THE total cost of the pandemic for top level football is still uncertain, but it is no secret that most clubs have felt the pressure of lost income, compromised commercial and broadcasting deals and the almost total loss of matchday revenues.
What’s more, among the consequences of an industry dependent on mass gathering is a loss of confidence among some of football’s partners, ranging from sponsors to financial providers. When times get tough, banks and other financial institutions often lose some, sometimes all, of their appetite for lending, especially to sectors that may be among the worst affected.
It’s not just lower revenues that have impacted clubs, they have also seen their levels of debt rise during the pandemic. Observers may point-out that football had ventured past the sustainable barrier long ago and that the crisis has merely exposed the unrealistic business models of many of the world’s top clubs. When the leading revenue generator, Barcelona, is said to be on the verge of bankruptcy, you know the system, if not broken, is in dire need of emergency treatment. Debt may be a way of life for many clubs, but when the income dries up, they become very, very vulnerable.
Debt is a universal problem. Barca have total debts of around € 1 billion, while Real Madrid’s indebtedness runs to € 650 million. In Turkey, the country’s big four clubs have a total of € 2 billion of debt. Tottenham, Manchester United and Everton have huge debts, but where English clubs differentiate is that they have been successful in pushing their debts into longer-term facilities.
The pandemic is an unprecedented time, not even the financial crisis of 2008 proved to be catastrophic for most clubs, indeed the aftermath of the Lehman Brothers collapse heralded the start of football’s own bull market, including in Spain, where the country’s economy stared into the abyss.
Right now, football is in need of the very thing that commercial banks have traditionally provided for the industry – short-term working capital cash flow. At the moment, the banks are unwilling to lend funds to clubs that have suddenly looked very flimsy. Interestingly, everybody knew the game had been tip-toeing around the rim of a volcano for some years, but while enormous broadcasting fees rolled in, they were willing to maintain their balancing act.
The UK’s Barclays has long had a link to football and has been among the top lenders to the sector, while Australian investment bank, Maquarie, had a strong appetite for deals with top clubs. Close Brothers is another firm that has been linked to the game. New lenders, known as challenger banks, have also built-up considerable business with football, although the enthusiasm has diminished in the past year or so.
While commercial banks, fearful of being linked to any club going under, have retracted from football, other forms of financing have emerged, not always being too beneficial for the clubs themselves. As in any major crisis, when the vanilla high street banks start to shirk from lending, borrowers look for alternative and sometimes onorthodox forms of financing.
Clubs have long used more exotic instruments to raise money, such as factoring – gaining advances on media income (around 40% of the Premier League have opted for this method) – and mortgaging their stadiums. As professionals from asset financing and leasing point out, though, if income suddenly stops, this model can be troublesome.
So if not banks, who will lend? One family office that has been lending to football clients is MSD Capital, the company that manages the interests of computer tycoon Michael Dell’s family. MSD recently lent £ 80 million to Southampton at an interest rate way in excess of standard – 9.14%. This raised a lot of eyebrows in that the extremely high rate suggested a certain degree of desperation from the borrower. But it’s a simple supply and demand argument – MSD have the cash, Southampton need it, and they were willing to pay for the privilege. Firms like MSD tend to take a longer-term view rather than short-term solutions for an immediate problem, so it might be an ongoing relationship that grows.
MSD also played a significant role in the £ 200 million takeover of Burnley, providing some of the cash that fuelled the leveraged buyout by investment group ALK. Burnley was a club that was simple, transparent and easy to understand. Their fans are concerned that they now have a complex club that has a lot of debt loaded upon it and an offshore corporate structure based in Jersey. It’s a far cry from the days when a butcher presided over the club that is the epitome of a sporting body representing a small, “what you see is what you get” town.
The private equity sector is also increasingly interested in football, attracted by its strong brand culture, opportunities in commercial and broadcasting partnerships and recession-proof aspects of the sport. But not everyone likes the idea of private equity’s growing influence, such as in Italy where Serie A clubs have collectively expressed their misgivings about the potential acquisition of Inter Milan by BC Partners.
Clubs have also sought assistance from government or central bank-driven initiatives. For example, Arsenal and Tottenham have, between them, borrowed almost £ 300 million from the UK’s Bank of England.
Since Manchester United were bought by the Glazers using a LBO structure fans have been suspicious of the financial industry buying into the game. But the use of tools like derivatives, securitisation, bond and equity markets have allowed clubs to navigate choppy waters in the past and also to manage their cash in a more sophisticated way. Football has become a sector and an asset class, which means a different approach has accompanied its transformation from a parochial to a global sector. Furthermore, the introduction of market-savvy owners has created a demand for more creative financial management which may be completely alien to most stakeholders. While this sea change in football’s profile has been beneficial to a certain degree, it also comes with the behaviours of the financial markets, which arguably care little for the romance of the game.
The corona virus has opened-up old wounds that really need dressing soon. It has shown us smaller clubs have to change their ways, find their most appropriate place in the eco-system and adopt a business model that is realistic and fit-for-purpose. This may mean lower expectations, part-time status and a platform that can lower cost bases. The lower level is not particularly attractive for high finance, but at the top, there is no doubt that the financial industry will walk hand-in-hand with football into the post-pandemic future. Their fortunes are undoubtedly inter-linked.
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