Mind the gap: football finance after lockdown

A version of this article originally featured in SportBusiness

17 August 2020

The COVID-19 pandemic resulted in the simultaneous cancellation of sporting events around the world. With strict social distancing measures set to remain in some form for the foreseeable, Jerry Korczak, who leads Macquarie Group’s sports financing business, reveals the impact on European football clubs and the prolonged implications of losing out on spectator driven match day revenues. 

As the COVID-19-delayed Premier League season winds down and with promotion, relegation, and European qualification issues finally resolved, football clubs are inevitably thinking ahead to the 2020-21 season.

"In the Premier League the hard cost of running on empty stadiums could be between £7-£15 million for each club." 

Jerry Korczak, Managing Director
Head of Sports & Entertainment Structured Finance Macquarie Group

There has been an unprecedented level of uncertainty for clubs and, at the time of writing, it is still not clear when English Premier League - or any of the other major European leagues - are scheduled to start their next seasons or play to full stadiums again. In response, many owners and financial directors are diligently planning for the worst and assuming that there will be no fans in stadiums before the end of the year.

The loss of ticket revenue, merchandising, and food and drink sales presents a significant challenge for clubs. In the Premier League the hard cost of running on empty stadiums could be between £7-£15 million for each club, depending on the size of stadium and scale of their match day operations.  The top football clubs benefit significantly from media and broadcasting revenues, but the clubs most reliant on game day revenues now face a significant near-term challenge.

Historically, when facing a cashflow crunch, clubs have relied on well-resourced owners to provide additional short-term support. However, many of these individuals or groups are currently having to focus their energy, attention and investment on their main cash generating businesses – to ensure those primary businesses successfully navigate the economic impact of the COVID-19 pandemic. The result is that football clubs will need to look for other ways to manage their current cash flow and working capital challenges. 

For fans, the most visible indication of these challenges will be a reduction in the number and level of summer transfers.

As a result of these cash flow challenges many football teams, with perhaps the exception of some of the biggest European clubs,  will be looking to either borrow money to cover the short-term funding gap, until the fans return, or find ways to reduce costs.

Prior to the global financial crisis, many clubs would have resorted to borrowing against large fixed assets, such as stadiums, to manage cash flow challenges. However, using long-term lending to fund short-term spending carries risks for lenders – and requires the clubs to ensure they have set aside sufficient funds to repay when the loan matures. The result was several defaults after 2008, and the end of this type of lending for all but the largest clubs that fund real estate developments combined with their stadium.

Fortunately, since then, the market has matured considerably – both with the introduction of Financial Fair Play and the increasing professionalism of clubs’ financial departments. Football club’s finance departments are now staffed with highly trained accountants, providing greater comfort for lenders and encouraging more UK based debt providers back into the market.

The main mechanism for lending is now receivable financing, which use future guaranteed income to provide immediate working capital for clubs, smoothing the club’s cash flow throughout the year – which can be helpful during periods of low or reduced income as we are seeing currently.   

Even under normal circumstances cash flow management is an issue for many clubs because of the timing of centralised payments from leagues. In the case of the Premier league, payments from media revenues are made in July and December - with third payment including prize or merit money in May.  However, spikes in clubs’ expenditure, including player bonuses and contracts, typically fall in other points in the year – meaning a negative cash balance for clubs between December and March ahead of the May payments.

Right now, that pressure is exacerbated by the absence of game day revenues.  The simple fact is that there are only so many costs that can be cut – so third-party financing could become a more popular option for clubs looking to navigate the coming months.

While receivables financing is designed to provide working capital, banks and Private Equity firms can also offer a potential source of larger funds for strategic or development finance.  Whatever the need, institutions lend according to the security offered by the club and their own appetite for risk.  Because they are contracted to receive a minimum sum each year from the Premier League - and therefore guaranteed income - England’s top tier clubs still have a range of finance options available to them to help them navigate the challenges ahead.