Phineas Taylor Barnum would have enjoyed the recent antics at two of today’s most famous circuses, Manchester United and Barcelona. After all, he loved high-wire acts and was not afraid to pay unprecedented wages for superstars.
But the famous American showman also had a note of caution for the great entertainers of our age: “There is scarcely anything that drags a person down like debt.”
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Barcelona’s various IOUs have been the talk of football for over a year, and another false dawn at Old Trafford has reminded everyone that their crushingly unimaginative owners borrowed the cash they used to buy the club and United have been paying for the privilege ever since.
Despite the turmoil on the pitch, many supporters still point the finger of blame at those owners, the United States-based Glazer family. United’s net debt has increased drastically overall since Sir Alex Ferguson’s retirement as manager in the early summer of 2013 yet a first post-Fergie Premier League title seems ever further away.
However, United and Barcelona are not the most indebted clubs in football. Not by a long shot. That title — insert your own gag here — belongs to Tottenham Hotspur.
But there are many varieties of debt, and they range from scary to statistically irrelevant, stupid to smart.
For example, Barcelona’s total debts of about £1.1billion ($1.3bn) include some of the most frightening flavours, as a quarter of it is “short-term”, which means it must be repaid within 12 months. The Catalan club’s short-term debt is the highest in Europe, double that of United, who have the highest short-term debt in the Premier League.
Barcelona, in fact, tick almost every box on the debt variety chart — they owe money this year and beyond to banks, other clubs, players, staff, the Spanish government and companies that supply them with goods and services. They are an equal opportunity borrower.
Tottenham’s £1.2billion debt, on the other hand, is largely made up of the most chilled-out variety — £854million in low-interest loans they do not need to repay until 2042.
The north London club borrowed that money to build their new stadium and the increased matchday revenue should comfortably cover the interest payments while also raising the value of the club. For the big banks that did the loaning — Bank of America, Goldman Sachs and HSBC — this was a low-risk bet and the terms offered reflect that.
“Debt is not inherently bad,” explains Ian Clayden, the national head of professional sports at global financial services firm BDO.
“It’s all about the purpose of the debt. If you’re investing in growth, why is that bad? But if you’re pumping in desperate amounts of money just to fund losses, that’s downward-spiral behaviour.”
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Roger Bell, co-founder of financial analysis firm Vysyble, agrees.
“Is debt a good or bad thing? Well, it depends what you’re using it for,” Bell explains.
“If you are using it to finance something that’s economically useful, (then) go for it, knock yourself out. You’re creating value. But if you’re using it just to shore something up, you’re destroying value.”
It is also hardly surprising that club debt has risen following a pandemic, with clubs of all sizes forced to fill holes in their accounts made by missing matchday revenue and broadcast rebates.
Debt, however, remains a four-letter word for most football fans, and it is easy to see why.
By the time Malcolm Glazer had completed his hostile takeover at Manchester United, the club had gained £660million of debt they had never had before.
Thanks to the bum-squeakingly expensive hedge-fund loans Glazer needed to close the deal in 2005, the club’s average annual interest payments between 2006 and 2010 were £95million, more than a third of their annual revenues.
Thankfully, they still had great players and manager Ferguson in the dugout, so the team kept winning and, in 2010, Glazer’s children were able to refinance those loans with far cheaper corporate bonds, taking the residual takeover debt to £500million.
Two years later, they floated a chunk of the club’s shares on the New York Stock Exchange, raising another £150million, half of which they used to reduce the takeover debt, half they pocketed.
But, a decade on, that takeover debt is still there, sat on the club’s balance sheet, going nowhere, kicking out interest payments. And now, thanks to COVID-19 effectively shuttering Old Trafford for 18 months, that Glazer debt is joined by an overdraft facility, taking the club’s gross debt close to £600million again.
Too much? Well, that goes back to what you think that debt is for.
The Glazers will tell you it was to invest in a business, help it grow and create value.
They will tell you the club’s revenues increased year on year — until the pandemic struck — reducing the impact of the interest payments until they were just another small and acceptable cost of business.
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They will tell you their clever financial engineering has enabled the club’s managers to match their state-backed or oligarch-owned rivals pound for pound in the transfer market. They will tell you United are still the biggest club in British football and one of the world’s most valuable sports brands. They will tell you Old Trafford, the biggest club stadium in England, is packed for every home game.
The collective wisdom of the New York Stock Exchange, however, would appear to agree with what many United fans think about the Glazers: it’s time to go.
As Vysyble’s Bell puts it: “Since 2015, Manchester United’s debt is up by £181million, which doesn’t sound great, and you can see what the market thinks of the decisions the club’s directors are making from the share price.
“It was $14 when the club floated, but it’s $11.55 now (Bell was speaking last Tuesday before the shares rallied by 10 per cent on the Wednesday, almost certainly because of renewed takeover speculation).
“The market is looking at Manchester United and saying, ‘We’re not that keen, thanks. We can see a team that needs a complete rebuild and a stadium that’s falling down’. But the takeover debt isn’t the issue. That’s ancient history. The share price is the problem.”
This chimes with what Kieran Maguire, the accountancy expert behind the Price Of Football blog, book and podcast, told The Athletic last year.
“United had £6million in the bank and no debt when the (Glazer takeover) took place,” Maguire explained.
“The lenders provided about £600million of the cost of the acquisition. The club is now worth, in my opinion, at least £2.6billion, and the debt is still £500million, which leaves more than £2billion for the shareholders and a 2,000 per cent return on investment.
“Initially, the interest rates were high, peaking at 16.25 per cent, which reflected the risk in the eyes of the bank. But as the revenues have increased, so the risk level has fallen and the debt is now a non-issue. The banks get a guaranteed £20million in interest every year and the Glazers can kick the can down the road in terms of the capital payments.”
Maguire has not changed his views about United’s takeover debt and agrees with Bell that the club’s real problems are long-term mismanagement and relative decline.
Speaking to The Athletic this week, Maguire says the recent increase in their debt is a “COVID-related finance solution”, with the Bank of America overdraft providing the cash lost from a season and a bit played without home crowds. With annual matchday income averaging between £100million and £110million before the 2019-20 season, the pandemic hit United hard.
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But the Glazers’ failure to find love in Manchester has not put off their compatriots from taking similar punts. Far from it.
After all, the Glazers have earned at least £500million in dividends, fees, share sales and soft loans from United since 2006.
Clayden’s firm BDO has just published its annual survey of club finance directors in England and found that more than four in 10 owners are looking for a “full or partial exit”, and most of the interest is from US-based private equity firms or Americans who have made their fortunes in that world.
This should not come as a shock to anyone who has been paying attention to who has been buying European clubs recently, with this summer’s Chelsea takeover coming down to an auction between four different American syndicates, AC Milan being sold by one US private equity firm to another, and other American groups buying clubs or large stakes in clubs from Leeds to Spezia.
And all these deals have involved borrowed money in one form or another.
No sooner had the Chelsea takeover been completed than new chairman Todd Boehly and the other owners had raised £800million in debt for investing in the team and stadium.
Unlike the Glazers, Chelsea’s new owners are bearing this debt themselves, but it will all come out in the wash eventually — they will want a similar return on investment.
Chelsea, of course, are no strangers to debt. They were the most indebted club in Europe until a couple of months ago, as they owed previous owner Roman Abramovich £1.5billion, which was built up over nearly two decades of asset-appreciating over-spending.
“Fans don’t always get it, and I understand why,” Clayden says. “They instinctively see it as a negative, but debt is normal in the private-equity world, and that’s where most of today’s investors come from.
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“For them, it’s simple: If you hope to grow the value of what you’re buying, you want to keep the growth for yourself, so you would always rather borrow money than give away equity. Debt gets interest, not equity. And, of course, we’ve just had a decade of historically low interest rates.”
Even now, with central banks trying to slow inflation by raising those rates, money is cheap providing you have the right credentials. And sports teams, of the right size and in the right leagues, are no longer immediately laughed out of meetings of investment committees.
“Sport is increasingly seen as an asset class now — it’s not just a hobby,” Clayden says. “And if that’s the case, we are going to see more of these sophisticated investors, many of them from the US, enter the market. And that means we’ll very probably see the amount of debt in the game go up.”
Maguire explains it like this.
“There is nothing wrong with debt per se, it’s the timings of cash flow that matter,” he says.
“Spurs have borrowings of £854million, but it’s the equivalent of an interest-only mortgage for the next 15-20 years, and they are paying about £25million in interest on a stadium that is bringing in £80million a year in additional revenues.
“An advantage of debt is that it is a fixed claim on a business, so that when inflation is high, borrowing at the rates Manchester United and Spurs have done actually saves money as the real cost of borrowing — interest rate minus inflation — is negative.”
Bell agrees.
“The rule of thumb, established over many years, is that equity is 1.5 to two times more expensive than debt,” he says.
“Now, this is partly because accountants don’t include the cost of capital in the books, but even if you do recognise the cost of capital — and we know there is a cost — debt is slightly cheaper because of the tax relief. And these are the things finance directors of any company are trying to work out when they look for capital — it’s a balance between debt and equity.”
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So, while the leveraged buyouts we have seen at United in 2006 and up the road at Burnley last year remain controversial, they make sense financially. For the investors, that is.
“If we use a house analogy,” Maguire says, “you buy a house for £500,000, contribute £50,000 yourself and borrow the rest, so the bank is owed £450,000. A year later, the house is worth £600,000, so the value has increased by 20 per cent but the return to the shareholders is 200 per cent.”
As Clayden put it, these guys want to keep that growth for themselves.
When then UEFA president Michel Platini first announced his intention to introduce financial fair play (FFP) rules across Europe, he made it clear he thought clubs had become too indebted. They were chasing their losses at the roulette wheel and that had to stop.
That was in September 2009. Six months later, Portsmouth became the first, and so far only, Premier League club to enter administration. They would do so again two years later but by that time they were in the Championship, where insolvency is like a badge of honour. But around the same time as Portsmouth’s second dose of administration, Scottish giants Rangers were going bust, too. Fans of clubs big, small and every size in between were warned: in football’s lottery, it could be you.
But clubs and their owners still take on debt for a variety of reasons, not simply to avoid going to the wall.
Newcastle United’s debt, for example, raised some eyebrows last month when they announced a lending facility with HSBC.
At first glance, this seemed like a strange move for a club majority-owned by Saudi Arabia’s largest sovereign wealth fund. Why borrow money from a high-street bank when your owners can just wire it over?
But what Newcastle have done is simply business as usual for football clubs, where the money going out is steady — wage bills — but the money coming in — season-ticket sales, sponsorships and TV rights income — is lumpy. The move from Barclays to HSBC probably had more to do with co-owner Amanda Staveley’s falling-out with the former than the latter offering Newcastle a free moneybox or super saver’s badge.
And unlike clubs further down the pyramid, Newcastle can still borrow from high-street banks at rates available to those banks’ other corporate customers.
“There isn’t much appetite among the high-street banks to offer commercial loans to clubs,” Clayden says.
“The big clubs can get them but that’s about it. They can leverage their central media rights income and transfer fees because those receivables offer a high level of security to lenders and the returns, in terms of interest, are good.
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“The problem for most clubs comes when you are looking for a loan to rebuild your stadium, because banks just don’t want to deal with them. If things go bad, the banks think they won’t be able to call the loan in, otherwise 80,000 fans might turn up outside their headquarters.
“The other issue is most clubs just don’t meet a bank’s lending criteria — their investment and risk committees will be looking for positive cashflows and EBITDA (earnings before interest, tax, depreciation and amortisation). This is why more than half the clubs we spoke to took the EFL’s COVID-19 loans, but no Premier League club needed one.
“The EFL clubs didn’t have much choice and the loans were interest-free, but they were pretty restrictive as they were effectively advances of central distributions and that limited cashflow further down the line. They also had to be repaid pretty quickly.”
Premier League clubs, or Championship ones in receipt of parachute payments, have more options.
For example, they can borrow from Macquarie, the Australian bank that has filled the gap vacated by its British counterparts. West Ham United are a recent example of a club who have chosen to sign over the transfer fee instalments they are owed for a player — Sebastien Haller, for example — in exchange for money upfront minus Macquarie’s commission in the shape of interest payments.
“Lenders like Macquarie have strong enough balance sheets to be comfortable with the risks, but they also know transfer receivables are protected by football’s preferred creditor rule, the Premier League’s creditworthiness is very high, and those broadcast contracts are rock solid,” says Clayden.
Maguire believes Macquarie and other lenders active in the cashflow-loan market are “providing a useful service, as the traditional banks are a bit wary of clubs.
“I did an investigation into a club many years ago following relegation and the local bank manager was terrified, as he thought fans would put his windows out and his kids would be bullied at school if the bank was seen to put the club into administration.”
So, should we all just chillax about football’s debts, then?
Bell is not so sure.
“When you look at the price Boehly and his partners paid for Chelsea, an awful lot of things have got to go right to justify it,” he says.
“Maybe they are right, but I wouldn’t want to take that chance. Good luck, though, because sooner or later, markets correct themselves.
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“I remember when people thought the housing market in south east England would never contract, but then it did by about a third. I can’t say when — I wish I could — but all markets balance themselves in the end.
“When other sectors are faced with the conditions we are seeing in football, when economic profits are rarer than hens’ teeth, companies merge. But Manchester United and Manchester City aren’t going to do that, are they?”
Mark Gregory is a visiting professor of business economics at Staffordshire University and author of More Than A Game, a book about football’s increasingly complicated finances.
“Debt is creeping up,” he tells The Athletic. “All businesses use it, but it needs to be at a level a club can service from income. The risk now is rising interest rates make existing debt too expensive.
“The other side of it is the type of debt. Stoke City’s interest-free, owner-provided debt is different to expensive overdrafts or debt provided by owners dependent on another business. For example, it was not that long ago the debt profiles of Stoke and Derby County were similar, and we all know what happened at Derby. I’d be cautious about Spurs’ debt, as it is dependent on delivering the business plan.
“Football is in a bit of a catch-22, as many clubs don’t want owner finance and this forces clubs to look at debt. A more sensible approach would allow investment, if it’s in the form of equity, as part of a more structured regime with salary caps and better monitoring.
“In the past, English football’s money used to flow around the system better, as money was shared between the divisions more evenly and big clubs would buy players from smaller ones. But that started to change as football became more international and money started to leak abroad.
“Now we have lots of clubs running at a loss and the only way you can fill the gap is with equity or debt, but the game has actually limited how much money owners can sink into their clubs via FFP rules. Surely we can find a model that would allow some more owner investment with limits and cost constraints?”.
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For Gregory, debt is not the cause of football’s problems, it’s the symptom.
He thinks the financial model is broken and there are many who believe him, most notably the UK’s former sports minister Tracey Crouch, whose fan-led review into the game’s finances and governance has been sitting in the government’s in-tray for nine months. They have been rather distracted, though…
Will a new prime minister tell his/her sports minister to pull their finger out and come up with legislation to force football to share its money more evenly, stick to sensible cost controls and incentivise responsible ownership?
Another fabled Barnum adage might be applicable here.
“There’s a sucker born every minute.”
(Top photos: Getty Images; design: Kris Sheasby)
