the country. I walked into Fratton Park in February to try and save the business and cut costs… yes, I was able to make 85 people redundant. But the largest overhead was the players’ wage bill and I couldn’t do anything about it.”
The reason Andronikou was unable to make layoffs among players is the protection afforded them by Premier League rules that give them preferred creditor status in cases of insolvency. Debts to other clubs for outstanding transfer fees are similarly protected, so while other creditors may be offered 10p in the pound, football clubs and players are paid in full. Understandably, that riles many, not least HM Revenue & Customs (HMRC), which has recently adopted a much stricter policy towards football and is often the instigator of winding-up proceedings.
HMRC’s tougher stance comes as no surprise to Spurs FD Collecott. “I think it is being tough on everyone right now: its number one priority is to collect taxes and football is obviously a very good target,” he says. “We are on the back pages every day and are perceived as being awash with money.”
This is a hard theory to disprove given endless tales of almost institutionalised largesse from club owners to players.
That outstanding transfer fees are protected has meant that finance for player acquisitions is readily available from specialist providers, something West Ham’s Igoe believes contributes to football’s indebtedness.
“You can always negotiate extended credit. I think that is something the Premier League is going to be looking at now,” he says. “You can sign a player on deferred terms and then you will find a finance house that will discount the terms for you, because the football creditor rule means that fund has got some guarantee of payment.
“You might sign a player on a three-year deal and spread the payments over the period, or even have it based on appearances, so it actually stretches to four years. You may also have sold players and accelerated the payments for them, so you end up with a team on the pitch that you haven’t actually paid for,” he explains.
He adds that FDs are able to discount future media payments and other revenue streams since there are always finance houses looking at how they can lend money to football.
“They know there is a certain amount of security and they know that football has an insatiable appetite for money,” he observes. “Football clubs will pay premium rates of interest in the pursuit success. You think, ‘that striker is the last piece in the jigsaw and if I just sign him now, we’ll win the cup’. Obviously, it rarely works out like that.”
Level of scepticism
While there is increasing support for tighter financial regulation of football, those working in the sport are sceptical about how such regulation can be fairly implemented.
“Uefa’s plans to limit debts sound great in theory, but the horse has already bolted: how do you implement it?” says Andronikou. “What are clubs that currently have debts going to do? Are they going to have to pay them off?”
Igoe thinks English clubs are already well regulated compared to some on the continent, being set up as limited companies subject to an audit process. Elsewhere in Europe, many clubs are actually sporting clubs or associations.
“They don’t have to face that level of scrutiny,” he says. And the Premier League is moving in Uefa’s direction, tightening its own financial reporting rules, which means clubs must submit a financial report by the end of March that meets certain minimum criteria – and has no qualifications from the auditor.
Collecott is uniquely placed to appreciate the different regulatory regimes in other European markets as Spurs’s parent company, Enic, has owned several European clubs in the past including Slavia Prague, AEK Athens and Italy’s Vicenza – and Spurs is one of the only clubs with shares traded on the London Stock Exchange.
He has also represented Spurs on Uefa’s European Clubs Association (ECA) forum, which was responsible for drawing up Financial Fair Play and agrees that football faces ample regulation already. He worries that more will cripple club management rather than help clarify their financial position.
“A lot of the ideas are good, but the challenge is not to make the rules so draconian that nobody can operate,” says Collecott. “Take the idea of a break-even rule [which will become an obligation]: if you have seen the IFRS or GAAP rules, which are very weighty documents, you will realise that the idea that Uefa can just issue some simple rules is somewhat over-optimistic. But Uefa is going to impose more regulation on us, because it looks as if the other European clubs are absolutely hellbent on pushing it through. The playing field is going to change over the next few years.”
Perhaps the new rules need their own roadmap, IFRS-style. The FD is mindful of cultural differences that could make uniform regulation difficult to enforce.
“Because integrity is so important in the UK, we take rules seriously,” Collecott says. “But that is not always the case in Europe and we know that because we have operated there. There are exemptions and people don’t always adhere to the rules, so it is harder to do business. In some European markets, it is about how well connected you are and there is often a political dimension. So I’m slightly sceptical about how easily break-even rules can be simply formulated and whether they will be strictly adhered to.”
He suggests alternatives such as a wages-to-turnover ratio, “which we do anyway, because our relationship with our banks means those are the sort of things we are covenanted on. So if we had four or five key multi-dimensional tests, I think that would work a lot better in practice than the proposed break-even rule.”
While the finer details of Uefa’s new rulebook are yet to emerge, it is clear they will add to the regulatory burden and, following the evolution that has been seen in the rest of the business world, the role of club FDs will become even more important in the quest for success. The spectacular collapse of Portsmouth under £138m of debt has made it painfully clear how crucial sound, responsible financial management is to the game – and how pockmarked that landscape is. And it emphasises that it is the responsibility of FDs to provide that leadership.
Read more about Uefa’s Financial Fair Play rules here
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