Football and the young lady of Riga
Football clubs did not always have debt. For some 30 years, Liverpool never had a bank overdraft. Peter Robinson, the club's secretary and the man I consider the best administrator the English game has ever seen, made sure his budgeted expenditure matched revenue from season ticket income and match-day ticket sales. Of course, Robinson was from a different era. Then, old John Moores of Littlewoods owned Everton and had more than a quarter of Liverpool. Nobody shouted for him to open his cheque book.
Club finances were simple. Income was essentially the money clubs received from ticket sales. There was no commercial income and very little cash from television. Banks did not like lending to clubs. Those clubs that did have overdrafts had cosy deals with their local bank manager. Yes, clubs did go into administration, but until the 1990s the idea that they were floating on a sea of debt would have appeared ridiculous.
Football flourished during the depression of the 1930s because it lay outside the economic cycle. You only have to read JP Priestley's English Journey, written in 1933, to see how the sport was the one shining light in that dismal, dishonest decade. But football in the 1990s was a different matter. It became part of the economic cycle. Now, in 2008, the credit crunch is forcing it to examine how it can survive.
During the past decade, clever financial experts discovered football and showed clubs how they could borrow money by mortgaging their income. The financiers were attracted to the game because clubs not only had income from ticket sales but also from huge television deals. The financiers showed clubs how they could use this money, or the rather the future promise of such money, to borrow - what became known as securitised debt. Many clubs took this route. You could say this was football's version of subprime debt.
The 1990s also saw football clubs capitalise on the value of corporate boxes, advance sales of which could finance the building of new stands or even stadiums. Until then, building a new stand could often be a very dangerous business for club owners. In the 1980s, both Chelsea and Tottenham changed hands because of debt problems caused by the cost of stand constructions. Spurs won the FA Cup in both 1981 and 1982 but still had to be sold, with the new owners floating the club on the stock market to clear the debts.
In a sense, floating Tottenham on the stock market was the start of football's shotgun marriages with the money men. But it was only in the 1990s that such alliances became the norm. The decade was punctuated by clubs floating on the stock exchange, with every club that floated heralding it as a new dawn.
Liverpool did not float but the club, which through the Shankly era did not have debt, now wanted money so badly that it did not mind going into the red. The result is it now has debt on its books as well as debt incurred by its American owners in buying the club. And remember, Liverpool spent some three years looking for a buyer, talking to Thaksin Shinawatra before finding Messrs Gillette and Hicks.
Liverpool's search for new owners was driven by its desire to match Manchester United and the income Old Trafford generates. United may not have incurred debt in extending their stadium but in becoming a plc it mortgaged its future. It was only a matter of time before an investor like the Glazers came along, borrowing heavily to buy the club.
The need to match United also drove Arsenal to take on huge debt and finance a move from Highbury. The Gunners did not float on the stock market, much to the chagrin of David Dein, its then vice chairman. This decision may have been because club chairman Peter Hill-Wood, a City man, knows a thing or two about markets. While its financing of the Emirates was tricky and depended on the sale of corporate boxes, the club got its timing right. No such financing would be possible now.
In contrast, Liverpool have postponed plans for a new stadium, while the debt incurred by its owners will have to be refinanced by January. Given that the two banks involved are Wachovia and Royal Bank of Scotland, this may not easy.
To an extent, what has happened to West Ham is an even more sobering story of modern football finance. Two years ago, its former owners decided they wanted a new ground and eyed a move to the Olympic Stadium following the completion of the 2012 Games in London. A new stadium seven minutes from the Eurostar to Paris and very attractive to City high rollers would be financially very lucrative, but the move required money, hence the need for new owners. The first buyer fell through, the second was from Iceland.
However, the man who fronted the purchase of the Hammers spent so much money in the first year that the real owner took over, only to find his own country was going bankrupt, putting West Ham's future at stake.
And all this has been endlessly complicated by the fact that while football was getting into bed with the City, one club, Chelsea, found a deus ex machina, otherwise known as Roman Abramovich. All clubs would like a Roman Abramovich. Yet while the Russian billionaire can act as his own banker, even he is affected by the credit crunch. And if he cannot bankroll Chelsea, what happens?
Football is now in the classic situation of the young lady from Riga, who got on the back of the tiger thinking she could ride it only to end up inside. The credit crunch could well see a few football clubs suffer the same fate.
I'm 
© MMIX~RS~q~RS~~RS~z~RS~27~RS~)
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Lots of clubs have debts - football is a business - sometimes businesses go bust because they have debts. Football clubs sometimes go bust. This may mean that they end up inside a tiger.
Hadn't thought of it like that before.
Maybe Brown and Darling have a £50bn rescue package in mind so that we can part-nationalise all the clubs and football might feel like it belonged to the public again.
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UEFA should introduce a solvency test before clubs are allowed to compete in Europe. For example, football-related revenue must be greater than wages plus operating costs plus overheads plus amortisation plus interest. That would stop clubs (like Chelsea and Manchester City) from buying players they cannot afford. It has to be done at a European level because otherwise Spanish and Italian clubs would have an advantage in Europe.
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Is there actually anything here to comment on?
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I'd like to see the regular gripers whine about this post.
A different perspective. Good stuff.
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I do love the phrase credit-cruch, makes me think of Pac-man!
It would be a shame if football was scarred by collapsing banks, and subsequent teams! I cant imagine a world without teams like West Ham, let alone Liverpool, Arsenal and Man U. Even the likes of Chelsea and Man City cant feel that secure because what happens if one day their investors decide they dont like football any more? Or that the sheiks at Eastlands didn't realise quite how depressing English January weather is?!
On a side-note, my beloved Kidderminster Harriers went to the press this week looking for investment. Not to get the likes of sheiks through the door though - in fact £50k would by you a spot on the board! Now to me that's 2 years wages, or half my mortgage, but to someone in the money, thats half a quarter of a new car!
I'd love to get a seat on our board, and it's almost possible.... all I need are 6 matching numbers... heck, 5 and the bonus ball would probably do it!
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interesting article...
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A salary cap is the answer. Clubs should only be allowed to spend no more than 60% of their overall income on player wages.
This would ensure that clubs act within their means, but would not unduly penalise the 'big' clubs for their bigger earning power.
Thus, Man United, Arsenal etc would still be able to pay out more wages and attract the best players - but even they would have to be a touch more prudent about it.
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Hi Mihir,
just wanted to know if you reply to comments. Your previous blog entry concerned Everton being imminently sold, something which they denied within hours.
You did not respond to that. Have you heard anything more about Everton since?
Thanks
Dan
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Good article but like everything I read on the subject it misrepresents the debt issue.
Comparsions with yesteryear are meaningless. It's like comparing the corner shop to the multi-national chain stores.
Football is now big business and like all big business, clubs use different financial structures to drive growth.
It's not about about debt per se but about the the level of gearing a club has. Also, extremely relevant are the recent and projected growth in revenues and profits or, to put it another way, the clubs ability to service their debt. This of course is fundamentally regulated by the lenders (banks) who are typically risk adverse. Comparison to the sub prime mortgage situation is, with respect, nonsense.
EPL clubs and in particular the top 4 have undergone unprecedented growth in revenues due to the huge expansion of the product into Asia and Africa with the resulting significant increases in TV and commercial revenues. The future expansion potential is still great in these marketplaces as is the ability of these clubs to continue to reap the rewards.
Yes, Liverpool may have to put a hold on their ground development because of the wider (unprecedented and unforseen) issues in the global economy but this is no more than sensible financial managment coming into play.
Just about everything I read on football blogs regarding this issue seems to start with the premise that clubs know nothing about sensible financial managment or financial structures that are robust as oppoosed to reckless. This is simply not the case. In the multi-billion industry they now operate in football clubs have as much expertise on board as any other business and are as capable of managing themselves.
In the case of Arsenal, Liverpool and Man Utd, even in the evnt of a problem with their current structures, their future growth potential would still mean they were extremely marketable to an astue investor, and as the 'jewels in the crown' of attractive clubs would almost certainly be picked-up by a billionaire playboy at worst.
This whole issue is being overstated, started, unfortunately, by Fifa and Uefa who, as we all know, have their own agenda.
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Thank you Wordsofwisdom.
At last somebody who is able to assess the current financial status of football clubs in a realistic manner.
Mihir Bose's articles are generally a cut above other lazy journalists, who love to jump on the stereotype of fat cat bankers and greedy opportunistic entrepreneurs bleeding clubs dry. However, I feel he has fallen into the trap here and gone along with the crowd. I'm sorry but using projected income from corporate boxes at Old Trafford / Emirates to service debt cannot be compared to the subprime mortgage situation.
The fact is that clubs such as Arsenal and Man U are extremely well run businesses, and probably spend a great deal of time developing a prudent long term strategy, as you would expect from a FTSE 100 bluechip.
If you want to be a "clever financial expert" you could talk about the capital asset pricing model and ungeared beta, but the reality is that most of it is common sense. If a business wants to build a new factory, they approach a bank to borrow money, or access the capital markets, or tap their shareholders for further capital. Why should a football club adopt a different approach to raise finance for a new stadium?
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money money money money money money money money money
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Mihir,
I don't want to sound like the moaners that often frequent your page, and personally I found this blog fairly interesting.
However, I am starting to wonder if you are simply using your position to launch an audacious bid for Robert Peston's job as the BBC's financial reporter, as I'm sure given the current economic climate the limelight and money would be wonderful.
Now I understand financial concerns are having a bearing upon football at the moment, but as a sports fan just for once I would appreicate reading something of yours solely about the thrills and spills of sport.
I'm sick to death of talk of debt and money worries, I come to the sports pages to escape! Please just drop your obsession with money for at least one week, you're supposed to be the top SPORTS reporter!!!
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What the credit crunch will do is weed out the badly run clubs. Notice I say badly RUN clubs, even a non league outfit run correctly can survive although obviously the deep pockets of a sheikh adds a certain amount of protection.
What will be interesting is clubs' reactions to ticket prices when Joe Bloggs can no longer afford to pay £25+. My advice? Go and watch non league, entry for a fiver or so and you get to watch REAL football without the glamour.
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Since when did 'Riga' rhyme with 'tiger'? The limerick either doesn't work, or it's American!
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Excellent article. Football needs more of this sort of perspective and rational thinking.
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This blog is better than the usual cutting and pasting of press releases, but wrong in several key aspects.
Man Utd built the best team in Europe without incurring debt, as Liverpool did in the 1970s/80s. Utd built the biggest club stadium in Britain, with no money from the Taylor report. The size of their stadium, and their ability to constantly fill it, was key to their financial success. Debt didn't enter into it. Skilled planning and the building of a team by sticking with a manager played a bigger part.
The 'unsustainable' teams in the Premiership are those who have a ludicrous wages/revenue ratio. A salary cap would really help here, but it would need to be UEFA-wide to avoid false disparities in European competition. I doubt Platini has the bottle to do such a thing - he prefers slagging off English clubs.
Perhaps Mihir could focus on the way Premiership clubs are financed compared to other big European clubs - Inter, Juve, Real Madrid and their magical training ground trick, etc.
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@homeoftheshoutingmen
You may find articles from a finance stand-point boring but, as Mihir as shown with the example of West Ham, a club's financial footing is a critical part of its survival - both in the Premier League and as an entity.
I disagree with your thoughts as this subject is something which the average fan needs to learn more of, for example the boardroom issues that are bedeviling Newcastle, and the likes of West Ham, Everton and others. We've seen clubs like Leeds and Forrest suffer from poorly run administrations and current economic climate will only serve to hinder clubs whose administrators are not up to the task.
Clubs and fans need to know about these issues are they can affect a team instantly, the factor is more critical than opting for 442 over 433 or not signing that target man up front, for example.
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Sorry but some of the comments on here are a little naive. Most companies are effectively forced to take on debt by shareholders "gearing", since the interest on a loan is cheaper than the expectations of shareholders return (any company ungeared would typically be forced to to take on gearing and simplistically realease money to shareholders since investors would demand it).
This is the basic premise of what you might call the foreign business investement (rather than the sugar daddy type - although even this is dangerous since the club is levvied with debt inthe form of directors loans that effectively are unrecoverable should the director walk away). The problem is the level of gearing that they have taken - in some clubs this is huge by industry standards, simply very little of the value of the club is owned by the shareholder. This is a factor of many things such as the problems caused by majority shareholding (at least one North West based club are effectively stacked with debt in this way to allow a "cheap" majority investment), but the crux of the matter is that it will inevitably leave the company unstable in a period of finacial uncertainty (read credit crunch).
I hope that football continues to move along unaffected and seeming oblvious to world around them, I however doubt it will (there is no way today I would sanction finacing packages for certain clubs that would rely on revenue generation from Champions League etc when all too many around them are content on competing on with apparent endless and unstainable finacial resource)! Expect another Leeds or two, the difference being that Leeds, dispite having some huge problems, had a fraction of the debt we come to expect as norm these days.
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"A different perspective. Good stuff."
"interesting article.."
"Mihir Bose's articles are generally a cut above other lazy journalists"
"personally I found this blog fairly interesting"
"Excellent article. Football needs more of this sort of perspective and rational thinking."
---------------------------------------------
It's a tough call this time for employee of the month...
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Interesting well-written article, didn't really know anything about the history of football finances and know feel enlightened. Although I do agree with wordsofwisdoms point that any comparison with subprime debt is a spurious idea...
The two are not remotely connected. Every firm in this country has some level of debt, this allows it to run succesfully and not to have to wait for almost certain cash flows ie Season Tickets. It is standard business practice and not remotely similar to borrowing 125% of the value of your house when you have no income...
Still though, the rest of the article was very interesting and I dont mean to criticise.
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If the bottom fell out of football would that really be so bad?
Now I appreciate that people love their clubs but wouldn't you really, deep down, rather not pay £35-50 to watch a game? Or shell out £30 a month for your Sky Sports package? Or pay £40 for a shirt?
One thing that is immune to the credit crunch is the game itself. There will always be football, and maybe it would be better served by the clubs if it was made the top priority once again.
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The subject of bank loans and scrutinised debt is one which cannot be mentioned in the same breath as my club, Hull City.
The club is in the black, is debt free, play in a stadium funded by the local authority and telephone supplier and they don't spend large sums on transfer fees.
The attendances are near capacity and the income raised by the selling of replica shirts etc has increased once we hit the 'big time'.
The club are holding their own in the best league in the world, and long may that continue in the same vein.
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Just a couple of comments: I think it's Gillett not Gillette - probably not 'the best a man can get'.
As for Liverpool going into the red...
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In reponse to modstakes comments
When did football ever belong to the fans, I am sick of this rose tinted bullsh*t view.
It is such a naive view old people have, you would be forgiven for thinking it comes from the minds of children. You should know better. (From a - very disgruntled with older generation - 24 year old)
Anyway, good article Mihir, very interesting and salary cap's seem to be the answer but how practical and the legality of it remains to be seen.
I was wandering Mihir, how you think it will go and what the answer will be if there is one?
I would have thought it would be based against income/revenue but to be honest I wouldn't have a clue. And secondly do you think anyone would agree to it?
Look forward to hearing your response, if you do, as after your book on the attempted Manchester United takeover (my club) I have a great deal of respect of your views and don't agree with the majority of comments made by people who read your blog. (Gotta wonder what kind of idiot continually reads somehting they don't like?!)
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jdkoke273 - what proof do you have I'm old? If you read my comments, I think it's conceivable I wasn't being entirely serious - will some clubs literally end up inside tigers?
The point I'm trying to make is that those who live by the sword die by the sword. Football clubs have evidently been businesses for some years now, and just because a lot of people care about each individual club, it doesn't insulate them from going bust if times grow harder. Although fairly eloquently expressed by Mihir, my only feeling is that isn't this fairly obvious?
Incidentally, Mihir, what makes Peter Robinson such a great administrator? Would he have any relevance in today's game? From your comments it didn't sound as if he had invented the wheel.
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