Thursday, March 20, 2008

Have City been saved from the Curse of Schechter?

With credit crunches and banking collapses now dominating the news I thought I'd take a look at City's recent debt levels.

The club's debt had reached a record £68million in the financial year to May 2007. That includes a £44m loan package made up of a £30.3m loan arranged by Bear Stearns in 2002 and a £13.7m loan arranged by Schechter & Co in 2003.

Both loans were securitisations, which means the debt was secured against future season ticket sales. Back then securitisations were a new type of financial package, and offered clubs the chance to borrow money which wouldn't be available from traditional lenders.

Understandably, they soon became popular. Between 1999 and 2003 nine English clubs took out securitised loans, seven of which were arranged by Schechter & Co (details here). But looking at how these clubs fared after the securitisations makes interesting reading, and provides a pointer to where City were heading before the takeover.

As the table below shows, four of the clubs were subsequently relegated (in Leeds' case twice) and three of those ended up in administration, while the three clubs that didn't go into administration are all currently in a relegation battle. In fact, the only club whose league position is higher than when they took out the loan is City - and that's only thanks to the fresh funds provided by this summer's takeover.

Not that securitisations are necessarily a bad thing in themselves. Everton raised £30m this way though Bear Stearns in March 2002 while Spurs borrowed £75m from Lazard in November that year and neither seem to have suffered as a result.

The problem appears to be that few clubs spent this money wisely. In a 2002 interview Andrew Lee, football analyst at Dresdner Kleinwort Wasserstein, foresaw the problems that lay ahead:

'You give them (clubs) money up front and they spend it willy-nilly. To recoup what Man City have spent, they'll have to get into Europe or win something. I find some clubs' financial planning comical,' he told The Observer.

Another prophet of doom to be proved right was John Moore, football analyst at Bell Lawrie Whitetold, who called football securitisations 'an accident waiting to happen':

'Football clubs have two assets: their ground and the goodwill of their fans, and that is what guarantees the revenue stream,' he says. 'Now clubs are cashing those assets. But you can only sell the crown jewels once. Anelka will probably be middle-aged by the time Man City finishes paying off its debt. 'Football clubs badly need to cut costs. Securitisations just give clubs more money to spend, when many have spent too much already'.

Certainly, the old City and Newcastle boards are good examples of bad housekeepers, with both sharing the unfortunate habit of blowing small fortunes on crocked ex-Liverpool strikers (there's a breakdown of Keegan's spending here). Ipswich provide another example of recklessness, spending £22m to increase Portman Road's capacity from 22,600 to 30,000 - then attracting an average crowd of 25,000 the following three seasons.

In City's case, the debt only became a real problem after the move to CoMS in 2003. The club spent £20m fitting out the commercial areas of the stadium (details in this pfd file), which was £5m more than originally budgeted. The deal struck with Manchester City Council also limited the financial benefits of the move, with 50% of ticket sales between 34,500 to 40,000 and 60% of sales above 40,000 paid to the council. Other added expenses were also included in the deal, with the club picking up the £200,000 a year bill for security on the whole 32-acre SportCity complex.

As the table below shows, the increases in ticket income following the stadium move was dwarfed by the increase in operating costs:

According to this analysis by academic Tom Burns, another potential downside of a securitisation is the restrictions that can be placed on the operation of the club, through the signing of covenants.

These could include a restriction on raising debt elsewhere, the creation of a reserve fund to protect the lender from payment defaults, and restrictions on 'any changes to the nature of the business without the approval of the bondholders'.

It's not known what conditions had been placed on City's loans, but it is possible that the nature of the deal created problems for City's cash flow, particularly as it is the norm to place a proportion of season ticket money into a separate 'locked' account until the annual debt repayment is made.

What is clear is that City's debts were creating serious problems. With the club running at an annual loss, the finances had been shored up by the sale of SWP, loans of £19.2m from John Wardle and David Makin, and in December 2006, by a £10m bridging loan from Standard Bank that was due to repaid in August.

It's unclear what City's current debt levels are or what they will become, but in December Thaksin gave this insight into his current plans, telling Reuters:

"If we want to own and manage Manchester City football club forever, we have to find other sources of income. You have to know how to use modern financial instruments, that's what we're planning.
"Securitisation is the name of the game they are playing in Western countries. We have to work on that.
"If we manage clubs in the old style, it's not going to work. The Premier League is global by nature."

That begs the question of what Thaksin actually intends to securitise, as he can't be referring to season tickets sales. One possibility is that future sponsorship income could be the next to be mortgaged which, as long as our finances are entwined with Thaksin's, should not pose a problem. But whatever the current debt is, it's clear we've got a long way to go before matching some Premiership clubs, whose debt levels are listed in this Telegraph article:

Man United: £660m (at June 2006) - £42m annual interest
Liverpool: £350m (at January 2008) - £30m annual interest
Arsenal: £307m (at November 2007)
Fulham: £159m (at June 2006)
Newcastle: £110m ('liabilities' at June 2007 – before Mike Ashley takeover)

~ It should be pointed out that Bear Stearn's recent problems shouldn't affect City's debt in any way.
The £30.3m loan didn't actually come from Bear Stearns itself, but was arranged by them on behalf of another lender, reportedly insurance giant Axa .
The debt will exist regardless of what happens to Bear Stearns and is repayable at the agreed interest rate, which is 7.27% fixed for 25 years on the £30.3m loan and 7.57% fixed for 25 years on the £13.7m.

~ The biggest loser in the Bear Stearns collapse is Spurs owner Joe Lewis, who is £600m out of pocket after building up a 9.7% stake in the company. Though according to newspaper reports he still has around £1.5billion tucked away.

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