2.3 Trade and receivables finance, in football terms

Chelsea football club itself spent more money than the Spanish, French, Italian and German leagues put together. But going into more detail, this huge concentration of CAPEX is because the Premier League has the biggest broadcasting rights.

With an estimated 3.5 billion fans around the world, it’s no wonder the finance behind football piques interest, even in the world of trade and receivables finance.

Trade Finance Global (TFG) delved into various facets of trade finance that affect the world of football, including player and receivables finance, project and export finance for clubs, and the ownership and running of football clubs.

Football’s most popular league, the Premier League has grown revenues by 2600% since 1992, but with diverse ownership models and revenue strategies which don’t necessarily complement each other, financial strategies challenge football clubs all around the world. Trade Finance Global (TFG) spoke with the University of Liverpool’s Football Finance Lecturer Kieran Maguire, also the author of ‘The Price of Football’, exploring the complex world of trade, receivables and working capital finance in football and uncovering the hidden financial workings of the game.

The principles of football club finance

Cash is king.

Football clubs are mostly financially challenged by volatility and unpredictability.

Football clubs get their revenues from three main sources; broadcasting rights, ticket sales and sponsorship deals.

Maguire said, “Broadcasting rights normally pay three or four times a year, leaving erratic cash inflows. Ticket sales, in the case of a Premier League club, may have 40-50,000 season ticket holders, who tend to pay at the same time of year.

Sponsorship deals and commercial income, tend to be on an annual basis, so clubs might be paid once or twice a year.”

With erratic income streams on a month-by-month basis, managing cash flow is difficult. On the contrary, outflows tend to be quite constant.

The main costs to a club are talent-related, in employee remuneration.

“We have some football clubs who are paying out 200% of income in wages alone, so that’s before they put on the floodlights, that’s before they mow the grass, that’s before, even by players, they’re already operating at a significant loss,” Maguire said.

Relegation is one of the most serious risks in football and budgeting.

“If we take a look at the step downs in revenue from relegation in the Premier League, if a club like Leeds or Everton was relegated this season, they could see a drop in income of close to £100 million. The people I speak to in the industry operate with two budgets. One on continuing to be in this division, and one based on a step up or a step-down,” Maguire said.

Trade credit insuranceunderwriting transfer fees

Europe’s top five football leagues spent nearly a billion pounds completing over 500 deals in this year’s January transfer window.

Chelsea football club itself spent more money than the Spanish, French, Italian and German leagues put together. But going into more detail, this huge concentration of CAPEX is because the Premier League has the biggest broadcasting rights.

The Premier League broadcasting rights are twice those of Italy, Germany and Spain and four times those of France.

As such, Premier League clubs have large financial commitments in terms of future payments.

Maguire said: “The Premier League clubs collectively, so we’re talking about 20 clubs here, collectively have outstanding payables of £1.8 billion and they have collective receivables of just over £600 million.

We have seen the credit insurance industry become involved as the volume and the value of individual transfer fees has increased.

It is now fairly common that if you do sign a player, that could be spread over three or four annual instalments, simply because even if you are owned by wealthy individuals, that doesn’t necessarily mean that they have access at a day’s notice or a few hours notice to significant funds.”

As with trading companies, the UK Premier League tends to buy from overseas.

Countries such as Portugal remain a major export market for footballing talent and are therefore wanting upfront cash rather than guarantees or delayed payments. This opens up space in the underwriting market for football players and clubs.

Commercial banks versus non-bank lenders - transaction banking services for football clubs

Maguire said, “The likes of Macquarie are very big [in the football financing market], Santander sometimes dip their toes in.

We did have some non-bank niche lenders who appeared to have disappeared from the market.”

Often commercial banks might be hesitant to provide working capital facilities to football clubs, as they are inherently high risk, particularly in the case of relegation.

Maguire said, “Some of the clubs I mentioned to you earlier, the likes of Leeds United, Everton, and West Ham, are not having a good season. We got Southampton down there as well.

Would you be willing to lend to any business as a commercial lender, especially if you are a high street bank, if there was a chance of that club losing its biggest [broadcasting] income stream over the course of the next six months?”

The lender itself could suffer reputational damage, which is why there has been a rise in boutique providers of finance in the industry to provide alternative funding.

However, this often faces controversies and challenges around paying down highinterest debts which can accumulate, in place of shorterterm financing for players.

Maguire said, “If we take a look at the case of Manchester United, since it was acquired by the present owners in an LBO in 2005, it borrowed around about £600 million.

It’s not managed to repay any of the debt.

It did have a listing on the New York Stock Exchange in 2012 which partially paid down some debt, but then it’s continued to borrow since it paid out over £900 million on interest on a £600 million loan.

And the fans get very angry because they feel the money should be spent on facilities for them.”

Future financings, amortization and wizardry

A major cost amongst football clubs is wages, but the second highest cost is often transfer fee amortization.

Maguire said, “If a club signs a football player for £100 million on a four-year contract, it’s one divided by the other. You end up with an amortization cost of £25 million a year. You don’t mark to market because there is no market for individual players. They’re trophy assets, they’re the equivalent of a work of art. Therefore, we tend to go down the straight-line amortization route.

But what we have seen, because lots of people have queried the amount of spending by Chelsea football Club under their new ownership, is they’ve said, well, if we just use straight-line amortization, let’s sign the players on targets and contracts in terms of the amount of time involved. We’ve got players on eight-year contracts, so that same £100 million player works out as an amortization cost of £12.5 million.

From a cash flow point of view, it’s completely irrelevant because it’s actually the instalments which are due in respect of that transfer, which have an impact on cash flow.

But in terms of satisfying the cost control measures [set out by UEFA], it has allowed Chelsea to spend considerably more money than people would have anticipated and stay within the parameters of the allowable loss model that we have in existence at present.

One of the issues of perhaps using an EBITDA-based metric adjusted for cash commitments is one which I personally favour of the football authorities.”