English football: The debt time bomb
Amid a frenzy of borrowing to pay the wages of international superstars– and build extravagant new stadiums – the most treasured clubs in the Premier League have been sold off to foreign investors. But as times get hard, English football could be sitting on a debt time bomb. Ben Chu investigates
Back in October, in the Great Hall of Stamford Bridge, the home of Chelsea Football Club, 1,000 "senior decision- makers in world football" gathered. There was an air of optimism and self-congratulation. Commercial managers from some of the country's top clubs talked of exciting new opportunities in the Far East. Gossip was traded about how lucrative the next Premier League television deal would be.
Among the speakers on the agenda was Lord Triesman, the chairman of the Football Association. But the FA chairman had not come to congratulate the power-brokers of the modern game for their success in turning football into such a lucrative sport; he had come to sound a warning. Lord Triesman mounted the podium and told the assembled delegates not to consider themselves immune from the effects of the turmoil in global financial markets. Citing the estimated £3bn cumulative debt of the Premier League's 20 clubs, he warned: "Football is obviously carrying a pretty large volume of debt... Debt has to be repaid; alternatively, it has to be refinanced. Your fate isn't in your own hands. This poses us with a tangible danger... it is not inconceivable that a great club, or a very small club, will come under pressures it has not seen before."
It was a warning, however, that got very short shrift. Next up to speak was Richard Scudamore, the chief executive of the Premier League. "What's important," Scudamore told delegates, "is the level of indebtedness is proportionate to your income. The last figures I saw was that indebtedness in professional football in his country was running at about £2.5-£2.6bn, which is about where current annual revenues are in football. So our ratio is about 1:1."
Thus reassured, the delegates returned to their networking. But was Scudamore right? Was Lord Triesman being unduly alarmist? A cold, hard look at the commercial realities of our national game suggests that the Premier League chief executive was exhibiting a dangerous complacency about the impact that the present financial crisis will have on top-level football.
Football is no normal industry, so arguably Scudamore's comparison with the debt burden of other sectors is misleading. Yes, the revenues for Premier League clubs are strong. Last January, the top English league struck a record three-year £2.7bn deal with BSkyB and Setanta. This has another two years left to run. And match-day gate receipts remain healthy too.
But take a look at the annual review of football finance by the accountants Deloitte, released earlier this year. Players' wage costs are huge, eating up 63 per cent of total turnover in 2006-7. At some overstretched clubs, it is considerably more. And wages rose by 13 per cent in that year. That is ravaging the bottom line. Only eight Premier League clubs recorded an operating profit over that period. And pre-tax losses reached a new high. What all this means is that a hefty proportion of the high revenues of top-level football are going straight out of the door in paying players. One thing they are not being used for is to repay capital debt.
Then there is the fact that global credit conditions have changed drastically for the worse, even since Lord Triesman voiced his concerns. The pole-axing of global investment banks and the sudden deterioration in the banking crisis means that the days of cheap credit are over for the foreseeable future. Many of the commercial loans taken out by football clubs will have to be refinanced in the coming years. And the interest rates they are going to be charged will be, in all likelihood, much higher than before (presuming the banks do not simply decide to call in the debts, of course). Those clubs that owe the money to generous "sugar daddy" owners such as Chelsea (which is in hock to Roman Abramovich for some £578m) might well be unaffected. But those clubs that are heavily in debt to the banks are likely to find it an ever-increasing struggle to refinance their borrowings.
There are already signs of strain. In February 2007, Liverpool FC was bought out by two American businessmen, Tom Hicks and George Gillett. They loaded the Merseyside club up with £350m in debt, promising heavy investment, a lucrative new stadium and the tapping of new commercial opportunities. The new stadium has since been put on hold because of "global market conditions". And the leading football financier Keith Harris suggested three weeks ago that the club might find it hard to renegotiate its loans next year with the Royal Bank of Scotland and the US bank Wachovia, both of which have been hobbled by the credit crisis. Some football analysts suspect Hicks and Gillett would sell, given the chance.
West Ham, which has debts of £36m, is the other major victim of the credit crunch. The club's Icelandic owner, Bjorgolfur Gudmundsson, was a significant shareholder in Landsbanki, the Icelandic bank that imploded spectacularly this autumn. Gudmundsson has now ordered a "review" of all his assets. Again, it is widely believed that the club is for sale.
By contrast, Alexandre Gaydamak, the owner of Portsmouth FC, has been a model of openness. The Israeli-French citizen has made it perfectly clear that he wants out. Portsmouth's profligate spending on players and the cost of servicing the club's £32m debts appears to have made it an unviable operation. There seems to be a similar tale at Fulham. After more than a decade in control, Mohamed al-Fayed, the owner of Harrods, is believed to be looking for a buyer for the west London club.
And then there's Manchester United. The most romantic name in international club football was acquired by the US-based Glazer family in 2005. The Glazers took a profitable, debt-free club and shackled it with £666m in borrowings. According to its most recent accounts, £138m of these borrowings are charging a punishing interest rate of 14.25 per cent. Manchester United has the strongest revenues of all the top clubs. But a large chunk is being eaten up by debt interest payments alone. And for all United's stunning success on the field in recent years, the business made a £57.8m loss last year. One football analyst I spoke to suggested that the Glazers would probably sell if they got a good offer, although this is denied by the club.
The conventional wisdom is that the Premier League is so glamorous that new owners will always come to buy any club in financial trouble. As Dan Jones, a football analyst from Deloitte, wrote earlier this year: "The key strategy for earning a return from owning a club appears to be brand value and long-term asset appreciation." But that conventional wisdom might need to be reconsidered. Everton and Newcastle, which are both officially for sale, are struggling to find buyers. A shortage of new, wealthy investors on the scene could leave some distressed clubs in serious trouble.
The possibility of insolvency for some of our top clubs cannot be discounted. After all, it has happened before. Leeds United went on a buying spree in 1999. The club's bank debt shot up to £100m in a few seasons. Leeds were doing well, riding high in the Premier League and reaching the later stages of the lucrative European Champions League. But then a bad spell on the pitch brought the whole edifice tumbling down. The club was forced to sell its best players. This resulted in a destructive spiral of poor performances on the pitch, declining income and the need to sell more players. Leeds now languish in the third tier of English football, a mighty club felled by too much debt.
When it was loading up on borrowing, the board of Leeds United pointed to strong projected TV revenues and healthy crowd attendances, just as many Premier League bosses do now. But it was not enough to save them. And here Stan Lock, a football analyst from the investment advisers Brewin Dolphin, has more bad news: "You can't keep relying on television money. People haven't got the money that they did this time last year. I bet they start renegotiating down [when the broadcasters next come to the table]."
He is not the only analyst questioning the assumption that all is rosy in the Premier League garden. Robert Peston, the BBC's business editor, wrote two months ago: "What's happening in the Premier League is a microcosm of the bubble that precipitated the credit crunch... When prices soar on the back of cash-fuelled emotion, the risk increases exponentially that bust will follow boom." If these analyses are on the ball, those clubs that piled up debt in the good years find themselves woefully exposed.
So how did we come to this? Lord Triesman had these wise words for delegates at the Stamford Bridge conference: "Football clubs are not mere commodities. They are the abiding passion of their supporters. We forget that at our peril." Yet that is exactly what the game's regulators did forget. They allowed clubs to be picked off by dubious investors, many from abroad. Some owners, it is true, have been generous benefactors. And some clubs, such as Arsenal, have borrowed sensibly for long-term growth by building bigger stadiums. But other club owners have engaged in irresponsible borrowing to chase short-term success, jeopardising the future of many famous old football names in the process. The purchase of Manchester United by the Glazer family deserves special attention. This was effectively a hostile takeover of one of the most treasured social assets in the country. The board were opposed. So were the fans. But because United was listed on the stock market, the Glazers simply needed to acquire enough shares with borrowed money to gain control. And the football regulators did nothing to prevent it.
There has to be a better way. The FA, with the backing of the Government, needs to lean on the Premier League to apply its "fit and proper" person test for those who would take control of its clubs rather more rigorously. Andy Burnham, the Secretary of State for Culture, Media and Sport, a keen Everton fan, has already said that he is thinking along these lines. This need not mean a lurch into xenophobic protectionism. There is no reason why foreigners should be barred from investing in British football. But they should invest their own money, not load up on bank debt. The football authorities should also ensure that owners keep their borrowing secured on club assets within prudent limits.
More needs to be done to encourage the fan- ownership model for clubs, along the lines of Spanish clubs such as Barcelona, Real Madrid and Athletic Bilbao. There is a growing appetite for this among supporters, as the growth of not-for-profit supporters' trusts, formed by fans with the ultimate goal of buying a financial stake in their teams, shows. The Government's establishment of Supporters Direct, an initiative to give financial and logistical help to such groups, is a start.
But perhaps more radical regulation is needed too. The German football association stipulates that Bundesliga clubs must be 51 per cent owned by members, preventing wealthy individuals taking total control as in England. It also monitors the amount of debt that clubs take on, stepping in if there is a threat of insolvency. The benefits are plain. The latest Deloitte report shows that Germany has the highest average match-day attendances in Europe, not least because fans enjoy the Continent's lowest ticket prices. And it is an approach that has contributed to financial stability. German clubs are the most profitable in Europe, and their debt is relatively low, leaving them much better placed in the present crisis than many of their English counterparts.
The immediate response of many in England to the suggestion that they follow suit will be that German football is boring, that it fails to attract the world's best players and that their teams are not progressing far in the all important Champions League these days. But will they be singing the same chant if the Premier League bubble bursts on the sharp rocks of profligate borrowing and reckless ownership? The coming year will tell.
Manchester United: The world's biggest football club was acquired in a hostile takeover by the American businessman Malcolm Glazer in May 2005. The club was debt-free and profitable when it was bought out. Now, it owes £666m. And, in 2007, the club made an overall loss of £57.8m.
West Ham United: The east London club was bought up by the Icelandic businessman and chairman of the now-defunct Landsbanki, Bjorgolfur Gudmundsson, in November 2006. The club has debts of £36m and is facing the prospect of paying £30m in damages to Sheffield United. The club's sponsor, the travel company XL, has gone bust. Gudmundsson has ordered a review of all his assets "including West Ham".
Portsmouth: Portsmouth, owned by the French-Israeli businessman Alexandre Gaydamak since July 2006, is believed to owe at least £30m to the banks, although some estimates put the figure at double that. The club's wage bill has risen to some 90 per cent of turnover. The club said in a statement in September that "should the right offer be forthcoming [to buy the club] serious consideration would be given to the proposal".
Fulham: Mohamed Al Fayed has been the owner of the west London club since 1997. The club owes £165m in an interest-free loan to one of Al Fayed's companies. The Harrods owner is believed to be "interested in selling".
Liverpool: Chairman David Moores sold the Merseyside club to two US sports tycoons, George Gillett and Tom Hicks, in February 2007. The American pair have since increased the club's debt to £350m. Plans for a lucrative new stadium are on hold because of "global market conditions".
'How will the top players regard the recession? As the clubs' problem. Their lucrative deals will have to be honoured'
When Manchester United's star defender Rio Ferdinand prevaricated over signing a new contract in 2005, he was visited at night at his apartment block in Cheshire by a group of the club's fans, all wearing balaclavas, who were, to put it lightly, eager for him to change his mind.
"There must have been more than 20 geezers with baseball caps and hoods on. I'd thought there were only two blokes there," Ferdinand recalled in his autobiography. "My heart started pumping furiously, it was scary, but I was high on adrenalin and there was no backing down now."
Ferdinand went out to confront the mob, who ran off when the police arrived. He admitted that he had been scared and worried about what would have happened if his wife had been at home alone that night.
So did he sign the contract there and then? Did he heck. Ferdinand sent in his hard-negotiating agent to secure, at the time, the highest wages ever paid to a United player. Three years later, he signed an even bigger deal that earns him just over £100,000 per week. This is the Premier League: if you want the best players, then show us the money or, quite frankly, you can talk to the hand.
How will the top players regard the forthcoming recession? As the clubs' problem. The clubs have signed lucrative deals with players such as Cristiano Ronaldo (£120,000 per week, in April 2007), John Terry (£135,000, in July 2007) and Frank Lampard (£135,000, in August this year) that will have to be honoured. Taking a pay cut is not an option, because there will always be someone else ready to give the talent the big money.
From the very beginning of English football's modern boom in wealth in 1992, with the inception of the Premier League, it has been the players who have taken the money straight out the game. That will not change until financial catastrophe strikes all of European football, because it is the players who are the key to success and it is the players who make even the shrewdest club-owners pay astronomical sums for their services.
Quite simply, it is a supply and demand industry and there are not enough Rooneys, Fabregases, Steven Gerrards or Robinhos to go around. Such was the power of players that, until recently, clubs would also pay a player's agent's fee – roughly 5 per cent of the contract – on top of the salary. That has now changed, but all it means is that even bigger contracts are demanded to compensate.
Footballers are vilified for their wages, but who would do any different in an industry worth £2.7bn over three years? In some areas of English public life there is a prevailing mood, rarely made explicit, that footballers, who have always tended to be tough inner-city kids, should not be allowed big houses and nice holidays because they are perceived to be crass or unworthy.
What nonsense. English football did not precipitate these economic woes. They were caused by grossly overpaid and incompetent bankers, who are subject to nothing like the public scrutiny of our most famous footballers. If you want to let off some righteous anger in these straitened times, direct it at the suits, not at the footballers who are trying to make the most a very short career.