Football Governance - Culture, Media and Sport Committee Contents

Written evidence submitted by Andy Green


—  The nature of sport and financial inequality means that football clubs have volatile and unpredictable income.

—  The volatility of earnings makes clubs very vulnerable to damage from excess borrowing (whether to fund the acquisition of the club, to fund unsustainable spending on players or to pay for poorly thought out stadium investment).

—  Other sports (such as the NFL in the United States) and other football leagues (such as the Bundesliga) show how easy it is to regulate borrowing in a sport.

—  Football in England has no limits on the amount of debt that can be placed on clubs and little indirect financial regulation that mitigates the impact of excessive borrowing. This is wrong. Current Premier League financial regulation is inadequate and needs strengthening.

—  Controlling excess debt in football is intimately connected to the issue of ownership. Greater supporter ownership would help prevent many of the current issues seen in the game.

—  The Committee should recommend tighter financial regulation of football through the banning of LBOs and either limits on debt or regulations similar to the Bundesliga or UEFA's Financial Fair Play rules.

1.  Introduction

1.1  I am writing this submission in a personal capacity. I am an investment analyst in London with 16 years experience of company analysis. Since January 2010 I have written a blog ( about football finance with a focus on Manchester United and the ownership of the Glazers. My blog is one of the leading sources of information and analysis of football finance and has received over 200,000 visits in its first year.

1.2  I conducted the initial research on the Manchester United bond issue that was carried by the Guardian (, Daily Telegraph ( and FT ( I also conducted the investigative work on the Glazers' US property business that was featured on the BBC Panorama programme "Man United—Into the Red" in June 2010. I have written for the Guardian and various websites and have appeared on TV and radio programmes to discuss football finance.

2.  Why debt is particularly dangerous for football clubs

2.1  Football is an industry and its clubs are limited companies, but the structure of the industry is such that it operates very differently from others. Whilst in other industries, the majority of (or even all) firms can prosper together, in football there are always winners and losers. Only one club can be the winner of each of the professional leagues each year. There can be no more than two winners of the major domestic cup competitions and in the Premier League, only four clubs can qualify for the Champions League and two to three for the Europa League. When clubs are successful, success (winning a title or promotion or European qualification) cannot be taken for granted (as Liverpool FC's fall from a member of the "big 4" shows). Whilst this sharp divergence between success and failure has always existed in the professional game, the highly skewed financial rewards seen in the last 20 years have made the financial impact of "failure" far more actute.

2.2  An English club qualifying for the Champions League can expect to receive c. €29 million (c. £25 million) in TV income even if they are eliminated at the group stages. In addition, the club will be guaranteed three home fixtures which will bring in significant matchday income (for example c. £5 million for Liverpool or c. £10 million for Manchester United). CL participants can expect to achieve better commercial and sponsorship deals and this too will add to income. The flipside to this bonanza of extra income is that failure to qualify for the Champions League can seriously impact a club's business model by depriving it of a major part of its "expected" revenues.

2.3  The same high risk/high reward profile is present for those clubs in risk of relegation from the Premier League. Although "parachute payments" reduce some of the downside, the skewed nature of domestic TV deals (the Football League receives £264 million over three years for domestic rights vs. the most recent Premier League three year deal worth £3.2 billion) means that relegation to the Championship can cause catastrophic financial problems.

2.4  It is in the nature of football that the largest cost, player wages, is largely fixed in the short-term. Players are typically employed on four to five year contracts and this makes reacting to adverse financial events difficult for clubs. Furthermore (and thankfully of course) football is highly unpredictable. Teams can and often do see huge slumps in form after periods of considerable success (obvious examples being Leeds United between 2001 and 2007 or Liverpool FC's current travails). Such volatility makes business planning in the normal sense very hard and increases the likelihood that revenues and hence profits will be highly volatile.

2.5  The volatility of sporting performance, the semi fixed nature of much of a football club's cost base and the skewed media income distribution within the professional game means that debt and leverage can have a very significant negative impact on clubs. Debt involves fixed interest and capital payments which as is well known increases risk for a business. Although financial theory states that debt is "cheaper" than equity it also riskier and the level of debt that is sensible for a business depends to a great extent on the stability and predictability of a business' income, profits and cash flow. Football with its highly volatile and unpredictable finances is inherently unsuited to high levels of leverage. Indebted clubs that unexpectedly underperform on the pitch can very quickly encounter very significant financial problems, with the forced sale of players, in some cases the sale of historic grounds, relegation and administration. Clubs that get into financial difficulties due to debt often have to file for administration and HMRC and other "non-football" creditors often suffer significant losses. The list of such problem clubs in recent years is well known and well documented and includes Portsmouth, Leeds United, Sheffield Wednesday, Liverpool, Cardiff City, Plymouth Argyle etc, etc. Debt is a factor present in the majority of these cases.

3.  Borrowing to fund player acquisitions and wages; "living the dream" and Leveraged Buyouts damage clubs and supporters. Borrowing for investment in assets is less risky but can still cause major problems

3.1  Although the risk that excessive borrowing presents to football clubs is always the same, it is important to identify the most dangerous types of leverage; borrowing to fund sporting ambitions through player purchases and paying unsustainable wages (often called "living the dream", a quote from former Leeds United Chairman Peter Risdale) and borrowing to fund the acquisition of a club itself. Borrowing for long-term investment such as new stadia (which by definition creates an asset) is less risky but can still have serious adverse effects on clubs (see the experience of Bristol City's delayed ground development for example).

3.2  Borrowing to fund sporting ambition is the most common form. Club owners are generally over optimistic about their management abilities and vision for a club. As Christian Müller, CFO of the Bundesliga told the European Commission:

"...we learn by experience all over the world [that] most Club executives tend to operate riskily, tend to overestimate their chances in the Championship. This may result in disproportionate spending relative to the income some clubs generate.... club executives have somehow to be protected from themselves."

All academic evidence is that there is a very strong correlation between squad wages and points won (see, something which is obvious to owners. There is a natural tendency to borrow in the pursuit of success, although the zero sum game nature of sport means that not all teams can be successful. The skewed media incentives described above also conspire to encourage owners to borrow just to keep their team where it is. With relegation from the Premier League into the Championship so dangerous, the tendency is to borrow in an attempt to retain Premier League status (see the recent problems of Hull City).

3.3  Leverages buyouts ("LBOs") are far less common than excessive borrowing in the pursuit of success on the pitch. It is commonly thought that only Manchester United and Liverpool have been bought in LBOs, but debt financing has been a material part of other purchases and subsequent problems of other football clubs including Portsmouth and Hull City as well as smaller clubs like Chesterfield. There is also suspicion that other "equity financed" takeovers have actually been funded with debt (Notts County and Derby being recent examples).

3.4  LBOs are in some ways even more problematic for football clubs than borrowing in the hope of success on the pitch. In the former case, owners are taking a gamble which may or may not pay off. Investment in the playing squad may lead to promotion and further success although the risks are high. With LBOs, clubs are saddled with debt solely to allow a particular party to take over the club. The club gains little or no benefit, no players are purchased, no facilities are built or improved.

3.5  In other "normal" industries, LBOs can often be defended as mechanisms to bring efficiency and financial discipline to target companies. Academic evidence is ambiguous and the financial crisis has caused a number of companies bought in LBOs during the boom to fail financially or run into significant problems (ie Readers Digest, EMI). When football clubs are bought using significant debt, the need to service interest costs has typically led to ticket price rises (c. 50% at Manchester United in the first five years following the Glazer takeover) and reduced investment (the need to service acquisition debt meant the deferral of Liverpool FC's plans for a new stadium for example). The "efficiency" sought by LBO buyers tends therefore to be against the interests of supporters and other stakeholders. LBOs actually exploit the loyalty of fans to their clubs (economists would describe the demand for tickets as relatively price inelastic). Supporters end up, literally, paying for the privilege of having new owners. Monies that could improve football clubs or make tickets affordable are diverted to servicing debt. Since 2005, Manchester United has wasted around £300 million on bank fees, derivative losses and interest. To quote former Liverpool Chief Executive Christian Purslow during the last days of Hicks and Gillett's ownership:

"Can we afford to meet [our loans, interest costs and bank charges]? Just about... Do I wish that every penny spent on interest was available to spend on players? Passionately....We are highly profitable. The issue is that too much of that profit is being used to service loans put into place when the club was bought."

3.6  As with debt taken on in an attempt to improve the team, unexpected failure (such as not qualifying for the Champions League) can cause significant financial problems for clubs loaded with LBO debt. Liverpool's near default on its debt is fresh in the mind, and the club enters 2011 further away from a new stadium and a competitive team than it was when acquired by Hicks and Gillett in 2007.

4.  Other sports have successfully regulated debt

4.1  There are essentially two ways to regulate levels of debt in sport, direct controls (seen in the NFL for example) and indirect controls (such as UEFA's Financial Fair Play regulations or the Bundesliga's liquidity forecasts). The latter method does not prescribe debt levels (although positive balance sheet equity is a key part of the Bundesliga's licensing system), but looks at the consequences of debt interest on profitability.

4.2  The NFL rulebook (formerly "The Constitution and Bylaws of the National Football League") provides the most obvious example of direct debt controls. Since 1988, the rules have prescribed a fixed "debt limitation" to which all franchises must adhere. The original 1988 ceiling was set at $35 million and it has been reviewed annually since. The current ceiling is set at $150 million and crucially within this sum, owners can only secure $25 million of their own liabilities on franchise assets.

4.3  In addition to the debt limitation, LBOs are specifically barred with the rules stating:

"…in connection with any acquisitions of a member club or any controlling interest therein, the principal and/or controlling owner shall be required to invest equity (cash on hand or funds borrowed against other current or determinable futures assets of such owner) in a minimum amount to be determined by the Finance Committee, and no acquisition transaction that the Finance Committee finds to be excessively leveraged shall be recommended by the Finance Committee for membership approval."

4.4  A single debt limit works in the NFL because of the near equality of franchise income and costs. Clearly in football where clubs vary enormously in their economic scale such a single monetary cap would be inappropriate. This does not mean that direct controls could not be introduced by one or more of the leagues, rather that such limits would have to be set as in relation to size (a net debt to EBITDA limit being perhaps the most obvious solution). The limitations on leveraged purchases of franchises could of course be applied on a near identical basis to football clubs.

4.5  The Bundesliga's licensing tests show a different route to regulate club finances and prevent the taking on of unsustainable and dangerous leverage. Each Bundesliga club has to submit detailed financial forecasts showing its liquidity resources and future liabilities. The league's licensing officers have the right to adjust the club's forecasts if they believe them to be inprudent. If the club (on the adjusted forecast) does not have positive liquidity over the forthcoming season, the league can force "conditions" on the club to ensure there is a prudent buffer. No Bundesliga club has ever gone bankrupt (or entered into the equivalent of English administration) during a season.

4.6  UEFA's Financial Fair Play rules, published last summer, borrow from the highly successful Bundesliga process. The Premier League initially resisted the proposals and has lobbied hard (and successfully) for an extended transitionary period for their implementation. Financial Fair Play is only relevant for the seven or so English clubs seeking a UEFA licence each season, and therefore does little to help the other 85 professional teams.

5.  English football does not have any significant element of financial regulation and what is there is inadequate

5.1  Sadly for English football, and despite dozens of clubs running into financial problems through mismanagement often associated with irresponsible borrowing, neither the Football Association nor the Premier or Football Leagues have attempted to limit borrowing by member clubs using either debt limits or indirect controls.

5.2  None of the rules of the Premier League, Football Association or Football League contain any stipulations concerning how much football clubs can borrow or any rules on how debt can be placed onto a club by its owners. The rulebooks also contain only very limited analysis by the leagues or FA of clubs' financial prospects.

5.3  Changes to the Premier Leagues rules effective from the 2010-11 season (rules 78 to 92) now require clubs to provide "Future Financial Information" to the Premier League in addition to accounts for the most recent period. This "Future Financial Information" includes financial projections for each club for the next year. Whilst this is a step in the right direction, enforcement action by the Premier League will only be triggered if:

Rule 89.1: the club fails to deliver annual accounts to the league by 1 March; or

Rule 89.2: the club fails to deliver interim accounts to the league by 1 March (which set of accounts are required depends on the club's year end); or

Rule 89.3 the club fails to deliver "Future Financial Information" by 31 March; or

Rule 89.4 the club fails to deliver additional information requested by the Premier League relating to the auditor's qualifications of its accounts; or

Rule 89.5 the club has failed prove its doesn't owe HRMC or other clubs money it should have paid; or

Rule 89.6 the accounts supplied are qualified or part qualified by the auditors; or

Rule 89.7 the Premier League Board, having looked at the information supplied by the club doesn't believe the club will be able in the next season to:

Rule 81.7.1 to pay its "football creditors" or employees; or

Rule 81.7.2 be able to play its 38 league matches the following season; or

Rule 81.7.3 be able to fulfil its league obligations to broadcasters.

5.4  The new rules rely too heavily on auditors qualifications or part qualifications of accounts as the "early warning" mechanism to determine whether clubs are likely to run into financial trouble. In the most recent case of major failure in the Premier League, Portsmouth FC, the auditors Grant Thornton did not qualify the accounts in the year prior to the club's collapse. The rules contain none of the questioning of financial projections seen in the Bundesliga. If in place last season, the rules would not have done anything to prevent Portsmouth's subsequent problems.

5.5  There are no rules forcing clubs to maintain positive equity positions, no rules on dividend payments (an ongoing threat to Manchester United) and no rules on using clubs as security for owners own liabilities. There is effectively no presumption of what is a "good" or "bad" financial model for the 92 professional clubs despite the fact that they are key social and community assets.

6.  Issues of financial management are connected to issues of ownership

6.1  Although better regulation would go a long way to protect clubs and supporters from financial mismanagement and excessive debt, longer-term and more stable ownership is also needed.

6.2  In the last 20 years English football has had a shift in ownership. Traditionally owned by local business people, many clubs have been bought and sold by a new breed of entrepreneurs from both the UK and overseas. In many cases owners have been proved to be short-termist, seeking swift improvements in team performance through debt funded investment, often mortgaging grounds and/or future ticket revenue in pursuit of success. The self professed "neutrality" of the football authorities on issues of ownership means that there is effectively no regulation of who owns football ("fit and proper" tests have proved highly ineffective).

6.3  A system of ownership that included supporters (probably through official trusts) would be more likely to provide long-term ownership and hence longer term planning horizons and greater financial stability. Supporters' trusts would act as a break on reckless short-term borrowing and would be more likely to safeguard historic grounds for their communities.

6.4  In Germany the well known "50+1%" ownership rules which apply to most clubs have given football a highly stable ownership base compared to English football. In France the involvement of local authorities provide a similar stability and connection with the local community. In England, owners with no knowledge of a club and its traditions can takeover, execute an aggressive and risky business plan and put up club assets as security for debt.

6.5  Significant supporter ownership cannot guarantee good governance (as the recent experience of Notts County has shown), but in conjunction with tighter regulation it can move English football into a new era of long-term financial planning and more stable financial performance.

7.  Conclusions

7.1  Financial mismanagement usually involving excessive borrowing has been a major problem for English football for over twenty years. Dozens of clubs have been forced into Administration, historic football grounds have been separated from their clubs, HMRC and small creditors have lost considerable sums. Leveraged buyouts at Liverpool and Manchester United have slowed investment and priced supporters out of the game. This has been allowed to happen because of overly lax regulation by the football authorities.

7.2  Regulating debt either directly or indirectly is not difficult and there are precedents and blueprints from other sports and other countries.

7.3  The Committee should strongly recommend that English football ban LBOs and introduces tougher financial regulation across the professional game. The Committee should also recommend that the football authorities actively encourage supporter ownership (with practical measures to help fans take stakes in their clubs) to encourage longer term financial planning in clubs.

January 2011

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© Parliamentary copyright 2011
Prepared 29 July 2011