Tuesday, June 2, 2009

A Billion Here, And Billion There And Pretty Soon You're Talking Real Money

The 20 EPL clubs are running massive debt. Yeah, tell us something we don't know.

Okay, the total debt is estimated at £3.1B.

The accounts for the clubs, mostly documenting the year to May, June or July 2008, show that the FA chairman, Lord Triesman, significantly underestimated football's indebtedness when he cautioned last October that debts in the sport as a whole, including the Football League and the FA itself, were at £3bn.
Two things: A) So those numbers are at least a year old, meaning they pre-date the evaporation of the global pool of money. B) The total number doesn't really offer an insight into any given club's ability to service its debt.

The really impressive part of this is the total debt owned by the Big 4 of United (£699), Chelsea (£700), Arsenal (£416), and Liverpool (£280). That's £2.096B or 67.6% of the cumulative league debt.

Holy fuck.

A couple of notes. First, Chelsea's debt is quasi-fictitious. It's mostly an unscheduled, interest-free loan that owner Roman Abramovich made to the club. He could just forgive it and Chelsea would be almost debt free. The debt stays on the books because if he ever sells the club, Abramovich wants that money back (there's a provision that if the club is sold, that money is due to him in something like 30 or 90 days). In fact in the face of pressure from the league, Abramovich already converted some of the debt to additional shares in the club (which we once postulated it just meant he diluted the per-share value of his holding in the club).

Arsenal's debt seems pretty alarming for a club that is thought to operate on the cheap. Most of that is a result of the financing for the construction of the Emirates. The good news is that the new stadium gives the club fantastic cash flows to service that debt. The bad news is that the Highbury development isn't selling units as anticipated with the housing downturn.

The other thing that's worth mentioning (and sorry that I can't source this, but I do remember coming across this someplace) is that an official with the club had noted there is a firewall between the Highbury development and the club. So, there is likely a completely separate entity like the Highbury Flats Development Corp or something that isn't linked to the club in any way. So if the development goes belly up, it doesn't mean the club operations take a hit and they have to sell off players because condos are sitting empty.

As for United, man it'd be nice to get better visibility as to what their situation is vis a vis the Glazers. For a hint at what might be going on, its worth taking a peek at the Tampa Bay Buccaneers, the Glazers other pro sports holding. The Bucs let go of a high-priced coach and replaced him with a cheaper unknown (seriously, I have no idea who the current coach in Tampa is without having to go look it up), they cut several higher priced veterans, and they didn't make any splashy free agent signings. Basically, they are cutting costs. In fact, if you look here you'll see that the Bucs have the most amount of room against the NFL's salary cap—$46M*—essentially meaning they are spending less on players than anyone else in the league.

Normally teams try to free up cap space to go sign free agents. But, as was noted, the Bucs really haven't brought in anyone of note. They are simply not spending money. And they wouldn't be doing that if they were awash in cash. Just saying.

[* Actually, that number depends where you look. One source had it at only $41M, but this page here which is on the NFL's official website has the cap-space number at $61M, which would mean an additional free $15M for the Glazers to spend elsewhere.]

[And there's also this little tidbit from the Pewter Report which indicates the Bucs have moved training camp back to Tampa from Orlando/Disney to save money. Also of note, the Bucs even canceled their Christmas party and have laid off "a large number of employees."]


Whizalen said...

I've often wondered about repayment of Abramovich's loan(s) if the team was sold - I've assumed at some point he'd just forgive the debt as owner of the team. However, who will have the financial backing to buy Chelsea plus throw in another billion to offset Abramovich's debt repayment? Plus, is there interest incurred on this debt? There's been talk that he's "tiring" of his plaything, but he can't sell under those financial conditions.

Precious Roy said...

That debt is interest free. So, no, no interest is accruing.

I wish I could find the terms of the debt if the club is sold, but I am 100% certain that the money is on the books and is due Abramovich. I just can't recall or find the length of time to pay it (although I recall it being relatively short... ). So yes, if you buy Chelsea, you have to pony up for the club, plus you owe Abramovich the additional £700M or whatever on top of that.

That makes it almost unsellable.

Mike Georger said...

Liverfourth! Woooooo!

Precious Roy said...

Yet everone seems to think that Hicks and Gilette (sp?) are in the worst shape... Curious.

The Fan's Attic said...

Didn't Roman forgive half of that debt or at least "convert it to equity"?

The Fan's Attic said...

Why, yes, yes he did.

Mike Georger said...

Well Arsenal are expected to have debt because of building the Emirates I think, and United can do no wrong in the media's eye.

It came out last week that George and Tom have actually put in about 150 million of their own money already, which is about 150 more than was thought. They're still in shaky condition, but the credit crisis is easing and it appears they've gotten a refinancing deal worked out.

Precious Roy said...

Re: the converted debt. Yes, I'm aware of that (mentioned it above).

The linked Guardian piece mentions that, yet the still have the total debt at £701M, so without knowing the particulars of what changed what, I deferred to the Guardian numbers.

Autoglass said...

Roman converted half the debt to equity AFTER the study was done. So the remaining debt is around 350.

Also, it doesn't HAVE to be paid upon sale of the club. Roman wants it paid. But that's just another desire. Since he controls the club AND the debt, it's nothing more than a bookeeping distinction. Someone buys the club and they negotiate a price. What Roman calls the proceeds - repayment of debt or purchase of equity - is entirely up to him.

WhiteSpeedReceiver said...

This will end poorly for someone and it will lead to a great wailing and gnashing of teeth.

Precious Roy said...


Both are correct (the conversion time frame and the debt). But the terms of the debt as they are written right now mandate the money to be repaid. Of course Abramovich can decide what happens if he sells. As it is now, he wants the money.

Precious Roy said...

I would also add that signaling to future potential buyers (if Abramovich ever wanted to sell) what they will have to pay is more than a 'bookeeping distinction.'

oyeoro said...

I have been extremely interested in the Arsenal deal, and have done considerable research on it. I love Arsenal so much looked into buy a flat. The previous mentioned firewall is in the form of 3 levels of LLC's which are joint owned by Arsenal and the developing entity. It is my understanding that board members are held as KP's not Arsenal; however Arsenal gets the majority of the cash flow. The Arsenal deal (believe it or not) is the basis of Mcfarlane's interest in DC United. He would try to make a real estate play with the new stadium (additional cash flow) and developing the RFK site.

Precious Roy said...

oyeoro... Thanks for the additional info on that. I never found anything that goes into detail on the structure of the development company(s).

Autoglass said...

PR, I'm only saying that the structure of the debt and equity is within Roman's control. If he's put in a billion, he may want a billion back, or more or less. How that billion is structured - in terms of debt or invested equity - doesn't really matter. He's going to have a number in mind given the state he is in at that time. The buyer won't care a whit what Roman does with the proceeds. Roman could write off the debt completely, or pay himself back, or a mix of the two. Up to him.

cjdomer04 said...

Didn't Roman pay like 1 quid for the club's equity, the rest was just taking on the debt? I would guess that's how most clubs will be sold for the next few years.

And oyeoro is right. Whether Roman calls it a sale of equity or an assumption of debt makes no difference other than, perhaps, to the taxman (assuming he doesn't just have said taxman killed for suggesting such a thing).

Ismail said...

chelsea also get to say they are in debt and have tax breaks due to it so in a way its a win-win for chelsea but the fact is that chelsea are still in the black every year since roman bought them. Not by much but enough that they have not yet made a profit in a very long time.
Their high wage bill, constant managerial firings, small stadium size and weaker merchandise sales means that their income is sub-par when compared to the other big clubs.