Monday, August 06, 2007

More English clubs face Leeds-style melt-down

Football clubs in the English Premiership and Championship are increasingly risking insolvency as the game’s economy begins to overheat, according to an in-depth survey of football club finance directors published by the Football Industry Group of PKF, a leading UK firm of accountants and business advisers. The report emphasises that increased Premiership television revenue has "piled the pressure on the clubs" in England’s top two leagues without adding to their bottom line profitability as clubs spend more on players’ wages in a bid to win or retain Premiership status. Mindful of the dramatic decline at Leeds United, the report shows that banks are applying more pressure to top clubs seeking to increase their borrowing and increasingly demanding personal guarantees for debt from club directors.

“There are clear warning signs that the football economy is overheating. The fact that 62 percent of Premier League clubs have increased their overdraft will be ringing alarm bells at the banks. Television money has increased but the banks will be worried that the money is effectively by-passing the clubs to be spent on buying and paying increasingly expensive players," Philip Long, head of corporate recovery at PKF and a football sector specialist, said. "The banks’ attitude suggests that, with player costs spiralling, not enough money is going towards the clubs’ balance sheets. The upcoming campaign is being financed through extra borrowings in an attempt to secure the rewards of a successful season but there is growing pressure on the clubs which don’t win. The excessive spending that brought Leeds to its knees is in danger of being repeated and could end with more clubs facing administration and ultimately insolvency.

“Backers like Roman Abramovich have taken the need for profitability out of the financial equation for a few Premiership clubs. But while they can spend money on new players almost at will, other clubs without the same financial muscle are being driven to borrow and spend more - potentially more than they can afford. The pressure is worse for Championship clubs seeking promotion as the pressure to spend is as great but the available resources are so much less.”

According to the report, 69 percent of clubs on the English Premiership expect to make a pre-tax profit in their next accounting period. However, 62 percent of clubs have increased the level of their overdraft in the last 12 months and 31 percent of finance directors said they were under more pressure from their banks. 69 percent of Premiership clubs will be spending more on first team wages this year with the remainder maintaining the same level. 54 percent of clubs are increasing their transfer budget and 23 percent maintaining the same level.

“The increasing importance of competing for lucrative places in Europe and the financial implications of poor performance is fuelling demand for key players. The combination of increased funding from wealthy owners, higher value sponsorship and media rights deals and the ease with which Premier League clubs can access finance is driving up player costs. But there is little indication that clubs are becoming more profitable as a result," PKF partner Stuart Barnsdall said.

PKF argues that the second-division Championship has become the "football pressure cooker" with the research showing 78 percent of clubs – the highest of any league - not expecting to make a pre-tax profit and 77 percent of finance directors coming under pressure to allow greater spending than the club can afford. No Championship respondents had increased their overdraft facility suggesting the leagues’ bankers are not keen to increase their exposure. When it comes to player costs, the Championship appears polarised. A third anticipated increasing the size of the first team squad and 44 percent said they would spend more on wages. However 56 percent were looking to reduce its size and the cost. Only 22 percent will be increasing the transfer budget for the coming season.

“The top half of the Championship is increasing spending, undoubtedly incentivised by the financial rewards of winning promotion. However the results suggest that more than half of Championship clubs either believe their squad does not have the capacity to win promotion or, more likely, are not prepared for the financial consequences of mounting a serious but ultimately unsuccessful challenge. Ultimately this is the league where the biggest risks may be taken. The gamble is how much you can afford to spend to win promotion and some gamblers may spend more than they can afford. If they succeed, the gamble will be worthwhile but the price of failure could be very high," Stuart Barnsdall commented.

PKF’s Football Industry Group commissioned an independent research company in May 2007 to undertake structured telephone interviews with finance directors of football clubs. A total of 59 interviews were completed with finance directors in the English Premier League, Football league Championship, Football Leagues One and Two, Scottish Premier League and Scottish First Division. All responses were recorded anonymously to ensure the confidentiality of the respondent.

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