Written evidence submitted by Andy Green|
THE DCMS SELECT
nature of sport and financial inequality means that football clubs
have volatile and unpredictable income.
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).
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.
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.
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.
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.
1.1 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
(www.andersred.blogspot.com) 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 (http://bit.ly/5OF2N8),
Daily Telegraph (http://bit.ly/gGmaTP) and FT (http://bit.ly/728KJ4).
I also conducted the investigative work on the Glazers' US property
business that was featured on the BBC Panorama programme "Man
UnitedInto 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
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
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
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 http://on.wsj.com/cAWKoz),
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
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
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
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
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
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
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
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
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.
7.1 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.