Football catches Enronitis
Sale and leaseback: the financial instruments used by British clubs to hide the extent of their debts
On the face of it, there may not appear to be much in common betwen the corporate accounting scandals such as Enron and World Com that are rocking American capitalism, and the financial crisis gripping the Football League.
But as football’s financial crisis deepens, it is becoming apparent that clubs have been using financial instruments that hide the true extent of their debts.
When Bradford City entered administration in May 2002, the club’s debts were revealed as £22million. However, when a list of creditors was released in August, that figure had increased to £36.5million. Just one season after relegation from the Premier League, many questioned how the club had managed to run up such liabilities. It emerged that Bradford had used a facility called off-balance-sheet third-party transfer funding
Off-balance-sheet third-party transfer funding – known in the City of London as ‘sale and leaseback’ – is a relatively new phenomenon. This allows clubs to ‘buy’ players by leasing them from the third party – for example, a bank – over the length of the players’ contract. The pioneer of this type of funding is a company called Registered European Football Finance (REFF), run by Ray Ranson, the former Manchester City defender.
The benefit for the selling club is that they receive the money up front rather than in instalments. The buying club are able to spread their payments. In 2001, the accountants Deloitte & Touche revealed that around £120million was deployed in this manner. The case of Bradford, however, has raised questions about the suitability of this type of financing and the Football League’s insolvency policy.
The Football League’s rule states that all debts must be honoured before a club can play. It means clubs that go into administration must pay all outstanding transfer debts and meet players’ wages for the remainder of their contracts before being included in the fixture list. The use of off-balance-sheet third-party transfer financing effectively changes the status of a club’s debt from football debt to unsecured trade debt. It therefore allows a club to run up debts when acquiring players that are not owed to other clubs, but to financial institutions.
In the case of Bradford, £7million was owed to the German insurance company Gerling, which had underwritten the debt on behalf of REFF. As a result of the creditors voluntary agreement between Bradford and all its creditors, Gerling was only able to recover £700,000, with a further £1million to be paid in a year’s time.
Some may think it prosaic that one the biggest losers to emerge from the spectacular bursting of football’s bubble, which followed the collapse of ITV Digital, should be a German insurance company. Off-balance-sheet third-party transfer financing was a product of football’s boom, which reached a peak in 2000 when the Premier League signed £1.6billion worth of TV contracts and the only way football was thought to be going was up. The phenomenon fed off football clubs’ desperation for instant success and the lenders saw it as a way of getting a slice of football’s ever-increasing pie.
Furthermore, while there may have been some nervousness about the future value of TV rights, it was assumed that player values would continue to rise. Now, with over 400 English players out of work – some even playing for nothing – and the subsequent collapse of the transfer market, any financial instrument backed by the sale and leaseback of players looks decidedly risky.
If the case of Bradford had happened in isolation, then the episode could have served as a warning for financial institutions about their involvement in a business as volatile as football. However, Deloitte & Touche’s estimate last summer, that English football had at least £120m of off-balance-sheet debt, is thought to have increased significantly since.
Because Bradford owed Gerling less than 25 percent of its total debt, the German insurer had little choice but to accept the settlement offered and write off nearly £6million – had it refused the club would have gone into liquidation and it would have received nothing .
A creditors voluntary agreement needs the support of 75 percent of creditors, and all other creditors accepted the terms on offer. But if another club owed more than 25 percent to such an institution, it could find itself being forced into liquidation in order to satisfy its creditors. It should be noted that Bradford’s debts, at £36.5million, are less than half of those run up by some Premier League clubs.
The Football League is concerned about the increase in off-balance-sheet third-party transfer funding because it circumvents its insolvency policy, which exists to keep clubs in business. But the League appears powerless to do anything about it. That Bradford survived means that the League can duck the issue for the time being, but as football’s recession runs deeper, it could be forced to confront this development sooner rather than later.
When a bigger club than Bradford is forced into administration, which is surely only a matter of time, off-balance-sheet third-party transfer funding will become an issue the game will need to address urgently.
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