Liverpool - Keep The Car Running

This has been a strange season for Liverpool. On the one hand, they have won their first trophy since 2006 by beating Cardiff City to secure the Carling Cup, which guarantees them European football next season, and have the chance of more silverware, having reached the FA Cup final. On the other hand, their form in the Premier League has been disappointing to say the least and they currently lie in eighth place, which is far below the expectations of their fans.

It is therefore difficult to work out whether the club is moving in the right direction, though there is little doubt that their new owners would have expected more from the Reds. Before the season commenced, John W Henry spoke about their objectives, “It’s too early for us to talk about winning the league. Our main goal is to qualify for the Champions League. If we don’t, it would be a major disappointment.”

That’s a pretty clear statement of intent, which was re-iterated by managing director Tom Werner, who described the Carling Cup success as “a big day for us”, but immediately emphasised that “our goal is still to reach the Champions League.” In other words, winning a domestic cup is fine, but success is defined by “finishing in the top four.” Of course, the focus on the league should be nothing new to Liverpool fans, as this was a mantra of the legendary Bill Shankly, “The league is a marathon not a sprint. It is where you find out if you are entitled to believe in how good you are.”

"John W Henry & Tom Werner - Magic Moments"

It was not meant to be this way. The returning Kenny Dalglish had worked wonders last season, bringing back the feel good factor and more importantly delivering results on the pitch. Hopes were high that Liverpool’s combination of old managerial skills and new money would produce a return to former glories, but the project is still very much a work in progress.

Dalglish has done himself few favours with some combative media interviews, though an irascible Scottish manager has not exactly hurt Manchester United. More importantly, Liverpool’s season has been de-railed by injuries to key players, such as Steven Gerrard, Daniel Agger and (crucially) the previously unheralded Lucas Leiva, plus the absence through disciplinary reasons of Luis Suarez. Even so, the Reds would have been higher in the table if they could have finished the numerous chances they created, thus converting draws into wins and avoiding so many one-goal defeats.

Of course, most teams could make the same excuses, but it is compounded in Liverpool’s case by the large amount of money they have spent on bringing in new players, which should have addressed some of the obvious weaknesses in the squad, such as finding someone able to consistently put the ball in the net. The policy of buying British has not exactly been a glittering success to date, exacerbated by the high fees spent on the likes of Andy Carroll, Stewart Downing, Jordan Henderson and Charlie Adam.

"Stevie wonders"

Although the side has under-performed, at least the owners’ willingness to back the manager in the transfer market should be applauded (“a significant commitment”, according to managing director Ian Ayre), especially as this is in stark contrast to the parsimonious approach adopted by their reviled predecessors, Tom Hicks and George Gillett. There seems to be an element here of proving to the fans that the new boss is not like the old boss, as Henry observed, “There was a fear we wouldn’t spend.” More positively, Billy Hogan, managing director of Fenway Sports Marketing, outlined the group’s philosophy, “You’re seeing the desire to win and the desire to compete in the transfer market.”

It’s worth pausing to reflect on how different this is from the unpopular former owners, who saddled Liverpool with a mountain of debt when they bought the club in March 2007, then took them to the brink of administration. The desperate situation was crisply summarised by UEFA’s William Gaillard: “The club has been rescued, thank God, but it was a close call. They suddenly found themselves being owned by two failed banks that had been taken over by governments.”

Liverpool’s debt had reached shocking levels under the previous unwanted regime. Although there was “only” £123 million net debt in the football club, the full picture was revealed in the holding company where borrowings had grown to around £400 million. The good news is that this debt was largely eliminated after the change in ownership, though there is still £65m net debt, comprising £38 million bank loans and £30 million owed to UKSV Holdings less £3 million cash.

This is enormously significant to the club’s finances, as the prohibitively expensive annual interest payments of £18 million (£40 million including the holding company) have been drastically reduced to just £3 million, which Ayre said meant that Liverpool are “in a much stronger position to utilise our revenues more effectively on the team.”

However difficult this season is proving, there is no doubt that it is preferable to the depths of despair suffered under the previous “gang of four”: Hicks and Gillett, a couple of charmless chancers; Christian Purslow, a smug, superficial excuse of a chief executive, who delivered little beyond infamously nominating himself as “the Fernando Torres of finance”; and poor Roy Hodgson, an experienced manager who was the archetypal square peg in a round hole (though apparently good enough to lead his country).

The arrival of Fenway Sports Group (FSG) has dramatically improved the club’s finances, as noted by Dalglish, “Off the pitch, especially, the club is a lot stronger than it was… see how much money we are getting through sponsorship and kit deals.” This comment was widely ridiculed, but he does have a point: the use of the money may be open to question, but at least it’s now available.

Some may wish that the owners would provide even more financing, but this is infinitely better than recent years when top class players were sold and replaced by inferior “talents” – Christian Poulsen and Joe Cole for Xabi Alonso and Javier Mascherano, anyone?

On the face of it, this improvement has not yet been reflected in the figures, as Liverpool announced a £49.3 million loss before tax for 2010/11, £29 million worse than the previous year, though much of this was due to clearing up the mess left by the “cowboys” with the club booking enormous exceptional expenses of £59m, mainly £49.6 million relating to the aborted stadium plans and £8.4 million termination payments to Hodgson (and his backroom staff) plus Purslow.

This is fairly typical of new management coming in and cleaning house. As Ayre said, “It is a big loss and a big write-off, but it means that it’s gone forever now and we can move forward without that around our neck.”

Excluding exceptional expenses, Liverpool would actually have made a profit of around £10 million, but  the worrying thing is that this was only after hefty profits on player sales of £43 million, largely Fernando Torres to Chelsea and Javier Mascherano to Barcelona. If both once-off items are excluded, the underlying loss is around £34 million, similar to the previous year.

Although EBITDA (Earnings Before Interest, Taxation, Depreciation and Amortisation) is positive at £10 million, it has declined for the second year in succession and is on the low side, e.g. Manchester United’s is £111 million. After taking into consideration depreciation and player amortisation (an important part of any football club’s business), Liverpool’s operating loss excluding exceptionals was £31 million.

In fact, Liverpool have consistently been making losses with only one profit reported in the football club in the last six years (2008, boosted by large player sales). Losses were even higher at the holding company level, after including all interest payable, amounting to a shocking £178 million in the four years before Hicks and Gillette exited stage left (2007 £33 million, 2008 £41 million, 2009 £55 million and 2010 £49 million).

The Reds also have to pull their socks up if we consider that many other teams are improving their financial performance. In 2009/10 only four clubs in the Premier League made a profit, but this doubled to eight in 2010/11 with many maintaining solid finances while performing well on the pitch, e.g. Manchester United, Arsenal, Tottenham and Newcastle United. On the other hand, there are still clubs registering large losses in their pursuit of honours, notably Manchester City £197 million and Chelsea £67 million.

Where Liverpool have done well is to hold their revenue at about the same level following the £21 million reduction due to the failure to qualify for the Champions League. They compensated this with a £7 million increase in the Premier League distribution, thanks to the improved central deal, and a striking £15 million increase in commercial income.

Uniquely among leading English clubs, the highest proportion of Liverpool’s revenue comes from their commercial arm with 42%. In fact, this has been the main driver of the club’s revenue growth, contributing £40 million (63%) of the £64 million rise in the last five years.

Even so, the operating loss widened following a £15 million increase in the wage bill, which grew 13% from £114 million to £129 million (excluding termination payments), meaning that the important wages to turnover ratio increased from 62% to 70%. This is much worse than Manchester United 46%, Arsenal 55% and Spurs 56%, but considerably better than Manchester City 114%.

Player amortisation, the annual cost writing-off transfer fees, fell to £36 million, though it is likely to rise after last summer’s acquisitions, although will again be far behind Manchester City’s £84 million.

All in all, Liverpool should really be doing better with the resources at their disposal, both in terms of their revenue and wage bill.

Even with the slight decrease in revenue to £184 million, their revenue is still comfortably the fourth highest in England, £20 million ahead of Tottenham, £30 million more than Manchester City and around twice as much as Aston Villa, Newcastle and Everton. On the other hand, they remain handicapped compare to the top three revenue generators, more than £40 million less than Arsenal and Chelsea (both around £225 million) and an incredible £150 million behind traditional rivals Manchester United (£331 million). That’s a significant competitive disadvantage.

Nevertheless, Liverpool are in a more than respectable ninth place in Deloitte’s European Money League, which is not to be sneezed at, especially as they are the only club in the top ten that did not compete in the Champions League in 2010/11. More gloomily, the Spanish giants continue to surge ahead with Real Madrid and Barcelona earning £433 million and £407 million respectively. That £200-250 million shortfall could either be considered an insurmountable obstacle or something to target, especially the commercial revenue, which is around double Liverpool’s.

It’s a similar story with the wage bill of £129 million, which is the fourth highest in the Premier League, a little higher than Arsenal (£124 million), but a fair way ahead of the next club Tottenham (£91 million) and perhaps more pertinently over twice as much as Newcastle (£54 million). However, it is a lot lower than Manchester United (£153 million), Chelsea (£168 million) and new kids on the block Manchester City (£174 million).

That said, Liverpool have been faced with escalating financial challenges over the last few years, both externally and internally.

On the external side, there has been a clear increase in competition, as the “Big Four” has expanded into the “Sky Six” with the addition of Manchester City and Tottenham, who have both managed to break the glass ceiling of Champions League qualification. City have been backed by Sheikh Mansour’s billions, while Spurs have benefited from the astute business guidance of Daniel Levy.

This can be seen by looking at the revenue trend of those clubs, which shows that Liverpool is the only one to have negative revenue growth since 2009. In the same period, the two Manchester clubs and Tottenham have all grown their revenue by more than £50 million. Arsenal’s revenue was also flat, but they are now £43 million ahead of Liverpool, having been £7 million behind in 2005 (a £50 million turnaround).

Furthermore, some of those clubs have spent big in their pursuit of success, notably Manchester City and Chelsea. As Henry said when asked what surprised him most about football, “The sums of money that are spent on buying and selling players is remarkable.”

Everyone bangs on about Liverpool’s activity in the transfer market since FSG’s arrival, but the splurge since January 2011 has really only been an attempt to compensate for the lack of spending in previous years. This is a difficult problem to quickly address when you only have two transfer windows a year, a new phenomenon for the owners that has been difficult to adapt to, as Werner admitted, “We’re used to American sports, where there’s a draft and trades and some free agency. This is a whole different way of thinking about players.”

In any case, the net spend is still relatively low, as much of the expenditure has been recouped via player sales, especially to Chelsea who paid £50 million for Fernando Torres and £12 million for Raul Meireles. Over the last four years, Liverpool’s net spend of £22 million is much of a muchness with Manchester United and Tottenham, but a long way below the two clubs funded by wealthy benefactors, Manchester City (around £400 million) and Chelsea (over £150 million).

However, much of the damage at Liverpool is self-inflicted, as the fall-out from the Hicks and Gillett era proved very costly to the club’s finances, adding up to around £300 million, which would have bought a lot of good players or even gone a long way towards a new stadium.

This has been the toughest problem facing FSG, as they inherited a club in disarray. The situation was in some ways reminiscent of the old joke whereby a tourist asks for directions and an Irishman replies, “If I were you, I wouldn't start from here.”

Specific areas that have hurt Liverpool include: (a) hefty interest payments; (b) money lost through not qualifying for the Champions League; (c) shortfall from lower Premier League finishes; (d) compensation paid to sacked managers and executives; (e) stadium expenses written-off.

(a) In 2006, the year before Hicks and Gillett bought the club, Liverpool’s net interest payable was less than £2 million, but this rose significantly in subsequent years, peaking at £45 million in 2010 in the holding company. The total interest needlessly incurred to pay the speculators from across the pond thus amounted to a depressing £124 million.

(b) Liverpool’s failure to qualify for the Champions League last season and missing out on Europe completely this season are down to many factors, but arguably the most important was the lack of investment by the previous board, which did not provide Rafa Benitez with the means to build upon his team’s Premier League runners-up spot in 2008/09.

Whatever the reasons, the Reds have missed out on significant sums. Their adventures in last season’s Europa League only generated £5 million, which was significantly lower than the money received by England’s four Champions League representatives: Manchester United £44 million, Chelsea £37 million, Tottenham £26 million and Arsenal £25 million (average £33 million).

Liverpool will obviously receive nothing this season from Europe, compared to an average of £31 million for the English sides – lower than last year, as most did not progress as far. A similar sum will go begging after missing out on qualification for next season’s Champions League, giving a total of £86 million in lost revenue.

(c) Although finishing lower in the Premier League will have hurt Liverpool’s pride, it has not damaged the bank balance too much, thanks to the equitable nature of the distribution of central funds. Half of the domestic money and all of the overseas rights are split evenly among the 20 clubs, meaning that Liverpool have only really been hit by lower merit payments with each place in the league worth around £0.8 million. The other variable is facility fees, based on how often a club is shown live on television, but Liverpool’s box office appeal has ensured that this remains high.

So, Liverpool’s positions of seventh in 2009/10, sixth in 2010/11 and eighth (currently) in 2011/12 only have a minor financial effect, which we can calculate as £7 million (compared to finishing in the top four).

(d) Liverpool have paid out £20 million in compensation to sacked employees in the last three years: 2009 £4.3 million to Rick Parry, the former chief executive, and coaching staff at the Academy; 2010 £7.8 million to Benitez and his backroom staff: 2011 £8.4m to Hodgson’s team plus Purslow.

(e) The £50 million write-off for the Stanley Park scheme this year should come as no surprise, as the 2009/10 accounts had warned, “It is highly likely there will be a significant write-off of the new stadium project costs in the financial year ending 31 July 2011.” These are costs that had previously been capitalised on the balance sheet, but are now booked to the profit and loss account. Added to £10 million of similar impairment costs in 2007, that makes an incredible £60 million squandered on useless stadium designs.

"My name is Lucas"

Some of the assumptions used in this analysis may be debatable, but there is no dispute that Liverpool have thrown away a vast amount of money – more than a quarter of a billion pounds per my calculations. As the late, great Ian Dury said, “What a waste.”

Enough of past sins, let’s look at the major challenges facing Liverpool:

1. New/redeveloped Stadium

Ayre has admitted that the lack of a solution to the stadium issue has set the club back several years, “If we had started building a stadium in 2007, we would be in it by now.”

Although Anfield is a wonderfully atmospheric old ground, its relatively low capacity of just over 45,000 means that Liverpool’s match day revenue of £41 million, while more than most teams, is £68 million below Manchester United’s £109 million and less than half of Arsenal’s £93 million. Liverpool only earn around £1.5 million from each home match, which is significantly less than United (£3.7 million) and Arsenal (£3.3 million), despite significant price increases in each of the last two seasons and having the fifth highest Premier League attendance.

FSG continue to review possibilities with recent reports suggesting that the preferred option is a return to 2003 plans for a 60,000-seat stadium in Stanley Park, which were long ago given planning permission by the local council. However, the feeling persists that they would rather redevelop Anfield in the same way that they refurbished Fenway Park, the iconic home of the Boston Red Sox, as Henry confirmed, “Anfield would certainly be our first choice. But realities may dictate otherwise. So many obstacles.”

This is partly for sentimental reasons, but also for hard commercial motives, which Henry explained, “If a new stadium is constructed with 60,000 seats, you’ve spent an incredible sum of money to add just 15,000 seats. If the cost is £300 million, that doesn’t make any sense at all. Liverpool isn’t London, you can’t charge £1 million for a long-term club seat. And concession revenues per seat aren’t that much different at Emirates from Anfield.”

He added that this is why the club is seeking a naming rights partner. While Werner has categorically stated that they “have no intention of exploring naming rights for Anfield”, there would be no hesitation in following Arsenal’s Emirates model for a new stadium. Ayre again: “The new stadium in the park comes down to economics. How do we pay it back? It needs a big naming partner.”

This is easier said than done, as many clubs have discovered, but it could be a compelling prospect for sponsors, so a £150 million multi-year agreement is feasible. This would finance half of the stadium costs, leaving £150 million to be covered by additional debt, as it is unlikely to be funded by the FSG partners. Again, this could follow the Arsenal path of low interest bonds. Even in the current tough economic climate, this is where FSG’s connections should help.

"Move like Agger"

Henry stated that “from a financial perspective… a ground share (with Everton) would be helpful”, but he accepted that the lack of support from both sets of supporters means that this is effectively a dead issue.

Notwithstanding all the difficulties, the absence of a clear stadium strategy after 18 months in charge must be disappointing to Liverpool fans. Most worryingly, an email from Ayre that Tom Hicks produced in court evidence implies that Henry’s purchase agreement included “no actual guarantee of a stadium”, which is bizarre, as this was described as the only non-negotiable element by Martin Broughton, the man brought into Liverpool as chairman to sell the club. Given the broken promises in the past, it is better that the new owners take their time and get it right, but it’s not as if they have too many options.

2. Champions League qualification

Although Ayre has said that the club’s business model does not “fall apart when we don’t have a year playing European football”, it’s still a lot of money to leave on the table, e.g. in 2009/10, the last year Liverpool qualified for the Champions League, they earned £29 million.

This year, of course, they will get nothing from Europe, compared to at least £46 million that Chelsea will receive for reaching the Champions League final, which only emphasises the potential size of the prize. Additional gate receipts and higher payments from success clauses in commercial deals also contribute to what Ayre calls a “significant revenue uplift”.

Gate receipts are important, as Liverpool’s last two seasons both included income from seven additional matches, which was worth around £10 million. This will not be the case in 2011/12 with no European competition, though domestic cup runs will partially offset the shortfall. However, the Europa League will contribute again next season (albeit probably lower attendances at reduced prices).

It is also imperative that Liverpool reclaim their traditional place among Europe’s elite (remember that they have won this prestigious competition no fewer than five times) in order to help attract world-class players to Anfield.

3. Revenue growth

FSG will be looking at revenue growth in terms of both short-term gains and longer-term possibilities.

More immediately, the focus is on commercial income, which rose an impressive 25% last season to £77 million. This is already the seventh highest in Europe, though it is a fair way behind Manchester United £103 million and only around half the amount earned by Bayern Munich, Real Madrid and Barcelona. As Ayre said, “We’ve made great progress but… we still have a long way to go particularly internationally.”

Most of the growth came from the four-year shirt sponsorship deal with Standard Chartered, which is worth around £20 million a year, so £12.5 million higher than the previous deal with Carlsberg. This is in line with Manchester United’s Aon deal and Manchester City’s reported Etihad agreement, but Barcelona’s £25 million contract with the Qatar Foundation has raised the bar.

Future growth is assured by the £25 million kit deal with Warrior Sports, which is not included in the latest results. Starting from the 2012/13 season, this is more than twice the amount received from Adidas, who currently pay £12 million a year, and is about the same level as Manchester United, Real Madrid and Barcelona. This makes sense, as these are the leading clubs in terms of replica shirt sales worldwide.

Interestingly, unlike the Adidas arrangement, Liverpool will be allowed to open their own retail outlets, which some have speculated might mean doubling the value of the deal to £300 million over six years, as Ayre noted, “That area of business currently represents 50% of everything we generate.” Of course, that is revenue, which is not the same as profit, and it is a policy that Manchester United abandoned in the 1990s when they joined forces with Nike, so it might not be the El Dorado many assume.

In addition, the club will surely look to emulate United’s success in attracting secondary sponsors, which will be helped by FSG’s ability to package the Liverpool brand with their other sports holdings to provide an attractive opportunity to advertisers, as they did with Warrior. As Ayre put it, “The more quality and high-level partners we can attract, the more we’ll have to invest.”

There are numerous possibilities to “leverage the club’s global following to deliver revenue growth”, which was emphasised by Werner, “We consider Liverpool to have untapped potential globally.” In particular, they have focused on Asia with plans to open two new offices there, supported by a pre-season tour that attracted huge crowds – a key element in securing the Standard Chartered sponsorship. They will build on this success by again touring the Far East plus the US, including a match at Fenway Park against Roma.

"Suarez - I fought the law"

One unexpected threat to this campaign emerged earlier this season when Standard Chartered expressed their unhappiness with the bad publicity around the Suarez affair, but a bigger danger would be a continued lack of sporting success. As Ayre said, “performance on the pitch definitely affects business.”

In the longer-term, FSG will be pushing to further “monetise” Liverpool’s global appeal, especially in the television space. They were attracted by the explosive growth in overseas TV rights for the Premier League, backed up by top matches attracting huge global audiences.

This is particularly relevant to Liverpool, as FSG have substantial expertise in this sphere, owning 80% of New England Sports Network, a profitable regional cable television network, while Werner is an experienced television producer. This may have been behind Ayre’s unpopular suggestion that leading clubs should receive a larger slice of the money from overseas TV rights, because the average fan in Kuala Lumpur “isn’t subscribing… to watch Bolton.”

New technology will open up a plethora of possibilities for digital rights, which to date have been treated as little more than an afterthought to the main TV deal, but the emergence of fast, broadband networks might just be the catalyst for clubs to interact directly with fans, when revenue could potentially explode. If so, you can expect Liverpool to be at the forefront of any such developments.

"Jordan: the comeback"

4. UEFA’s Financial Fair Play regulations

Another motive for the club to increase revenue is the advent of UEFA’s Financial Fair Play (FFP) rules that aim to make clubs live within their means, rather than operate with big losses bank-rolled by wealthy benefactors.

The first monitoring period is 2013/14, but this will take into account losses made in the two preceding years, namely 2011/12 and 2012/13. In other words, the 2010/11 accounts are not considered, but those from the current season will be, so a rapid improvement is required.

However, they don’t need to be absolutely perfect, as owners will be allowed to absorb aggregate losses of €45 million (around £38 million), initially over two years and then over three years, as long as they cover the deficit by making equity contributions.

Not only is Henry supportive of these regulations, but he said “we wouldn’t have moved forward on Liverpool except for the passage of FFP.” However, he is concerned that others will find ways around the rules, “The question remains as to how serious UEFA is regarding this. It appears that there are a couple of large English clubs that are sending a strong message that they aren’t taking them seriously.” He specifically queried the transparency of Manchester City’s massive Etihad deal, given the owners’ close relationship with the sponsors. Werner supported the party line, hoping that UEFA’s process “would have some teeth.”

One point to note is that the cost of a new stadium would be excluded from UEFA’s break-even calculation, so that should not be a factor in any investment decision.

5. Cut costs

Given the revenue pressures arising from the lack of Champions League, Liverpool will have to cut their cloth accordingly, which means reducing the wage bill. After purchasing the club, Henry complained about “a huge multi-year payroll for a squad that had little depth.”

Action was taken last summer with many bit part players leaving either through sales (including Meireles, Paul Konchesky, Milan Jovanovic, David N’Gog, Sotirios Kyrgiakos, Emiliano Insua and Philipp Degen) or loans (notably Joe Cole and Alberto Aquilani), even if this meant cut-price deals or subsidising loans. Obviously, there have been a fair few arrivals too, so the net impact is unknown, but is likely to be positive in the next accounts.

The danger of this approach is that other clubs continue to grow their wage bill, which traditionally has a high correlation with success on the pitch. That said, Tottenham have outperformed Liverpool recently with a far lower payroll.

"Would you Adam and Eve it?"

While FSG were initially attracted to Liverpool by parallels with the Red Sox, another great club that had fallen on hard times and needed a stadium solution, there were also sound business reasons behind the investment, even though Henry has stated, “I don’t think you go into sport to make a profit.” In particular, if they succeed in driving revenue growth, they will be able to keep all the money they make (apart from some of the TV rights), unlike baseball where their income is taxed by the MLB and shared among other clubs.

Despite the obvious synergies, both clubs have suffered recently in the sporting arena, Liverpool enduring their worst run of results in the league for over 50 years, while the Red Sox spectacularly collapsed to miss out on qualification for the post-season play-offs. This has raised concerns that FSG are being spread too thin, though their template leans heavily on the managers of the franchise, mainly Ayre, Dalglish and (until recently) Damien Comolli, the Director of Football.

In fact, FSG’s mantra has long been one of self-sufficiency for Liverpool. This will be a challenge, as their cash flow has been consistently negative before financing – except when investment in the squad and stadium is restricted like in 2010. The problem is that this is exactly what Liverpool need, hence the dash for cash with new sponsorship deals.

A key element of FSG’s strategy is a focus on youth, as outlined by Henry, “We have been successful through spending and through securing and developing young players.” Werner added, “We certainly feel we can do a better job bringing in more players that are home grown.”

Dalglish has been more than willing to follow this policy, acknowledging the improvements, “You look at the academy and see how much better it is.” Many graduates have been given first team action this season (Jay Spearing, Martin Kelly, John Flanagan and Raheem Sterling), which is testament to the changes implemented by Benitez, as is the high number of Liverpool youngsters involved in England squads.

When FSG first appeared on the scene, much was made of their belief in the application of statistical analysis made famous by Moneyball, Michael Lewis’ bestseller about the innovative methods adopted by Billy Beane at the Oakland Athletics baseball club. However, it was never quite that simple, as Henry acknowledged, “Everyone is fixated on Moneyball or sabermetrics, but football is too dynamic to focus on that. Ultimately you have to rely on your scouting.”

"Carroll - big deal"

It has always been the case that they have used their financial muscle to complement value purchases by also spending big on players that they needed. In fact, the Red Sox have been among the highest spenders in major league baseball. That said, some of the prices paid for Liverpool’s purchases have looked ridiculous, especially considering the good use that Newcastle have made with the money Liverpool paid them for Carroll. Ultimately, that was one of the reasons for Comolli being given his P45. As Werner wryly explained, “We’ve had a strategy that we agreed on. There was some disconnect on the implementation of that.”

The investment in the academy and scouting is all very worthy, but in the meantime the first team has been under-performing, so it is legitimate to ask whether FSG’s strategy is the right one for Liverpool. After all, when Henry bought the club, he confessed to knowing “virtually nothing about Liverpool Football Club nor EPL.” A year later, he said, “We have so much to learn about all aspects of the sport and we are still learning.”

Some fans are crying out for stronger leadership, which often translates into additional investment, both in the playing squad and the stadium. Conversely, FSG might argue that they could have expected a better return on the money they have put in (even though the acquisition was concluded at a “fire sale” price of £300 million). Ayre is firmly supportive, “Money is not an issue. If we need somebody, I think our owners have shown the level of commitment you would expect from a good ownership group.” Mind you, he said that before the late season slump.

"The Kuyt Runner"

It was always a big ask to secure Champions League qualification in the first full season under new ownership, but there’s little doubt that Liverpool’s results have been below par. Although by no means disastrous, it has been a disappointing season, leading to Dalglish’s position being questioned.

Henry has shown that he is not afraid of pulling the trigger, especially when the long-serving Red Sox manager Terry Francona was effectively fired last summer. The removal of Comolli confirmed that FSG could be just as ruthless at Liverpool, with Werner observing, “when it’s time to act, we need to act”, but Henry recognises that the rebuilding process at Anfield will take time, “it could take years to get the club back to where it needs to be.”

Even though the team might be lagging behind expectations, there has been some improvement under FSG, which was recognised by stalwart Jamie Carragher, “people need to remember the club was on its knees.” Years of mismanagement has cost Liverpool hundreds of millions, but Ayre for one is now positive, “The key message is that the new ownership has created stability, a long-term opportunity for Liverpool and some good foundation work that hopefully we’ll all build on.”

"Hope in the Ayre"

Nevertheless, the fans will want to see more progress where it counts, as Ayre acknowledged, “The finances are all well and good – if you don’t have any finances, it makes it more difficult to be successful – but success on the pitch is the biggest factor.”

There may well be changes on the playing side (and even in the manager’s seat) this summer, but to date FSG have backed their man, taking a patient, level-headed view of the club’s prospects, as seen by Werner’s pre-season objective, “We just want to move forward – we want to be better this year than last year and just keep going on the right track.” In other words, keep calm and carry on. 

The Truth About Debt At Barcelona And Real Madrid

Despite their failure to reach next month’s Champions League final, Barcelona and Real Madrid are by common consent the best two club sides in world football. Featuring superstars such as Lionel Messi and Cristiano Ronaldo, their talented players entertain and delight us in equal measure, as they dominate La Liga season after season.

However, admiration of their exploits is tempered by the financial advantages that they enjoy compared to other less fortunate clubs. Not only do they generate far more revenue than anybody else (around €100 million higher than the nearest challenger, Manchester United), but one of the main reasons for this substantial competitive advantage is an unbalanced domestic TV deal that awards the two Spanish giants almost half of the money available.

Their reputation off the pitch also suffered a hit recently in the media when it was “revealed” that these great teams were built on a mountain of debt (€590 million at Real Madrid and €578 million at Barcelona), raising questions as to whether this was, to coin a phrase, “financial fair play.”

Quite why this came as a surprise to some analysts is a little perplexing, given that the clubs’ accounts have been available to the public for many months. Whatever.

"Pep Guardiola - Goodbye cruel world"

The fundamental issue is whether this debt is too high, as many commentators suggest, with the implication that these grand old clubs might even be in some financial difficulty.

That might seem like an easy question to answer, but, as is so often the case in the murky world of accounting, it’s not quite so simple. To give a comprehensive response, we have to do three things:

1. Importantly, understand what this debt figure actually represents, as there are numerous definitions, all of which can be equally valid in different circumstances.

2. Look at the overall strength (or weakness) of each club’s balance sheet, i.e. also at assets, not just liabilities.

3. Explore how well the debts are covered by items such as income and cash flow.

To avoid looking at Madrid and Barcelona in isolation, we should also compare their debt position with that at other leading clubs. For the purpose of this exercise, I have opted to look at two English teams, Manchester United and Arsenal, as they are useful comparatives, who are viewed as being at different ends of the spectrum. The former are known for the large amount of debt they have been carrying since the Glazers bought the club via a leveraged buy-out, while the latter are often portrayed as the poster boy of sustainable football clubs.

"Jose Mourinho - I couldn't bear to be special"

1. What is debt?

For people without a financial background, the different definitions of debt can be a bit confusing, as acknowledged by UEFA’s snappily titled Club Licensing Benchmark report, which stated, “In practice, the term ‘football club debts’ has been used in many different ways with a great deal of flexibility, references ranging from the very broad, totalling all liabilities that a club has, to the narrow definition of debt financing either including or excluding interest-free owner loans.”

At the narrowest extreme, we have just bank debt: at the broadest extreme, we can use total liabilities, which covers all financial obligations, including tax liabilities, trade creditors, provisions for future losses, accrued expenses and even deferred income. Often, when the media refer to debt, they actually mean total liabilities.

This includes what might be described as operational debt, such as: (a) trade creditors (payables) for amounts outstanding on bills for products or services received, e.g. rent, electricity; (b) money owed to staff, e.g. wages earned by staff paid at the end of the month, bonus payments; (c) other accrued expenses (accruals), which are the same as payables except no invoice has yet been received; (d) provisions, which are an estimate of probable future losses, e.g. legal claims; (e) and, most bizarrely, deferred income for payments received for services not yet provided, e.g. season ticket revenue for matches to be played in the future.

That last one highlights one danger of using liabilities as a definition for debt, as season ticket money received in advance is clearly not a bad thing, as UEFA explain: “It is recorded as a liability, as accountants consider the cash received as not yet being fully earned until the matches take place. This is a liability, but not a debt that will have to be paid back.”

So, much of Madrid’s €590 million and Barcelona’s €578 million debt includes liability for what might be termed normal operations. If we apply the same definition to Manchester United, they have debt (total liabilities) of just under €1 billion (£824 million converted at a rate of 1.20). Even Arsenal’s debt on the same basis is €524 million, which the journalists would no doubt describe as “eye-watering” if they were talking about others and not their template for a well-run club. To use an old adage, you have to make sure that you are comparing apples with apples.

Of course, if you wanted to make a club’s debt look as bad as possible, then you would absolutely use the total liabilities definition. However, it is very conservative to say the least. Indeed, in response to their critics, Madrid and Barcelona might feel like misquoting Mark Twain: “The reports of my debt have been greatly exaggerated.”

The net debt reported in an English club’s financial statement will be in line with IFRS (International Financial Reporting Standards) and essentially covers purely financial obligations, such as overdrafts, bank loans, bonds, shareholder loans and finance leases less cash. On this basis, the gross debt of Madrid and Barcelona at €146 million and €150 million respectively is not only considerably smaller than the figure highlighted in the press, but is also much lower than Arsenal €310 million and Manchester United €551 million.

The difference is not quite so large for net debt, as both United and Arsenal have substantial cash balances, but the Spanish clubs are still lower: Madrid €48 million and Barcelona €89 million. Arsenal are much of a muchness with €117 million, while United are the outlier with a hefty €370 million.

In their Financial Fair Play (FFP) guidelines, UEFA introduce a third definition of debt which lies somewhere between the narrow calculation employed in annual accounts and the widest possible measure of total liabilities: “A club’s net player transfers balance (i.e. net of accounts receivable from players’ transfers and accounts payable from players’ transfers) and net borrowings (i.e. bank overdrafts and loans, owner and/or related party loans and finance leases less cash and cash equivalents).”

They go on to explicitly state, “Net debt does not include trade or other payables.” However, it does include the net balance owed on player transfers, which is a reasonable approach to take, as this can be an important element in the business model adopted by some football clubs, e.g. this amounts to €76 million at Madrid (actually down from €111 million the previous year and an astonishing €211 million in 2009), though it is only €12 million at Arsenal, which probably comes as no surprise to those fans that have been exhorting the club to spend some money.

This has clearly been an important factor in allowing Madrid to finance big money acquisitions. Although all clubs make stage payments for transfers, very few do so to the same extent as Madrid (and indeed Barcelona).

Of course, this does not make the practice inherently wrong. Indeed, UEFA commented, “It is worth noting that the size of transfer payables reported in financial statements can be influenced by the timing of the financial year-ends relative to the timing of transfers, and that transfer payables are, in most cases, not overdue but in line with the payment schedule agreed between the respective clubs.”

Under this UEFA definition, it is remarkable how similar the net debt is between Madrid, Barcelona and Arsenal, with all three clubs reporting a balance in a narrow range of €124-131 million. The exception to the rule is United with, deep breath, €442 million.

2. Strength of the balance sheet

To state the blindingly obvious, liabilities are only one side of the story (or balance sheet). To get a full picture of a football club’s health, we also have to look at its assets. This is where the English clubs start to look better, as they tend to have higher assets, especially as they usually own their own stadiums.

United’s net assets (assets less liabilities) are a mighty €973 million, though €618 million of this is due to inter-company receivables from the parent undertaking, while Arsenal have a highly respectable €322 million. Madrid are far from shabby with net assets of €251 million, but Barcelona fall down on this measure with net liabilities (also described as negative equity) of €69 million. In other words, their reported liabilities are larger than their reported assets. Barcelona are far from alone in this, as UEFA’s benchmarking report noted that 36% of clubs reported negative equity in 2010, but it is still nothing to be proud of.

If this ratio is refined to only cover current assets and liabilities (payable within 12 months), then it is even worse for the Spanish clubs, as they both have net current liabilities: Madrid €141 million and Barcelona €226 million.

Once again, the accounting values are a little misleading when looking at the balance sheet, because of the way that certain assets are treated in the accounts. As UEFA say, “Some of the principal assets of a club, such as a loyal supporter base, reputation/brand, membership/access rights to lucrative competitions, and home-grown players, are not included within balance sheet assets since they are extremely difficult to value, despite them unquestionably having a value. These unvalued assets tend to be greater for larger clubs.”

"The Glazers - Money (that's what I want)"

This is highlighted when a football club is sold. Invariably, the purchaser pays a higher price than the fair value in the accounts and the difference is booked as an asset called goodwill. In this way, Manchester United’s balance sheet includes £421 million of goodwill.

This can also be seen very clearly with player valuations. In the accounting world, when a player is bought, football clubs do not expense the cost immediately, but instead book it onto the balance sheet as an intangible asset and write it off evenly over the length of the contract. Following the Bosman ruling, the assumption is that the player will have no value after his contract expires, since he could then leave on a “free”.

However, the value in the real world is almost always higher. As Javier Faus, Barcelona’s Vice President of Finance once explained, his club has over €250 million of assets that are not reflected in the balance sheet. This is particularly the case for the Catalans, as their team is full of players developed in-house by the legendary La Masia, and these effectively have zero value in the accounts. I don’t know exactly how much the likes of Messi, Xavi and Iniesta would be worth if sold, but I do know that it’s more than zero.

The respected Transfermarkt website does actually list values for each major team’s squad, so we can get an idea of how much stronger each club’s balance sheet would look if you applied real values instead of accounting values. As expected, this is most striking in the case of Barcelona, where the real value is estimated as €591 million, so €470 million higher than the books, leading to adjusted net assets of €401 million.

Of course, it would kind of defeat the object if a club were to realise that value by selling all its players, but a few judicious sales can make a big difference to the reported strength of a club’s balance sheet.

3. Debt coverage

As we said earlier, Real Madrid (€480 million) and Barcelona (€451 million) have the highest revenues in world football, covering around 80% of their debt, which is significantly higher than their English counterparts, Arsenal 57% and Manchester United 40%. In Arsenal’s case, this is obviously a function of much lower revenue (€307 million), even though I have included property income, as liabilities are not split by business segment.

However, as the old saying goes, “revenue is for vanity, profit is for sanity”, so a more useful ratio might be cash flow to debt, which provides an indication of a club’s ability to cover total debt with its annual cash flow from operations. There are many ways of defining cash flow, but I have used EBITDA (Earnings Before Interest, Taxation, Depreciation and Amortisation) for simplicity’s sake. Others might adjust for (irregular) profit on player sales, while you could also use free cash flow, (operating cash flow minus capital expenditure).

Contrary to popular belief, Real Madrid and Barcelona are relatively profitable: Madrid have made total profits of around €200 million in the last five years, including €47 million last season; while Barcelona’s loss was only €12 million. Adjusting for non-cash flow expenses like depreciation and amortisation plus interest produces very impressive EBITDA of €151 million for Madrid and pretty good €66 million for Barcelona. In the same way, Manchester United’s notable ability to generate cash results in excellent EBITDA of €138 million.

So, Madrid’s cash flow over debt ratio comes in at 26%, much better than the others: Manchester United 14%, Arsenal 13% and Barcelona 11%. Simply put, the higher the percentage, the better the club’s ability to pay its debt.

While it is clearly important to be able to ultimately pay off debt, a club’s ability to service its interest expenses is absolutely crucial. This can be explored with the interest coverage ratio (cash flow/interest payable), which tells a similar story to debt coverage, i.e. Madrid’s ratio of 11.7 is by far the best, though the others are not too bad: Barcelona 4.5, Arsenal 3.9 and Manchester United 2.5 (anything below 1.5 is a bit questionable).

What is striking here is just how much higher the interest payable is at United €56 million (£46 million) compared to the other clubs: Arsenal €18 million, Barcelona €15 million and Madrid €13 million. In fact, both “heavily indebted” Spanish clubs actually pay less interest than the two English clubs.

Let’s look at the debt in a bit more detail for the clubs we are reviewing, as this might throw up some other anomalies.

Real Madrid’s accounts use yet another definition for debt, which is essentially the same as UEFA’s definition (bank debt plus net transfer fees payable) plus selected creditors (essentially stadium debt). This gives a net debt of €170 million, a reduction of €75 million from the €245 million in 2010. That’s pretty impressive, especially when we consider that the net debt peaked at €327 million the year before.

That said, for many years before 2009 they had no bank debt at all. The loans are split evenly between Caja Madrid and Banco Santander and were mainly used to finance the major signings that summer. The interest rate is relatively low, but the loans do have to be repaid by 2015, though even here Madrid were given some leeway with lower payments in the first three years.

Stop me, if you’ve heard this before, but Barcelona also use a different definition for debt, providing their Annual General Meeting with a figure of €364 million, which is not fully explained, but the main distinguishing factor is that some debtors are deducted to arrive at the net balance.

This represents a 15% reduction from the €430 million reported the previous season, but is still higher than the preceding years. Indeed, Javier Faus, Barcelona’s Vice President of Finance, admitted, “We’ve reduced the debt, but we’re still in a delicate situation. The debt is still too high for us to be able to dictate our future. We can’t afford to owe so much money to the bank, and we need to generate more income.”

He emphasised the board’s concern when he added, “It’s not the debt that we want, and we have to reduce it further, to sustainable levels, with regard to the cash flow generated by the club. We’ll continue to work on it.” Ideally for Faus, the net debt would be “just over €200 million.”

Indeed, Barcelona were forced to take out syndicated loans of €155 million in 2010 from a group of banks led by La Caixa and Banco Santander, though club president Sandro Rosell has defended Barca’s debt level, arguing that it is eminently serviceable via its huge revenues, “The club is not bankrupt, because it generates income. The banks know that we have a business plan that will allow them to recover the money.”

Indeed, the willingness of Spanish banks to help Barcelona is a factor, as it is difficult to imagine a scenario where a local financial institution would be responsible for damaging the emblem of Catalonia, given that its customer base is largely made up of the club’s supporters – even with the struggles in the Spanish economy. This is evidenced by the banks ignoring Barcelona’s breach of commitments in terms of total liabilities made when securing the 2010 loan.

Manchester United have also succeeded in reducing their net debt, which was cut from £377 million to £308 million (£459 million gross debt less £151 million cash), after the club bought back £64 million of its bonds. This is down from a peak of £474 million in 2008.

Last year the club raised around £500 million of funds via a bond issue, so that they could repay the previous bank loans, in order to fix the club’s annual interest payments for a longer period (up to 2017), thus ensuring more financial stability. However, there was a price to be paid, which can be seen with a comparison to Arsenal’s bonds, as the debt has to be repaid quicker (7 years vs. 21 years) and the interest rate is higher (8.5% vs. 5.75%).

The really annoying thing for United fans is that this is still unproductive debt. While clubs like Chelsea and Manchester City have used their debt to fund the purchase of better players and Arsenal used theirs to build a new stadium, United’s debt was only used to enable the Glazers to buy the company.

At least the owners managed to find £249 million last November to pay off the prohibitively expensive Payment In Kind notes (PIKs), which carried a stratospheric interest rate of 14.25% (rising to 16.25%), though it is unclear how they funded this repayment. Including the PIKs, United’s gross debt was at one point as high as £773 million with annual interest payments of around £70 million. To paraphrase Winston Churchill, “never has so much been owed by so many to so few.”

"Emirates Stadium - good debt"

Included within the net debt as at 30 June 2011 are astounding cash balances of £151 million, though this was boosted by cashing the £80 million Ronaldo cheque and the £36 million upfront payment from the shirt sponsor. United’s board has argued that it likes to retain so much cash to provide “flexibility”, but this seems a strange decision when they have to pay 8.5% interest on the bonds, while cash balances are unlikely to attract more than 2% interest.

The latest financial engineering from the Glazers is the decision to float a minority stake of the club via an IPO (Initial Public Offering) on the Singapore Stock Exchange with whispers suggesting that the board is seeking to raise £600 million for a 30% stake. The IPO was postponed last year due to volatile market conditions, but is now reportedly back on the agenda.

If some of the proceeds were used to repay part of United’s debt, as the club has apparently briefed journalists, then they would benefit from lower interest payments, though this would not improve cash flow if they were then replaced by dividends to the new shareholders.

Arsenal have now eliminated the debt they built up as part of the property development in Highbury Square, reducing gross debt to £258 million as at end-May 2011. That comprises the long-term bonds that represent the “mortgage” on the Emirates Stadium (£231 million) and the debentures held by supporters (£27 million). Once cash balances of £160 million are deducted, net debt was down to only £98 million, which is a significant reduction from the £136 million last year and the £318 million peak in 2008.

Many fans ask whether it would be possible for Arsenal to pay off the outstanding debt early in order to reduce the interest charges, but chief executive Ivan Gazidis has implied that this is unlikely, arguing that not all debt is bad, “The debt that we’re left with is what I would call ‘healthy debt’ – it’s long term, low rates and very affordable for the club.” In any case, the 2010 accounts clearly stated, “Further significant falls in debt are unlikely in the foreseeable future. The stadium finance bonds have a fixed repayment profile over the next 21 years and we currently expect to make repayments of debt in accordance with that profile.”

So, Real Madrid and Barcelona might not exactly be sitting pretty in terms of debt, but their situation is not quite as bad has been made out. However, it is true to say that debt is a major issue for many other Spanish clubs.

A recent study by Professor José Maria Gay de Liébana of the University of Barcelona revealed that total debt of La Liga clubs was €3.5 billion with half of them having negative equity (though it should be noted that the accounts from seven clubs were only from the 2009/10 season and two from as far back as 2008/09).

As Professor Gay said, “Everyone is concentrated on Madrid and Barca, who are the kings of the banquet, while the rest live a real uncertain future. Many clubs are living dangerously.”

While Madrid and Barcelona unsurprisingly top the list with debt (total liabilities) of €590 million and €578 million, seven other clubs have debt over €100 million, most notably Atletico Madrid €514 million, Valencia €382 million (even after selling stars like David Villa, David Silva and Juan Mata) and Villarreal €267 million. In contrast to the big two’s debt cover (by revenue) of around 80%, theirs is much lower, e.g. Atletico Madrid just 19%.

Spanish football’s struggles are highlighted by the fact that no fewer than six clubs in the top division are currently in bankruptcy protection: Racing Santander, Real Mallorca, Real Zaragoza and all three promoted clubs (Real Betis, Rayo Vallecano and Granada). Furthermore, the beginning of this season was delayed by a players’ strike over unpaid wages. The figures are frightening with 200 players owed a total of €50 million, up from €12 million owed to 100 players the previous year.

"Athletic Bilbao: good football, low debt - what's not to like?"

This is due to two factors: (a) Spanish football’s inability to govern itself properly; (b) the awful state of the economy.

Up until recently, the Spanish Football League (LFP was unable to impose any meaningful sanctions on financial miscreants, but a new law came into force in January 2012 that now authorises the authorities to relegate a club in administration – though whether they have the stomach for a confrontation with a club’s supporters is debatable.

In fairness to the LFP, they have also been impacted by the troubled economy, as Spain is entering recession with a record unemployment rate of 24% (a horrific 40% for young people) and Standard & Poor’s cutting the country’s credit rating. As LFP president José Luis Astiazaran noted, “We are not immune to the wider economy.” Professor Gay agreed, “Football is largely a reflection of what has been happening in our economy, with people spending way beyond their income, relying on fanciful growth forecasts and ending up with unsustainable debt and an asset pricing bubble.”

It could be argued that the dominant position of the two Spanish powerhouses is slowly killing Spanish football. This financial pre-eminence is boosted by the “every man for himself” approach taken with the individually negotiated TV deals. Madrid and Barcelona both trouser €140 million a season with the nearest club to them, Valencia, receiving about a third at €48 million. Thirteen of La Liga’s clubs receive between €13-18 million, including Athletic Bilbao with just €17 million. What price them holding on to all of the scintillating young talents that have enthralled us during their Europa League campaign?

Spain is unique among the leading European leagues in not having a collective TV deal, which explains why accusations of selfishness have been aimed at Madrid and Barcelona. The Sevilla president, José Maria del Nido, complained, “We cannot allow a situation where, because two clubs are very powerful, they bring about the demise of the Spanish league.”

That said, football is an amazingly resilient industry and it has not yet collapsed under the weight of debt in Spain, even though the issue is not a new one. In fact, La Liga debt has been about the same level of €3.5 billion for the last four years. Although it rose €50 million last season, the 2001 debt of €3.53 billion is actually lower than the €3.561 billion peak in 2008.

Nevertheless, there is no room for complacency, when a comparison is made with the other major European leagues. At €3.5 billion, Spanish liabilities are by far the highest, almost a billion Euros more than Serie A €2.7 billion (up €327 million in 2010/11) and the Premier League €2.6 billion (2009/10 figure). The debt levels in the financially disciplined leagues are unexpectedly much smaller: the Bundesliga €0.9 billion and Ligue 1 €0.7 billion.

In addition, the Spanish league also has the worst debt coverage (in terms of revenue) at 47% compared to the others: Serie A 63%, Premier League 95%, Ligue 1 140% and the Bundesliga 193%.

This sad state of affairs was underlined when it emerged that Spanish clubs owed the taxman €752 million, including €426 million from clubs in the top division. In fact, that came from just 14 of the 20 clubs, as the remaining six had no outstanding tax debt. According to the AS newspaper, that included Real Madrid, which seems a little strange, as both the club’s accounts and the study by Professor Gay do list tax liabilities.

Once again, Atletico Madrid have the dubious honour of leading the pack with the largest tax debt of €155 million, even after paying the €50 million from the sale of Sergio Aguero to Manchester City directly to the tax authorities. The next highest was Barcelona with €48 million.

This high level of tax debt is galling to many, particularly given the fragile Spanish economy, not to mention the fact that Spain has five clubs in the semi-finals of the Champions League and the Europa League – including the aforementioned Atletico Madrid.

As always, Uli Hoeness, the forthright president of Bayern Munich, got straight to the point, “This is unthinkable. We pay them hundreds of millions to get them out the shit and then the clubs don’t pay their debts.” In fairness, some clubs have negotiated payment plans with the authorities, such as Atletico Madrid (€15 million a year), Levante (5 years) and Mallorca (10 years).

On top of that, the Spanish government and the football league recently announced new rules that would pave the way for the clubs to repay the outstanding tax debts, as the threat of intervention from European Union anti-trust officials loomed large. The LFP said, “Economic control will be strict, as well as the sanctions regime.” These measures will include clubs being obliged to set aside 35% of TV rights revenue for tax payments from the 2014/15 season; clubs possibly being forced to sell players to raise cash; and clubs maybe even booted out of the league.

"Holidays in the sun"

Of course, Spain is hardly unique in having clubs facing severe tax issues, as fans of Rangers and Portsmouth would no doubt attest, but it is the magnitude of the debt in Spain that is concerning, especially given the relatively low revenue of some of the clubs involved.

Given the understandable focus on tax liabilities recently, it might also be a good idea for UEFA to include these in their definition of debt in order that clubs take this issue more seriously than they appear to have done in the past. It is actually a little strange that UEFA do not, as Article 50 of the FFP regulations specifically states that there should be no overdue payables to social/tax authorities (as well as employees) in the same way that Article 49 prohibits overdue payables towards football clubs. While the latter is included in their definition of net debt, the former is not.

In conclusion, while there are some very real debt problems in Spanish football, the situation is not quite so dramatic at Barcelona and Real Madrid as some would have people believe. It would obviously be better for their balance sheets if the debt was lower, but their ability to generate revenue is unsurpassed, admittedly partly due to the current unfair TV deal, but also their high gate receipts and awesome commercial strength. These operations continue to grow, as seen by Barcelona’s record-breaking shirt sponsorship deal with the Qatar Foundation and Real Madrid’s plans to build a $1 billion holiday resort in the United Arab Emirates.

"Put your shirt on it"

Of course, the two Spanish giants may still come under pressure from their creditors at some stage, especially if they embark on a summer spending spree following the disappointing Champions League semi-final exits. Nor should the impact of Spain’s faltering economy be trivialised, but the fact is that right here, right now, the important debt (bank loans, transfers and tax liabilities) is relatively low, at least for clubs of this size.

When reading reports on how much Barcelona and Real Madrid owe, it’s not quite a case of “don’t believe what you read”, but you do need to understand what any analysis is actually referring to, because, as we have seen, debt has many different definitions.

Caveat emptor – or something like that.