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InLambertWeTrust!

The debt of football clubs in England.....

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Now- any regular posters/viewers of this message board will know that all too often I start (or attempt to) serious debates about serious issues. This is one of those times!I regularly contribute to the official Liverpool forums and after our relegation I decided to start a post about the decline of football at Norwich City and the debt of english football clubs. The relegation part isnt the topic I want to discuss- the debt part is.Unless I am very much mistaken the credit crunch is a result of :a) the banks lending far too much money and charging very high interestb) the country being stupid enough to think that we can spend our way out of trouble-thus increasing the massive debt we have now and of course contributing massively to the credit crunch and the financial trouble we find ourselves in (credit being techy speak for lending?)Could this same thing in affect potentially happen in football?Some liverpool fans have made me aware of the fact that the debt of Hicks/Gillette (sp?) which is of course now Liverpool football clubs has to be paid back before the 1st day of july. Some are worried/some are not.There was nothing to stop the debt of southampton fc/luton town fc(and various overs) being called in by the banks and I''m sure that eventually the debt will be called in of the bigger prem clubs and the ''bubble'' will eventually burst. I dont claim to have a vast amount of knowledge about finances and debt being called in but surely football as it is cannot be run as a product like it is now?The debt HAS to be called in eventually- is this the case of football?If one of you with financial knowledge could shed some light on the whole issue for me- i would appreciate it.Thanks in advanceBTW- if the debt IS called in ( in the future) then where the hell does that leave poor ol Norwich City? I''m guessing an investor would be vital to us?I''m sure even doomy may struggle to put positive spin on this one (if it does come true!).

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Funny, many teams have some form of debt. The likes of Leeds, Southampton and Luton get punished whilst Manchester United sit their in even greater debt considering their next 30 million pund signing. Now, how is that possible?

Because Manchester United and other such big clubs will never get punished as it would ''upset'' a large fan base who help to bring money into football.

But besides, that''s just the FA as far as I presume. As for where the banks come into it, I don''t have a clue either. When do they decide enough is enough?

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[quote user="NCFC_Shaun"]

Funny, many teams have some form of debt. The likes of Leeds, Southampton and Luton get punished whilst Manchester United sit their in even greater debt considering their next 30 million pund signing. Now, how is that possible?

Because Manchester United and other such big clubs will never get punished as it would ''upset'' a large fan base who help to bring money into football.

But besides, that''s just the FA as far as I presume. As for where the banks come into it, I don''t have a clue either. When do they decide enough is enough?

[/quote]I dont want to put your post down in anyway but southampton have quite a big fan base (correct me if I''m wrong) and still the debt was called in.Thanks for posting in response though mate [Y]

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[quote user="CT "][quote user="NCFC_Shaun"]

Funny, many teams have some form of debt. The likes of Leeds, Southampton and Luton get punished whilst Manchester United sit their in even greater debt considering their next 30 million pund signing. Now, how is that possible?

Because Manchester United and other such big clubs will never get punished as it would ''upset'' a large fan base who help to bring money into football.

But besides, that''s just the FA as far as I presume. As for where the banks come into it, I don''t have a clue either. When do they decide enough is enough?

[/quote]

I dont want to put your post down in anyway but southampton have quite a big fan base (correct me if I''m wrong) and still the debt was called in.

Thanks for posting in response though mate [Y]
[/quote]

 

Yes, but in comparison to Manchester United? Southampton have no where near the fan base size that a club like Manchester United have, and therefore can offer no where near as much income from tickets, merchandise, television sales and other such things.

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Debt is not always called in, as long as the lender is happy with the interest the borrower is paying.

I think the big difference between citys debt now and when they had big problems around 1996 under Robert Chase is that now the debt i structured. Structured debt is like the mortgage that you have on your house if you keep up the interest payments the lender wont be called back and the debt will be paid off over a set period. Back in 1996 the debt was in the form of an overdraft where the lender can call it in at any point, this is what has happened at saints.

The problem I have is that I think the interest City are paying is around the 7% mark which I think seems rather high, but I assume that if they could get a better deal they would.

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[quote user="Karl Pilkington"]Debt is not always called in, as long as the lender is happy with the interest the borrower is paying.

I think the big difference between citys debt now and when they had big problems around 1996 under Robert Chase is that now the debt i structured. Structured debt is like the mortgage that you have on your house if you keep up the interest payments the lender wont be called back and the debt will be paid off over a set period. Back in 1996 the debt was in the form of an overdraft where the lender can call it in at any point, this is what has happened at saints.

The problem I have is that I think the interest City are paying is around the 7% mark which I think seems rather high, but I assume that if they could get a better deal they would.[/quote]That is a lot - especially when you consider that if we are say £18million in debt. Thats quite a hefty sum that could otherwise be spent on the team.

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[quote user="chicken"][quote user="Karl Pilkington"]Debt is not always called in, as long as the lender is happy with the interest the borrower is paying. I think the big difference between citys debt now and when they had big problems around 1996 under Robert Chase is that now the debt i structured. Structured debt is like the mortgage that you have on your house if you keep up the interest payments the lender wont be called back and the debt will be paid off over a set period. Back in 1996 the debt was in the form of an overdraft where the lender can call it in at any point, this is what has happened at saints. The problem I have is that I think the interest City are paying is around the 7% mark which I think seems rather high, but I assume that if they could get a better deal they would.[/quote]

That is a lot - especially when you consider that if we are say £18million in debt. Thats quite a hefty sum that could otherwise be spent on the team.
[/quote]

Ding-a-ling! Someone else has just worked it out. When you consider that the main reason why we have so much debt is because the money has been spent on non-footballing assets it is even more annoying, isn''t it? This debt could and should have been dramatically reduced with the extra Premiership money/parachute payments but it was all squandered.

7% is actually a very good rate in today''s economic climate. They wouldn''t be able to borrow that money at any rate these days.

On the OP point, most if not all clubs have debt. It only becomes a problem if the debt can no longer be serviced or the servicing costs (interest payments) lead to financial difficulty. In NCFC''s case the debt servicing has detracted from team affairs and is close to causing serious financial difficulty. The club''s accounts were only given a clear audit statement last year on the basis that DS & MWJ would plug the funding shortfall with their own money. Imagine the problems we face now when that funding shortfall has grown from £2.5m to £7m per year. Even if DS & MWJ wanted they simply do not have the funds to commit.

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In terms of sale of Norwich City- I''m not really sure why the debt being wiped off  was part of the deal that Delia was ''hoping'' to strike with Cullum.

 

I can understand why she wanted the £20m to be spent on players and obviously I can understand why she wanted money for the shares. But why the debt?

When ME took over at the scum he was not saddled with the clubs debt- it was passed over. He was still happy to have the clubs debt- as I''m sure Cullum would do.

The cynical part of me thinks that adding the debt was a ploy to increase the ''value'' of the club and to increase the amount that any potential buyer would need to spend....

Obviously now we''re in League 1 (i dont think ill ever get used to that [:(])  the value of the club will decrease. The debt however will surely increase?

 

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The key issue is security. Lenders are happy with serviced debt which is fully secured, as this represents a no risk return for them. If the borrower ceases to service the debt the lender calls in the security (usually bricks and mortar of some sort) and sells it to clear the outstanding liability. If there is insufficient security then the next step is to go after the guarantors of the loan ( in the case of football clubs this will invariably be the directors) on a personal basis.

However, with the credit crunch and property slump we now have a situation where the gap between lending and recoverable security is massive in some cases, so that if loans were called in the lender would have no chance of recovering the full amount, or anything close. There is a business cliche that goes "if you owe the bank £1000 you''ve got a problem, but if you owe them £10 million they''ve got a problem" This is the much talked about "toxic asset", ie an irrecoverable debt where the lender keeps the loan going in the hope that the borrower will be able to service it until security values recover. If the borrower doesn''t the lender is faced with a choice of renegotiating the terms to make it easier for the borrower to service it (so reducing the lender''s profit margin) or calling the loan in and writing off the irrecoverable element. In the case of football clubs, as an earlier poster mentioned, there is greater pressure on lenders to avoid foreclosure because of the public perception element.

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[quote user="CT "]

In terms of sale of Norwich City- I''m not really sure why the debt being wiped off  was part of the deal that Delia was ''hoping'' to strike with Cullum.

 

I can understand why she wanted the £20m to be spent on players and obviously I can understand why she wanted money for the shares. But why the debt?

When ME took over at the scum he was not saddled with the clubs debt- it was passed over. He was still happy to have the clubs debt- as I''m sure Cullum would do.

The cynical part of me thinks that adding the debt was a ploy to increase the ''value'' of the club and to increase the amount that any potential buyer would need to spend....

Obviously now we''re in League 1 (i dont think ill ever get used to that [:(])  the value of the club will decrease. The debt however will surely increase?

 

[/quote]

 

As has been posted ad nauseam over the season, the terms of the loan are that if control of the club changes hands the debt becomes repayable immediately, unless the new owner can renegotiate it. Both Delia and Cullum have made it clear that the £20m quoted represented the outstanding debt, not a payment to Delia herself. It had to be quoted like that, because we simply don''t know if the bank would renegotiate as they were never put in that position, because, for whatever reason, talks didn''t get that far.

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[quote user="CT "]Unless I am very much mistaken the credit crunch is a result of :
a) the banks lending far too much money and charging very high interest
b) the country being stupid enough to think that we can spend our way out of trouble

-thus increasing the massive debt we have now and of course contributing massively to the credit crunch and the financial trouble we find ourselves in (credit being techy speak for lending?)[/quote]

Nearly,  the biggest cause was

1: banks lending to people who could never afford the payments

2: other banks buying those loans without knowing this.

and yes credit is the technical name for lending (hence the term credit card)

[quote user="CT "]Could this same thing in affect potentially happen in football?[/quote]

The biggest effect that football will see (and currently is) is that it will be harder to get loans/overdrafts.  They may also increase the payment on existing credit or call in some altogether.  I fully expect a football club to completely belly-up before the end of the recession and not necessarily in the lower leagues.

[quote user="CT "]The debt HAS to be called in eventually- is this the case of football?[/quote]

It all depends on two factors

1. can the club in question afford the repayments?

2. can the bank that lent the money afford to keep the repayments at the levels they currently are?

think of it this way if someone has a mortgage they can repay the bank will be quite happy with the loan as it is.  If they can not afford the repayments then they will start to worry and generally try to agree a new payment plan. This would probably be by paying over a longer time generally for less in individual payments just more of them.  If a deal like this cannot be reached then they take the house away.  that ultimately is what could happen to city, they take carra rud away.

[quote user="CT "]BTW- if the debt IS called in ( in the future) then where the hell does that leave poor ol Norwich City?[/quote]

Up the creek, no paddle with termites eating the boat

[quote user="CT "]I''m guessing an investor would be vital to us?[/quote]

it always is in football.  there are very few clubs in the world that could afford to run without the TV money and most in this country have too much debt.

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[quote user="CT "]Unless I am very much mistaken the credit crunch is a result of :
a) the banks lending far too much money and charging very high interest
b) the country being stupid enough to think that we can spend our way out of trouble

Could this same thing in affect potentially happen in football?
Some liverpool fans have made me aware of the fact that the debt of Hicks/Gillette (sp?) which is of course now Liverpool football clubs has to be paid back before the 1st day of july. Some are worried/some are not.

There was nothing to stop the debt of southampton fc/luton town fc(and various overs) being called in by the banks and I''m sure that eventually the debt will be called in of the bigger prem clubs and the ''bubble'' will eventually burst.

I dont claim to have a vast amount of knowledge about finances and debt being called in but surely football as it is cannot be run as a product like it is now?
The debt HAS to be called in eventually- is this the case of football?

If one of you with financial knowledge could shed some light on the whole issue for me- i would appreciate it.
Thanks in advance
[/quote]

A few things.

The credit crunch is largely a result of insufficient interest being charged when loans were put int place, and higher rates being demanded on refinancing. ''Risk'' disappeared from the banker''s vocabulary for about 10 years - 1998-2008, part from 2002. Risk of non-repayment was not properly factored in when calculating the interest rate. The myth of ''total security'' helped this - if the asset bubble continues growing, there is no risk of non-repayment as the assets bought will always be worth more than the debt borrower to buy them. Of course, we now know this to be complete and utter b0ll0cks.

Liverpool is unlikely to go under because of its debt. What will happen is some cheeky arab will buy the debt on the cheap, call it in and insist on huge amounts of shares being issued to them in satisfaction of the debt because it can''t be refinanced. This was a popular game in the 80s, where the debt of failing companies was often a better way to control the company that by buying shares. In reality, the debt of the large football clubs is the debt of the owners, and so the punishment will fall on the owners, not the clubs. Southhampton''s problem (and Norwich''s) is that the business is not worth a great deal anyway, even without the debt.

But I agree that the high leverage is not sustainable in the long term. Indeed, the whole finance structure of football is unsustainable in the long term. Football has become the sport of Princes.

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[quote user="NCFC_Shaun"]

Because Manchester United and other such big clubs will never get punished as it would ''upset'' a large fan base who help to bring money into football.

[/quote]

 

Absolute rubbish. Man U have sufficient revenue to be able to support their debt, currently. And their marketing machine is nothing compared to Real Madrid''s. Man U can make a lot more money than they currently do.

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The debt of football clubs in England is largely down to the ploughing of vast sums of money into Europe.

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I don''t know about that from my travels it looks like Man U are significantly more popular than Real Marid especially since Real are not that good at the moment.The issue with Man U is not if they can service their debt its if somone will actually lend them the money when it comes to roll these debts over ie the investors may need this money themselves and with football relying on advertising and fans having the cash the pool of potential investors is shallower.  However Manchester United is like a supermodel if you cannot afford her some old billionare called Favio will no doubt.Real are a financial basketcase by some measurements they are the worlds richest team but I read some articles saying that they are so in debt is utterly amazing, but you would be a dead man if you forclosed on this money.

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If u could just add had a few points:

1. It''s inevitable that eventually Sky TV will no longer be able to keep increasing it''s customer base and without new innovations such as HD TV on the horizon to fleece their existing customers of more money, then they will have a finite amount to spend on football and indeed it may start decreasing. Setanta who have the rights to some games and the England matches are already in dire straights and are trying to renegotiate their existing contracts on all sporting fronts.

2. No club can live outside it''s means forever. Man Utd''s debt actually increased last year as the Hedge Fund that the Glaziers borrowed the money from to buy the club with, is charging 14% interest. Yes there may well always be some wealthy person somewhere who will want to buy and bail out the Man Utds of the world but if they think they are invincible and immune to the financial realities of the world then they will come unstuck in a big way one day too as the last year has shown. No one is immune from it!

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[quote user="CT "]Unless I am very much mistaken the credit crunch is a result of :a) the banks lending far too much money and charging very high interestb) the country being stupid enough to think that we can spend our way out of trouble

[/quote]Well on this one, at least, you are very much mistaken.

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