Football Management

Commentary on the management of over 160 English football clubs by Dr John Beech, winner of the FSF Writer of the Year Award 2009/10 Twitter: @JohnBeech Curator of Scoop.it! Football Finance

Is this really ‘financial fair play’ yet?

Posted by John Beech on January 7, 2010

‘Debt-for-equity swap’ seems to be the buzz phrase of the moment.

[Please scroll down to beyond the italics if you are into finance and don’t want to rehear some basic stuff.]

What it means in simple terms is that someone who has lent the club money decides to wipe the debt out by accepting shares in the club instead of getting his money back.

For the ‘benefactor’ who lent the money there is little immediate change – instead of an IOU he now has shares.  As the person involved is a ‘benefactor’, he almost certainly isn’t planning to sell the shares immediately to get his hands on cash.

For the club, there is a more obvious benefit.  First of all, the danger of ‘soft debt’ (a debt for which there is little pressure to repay in the shorter term) turning into ‘hard debt’ (“I want my money back and I want it now!”) is removed.  In the club’s accounts, the figure no longer appears under ‘Long-term Liabilities’ (a ‘negative’) on the company’s Balance Sheet; now it will appear as ‘Shareholders’ Funds’ (a ‘positive’), in spite of the fact that no cash has actually changed hands.  This makes sense as the money now belongs to the club and will never have to be repaid.  However, it doesn’t mean there is any new money available.

The overall effect is to make the club seem stronger financially as there is no longer the millstone of debt around its neck.

This has happened recently in a big way at both Manchester City (1) and Chelsea (2).

In one sense, this is very good news.  A Premier League with collective debts of over £3 billion does not suggest that top-flight football in England is in a healthy state financially, as UEFA and specifically Michel Platini, have repeatedly pointed out.  As they also point out, and forgive my paraphrasing, it reduces the beautiful game to a battle of which club has the ‘benefactor’ with the deepest pockets, thus removing the game a long way from any sense of keeping to a sporting ethic.

Now, unnamed financiers (3) have dismissed the swap in the cases of Chelsea and Manachester City as ‘window dressing’ and ‘putting money from your left pocket to your right pocket’.  A little harsh perhaps, but they highlight the point that tax had no bearing since these clubs weren’t paying interest on the loans in any case.  Many others of course are however, and would welcome the removal of hefty interest charges.

Of more concern to me is that Manchester City have broken Chelsea’s 2004/05 record for greatest (financial) losses.

What has happened is that the worst debt culprits have had their ‘benefactors’ swap debt for equity to comply with UEFA’s Fair Financial Play code.  This has only been possible because the clubs that are the most indebted are so because their ‘benefactors’ have the deepest pockets, and are thus in the best position to be able to afford debt-for-equity swaps.  In other words, the worst culprits are the clubs who can best afford to comply.  No such luck for the Portsmouths or the Hull Citys.

For Fair Financial Play to be effective, another of its elements must come into play: the requirement that clubs balance their books over a period of time.  Clearly neither R A Abramovich’s XI nor Sheikh M Z Al Nahyan’s XI show that much sign of winding their spending in to comply with this, the second being particularly active in the current transfer window.

UEFA intends to introduce their ‘Financial Fair Play’ concept for the 2013/14 season; the delay is to allow a ‘soft landing’, or in other words to give clubs time to make the necessary arrangements.  It will be applied to clubs ‘whose turnover is over a certain threshold‘ (4).  The threshold will undoubtedly be set to include clubs in the Premier League and all the major European Leagues.  Because of the latter, many Championship clubs will have to comply too, given the financial scale at which the Championship operates.  To get them to comply, UEFA will have to come with a sanction a tad more relevant than a ban from European competition, as currently envisaged.

One thing is certain, the further defining of the Financial Fair Play concept will have major implications for English clubs, and they need to be thinking about how to achieve a soft landing sooner rather than later.

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