Driven by people with an inability to accept the evidence before them, there appears to be a great desire in society to promote a new normal (which in itself is surely an oxymoron?) The pretence that we’ve gone back to a post covid existence with minimal apparent changes nor damage.

Nowhere more so is that apparent than in the bubble that is the Premier League. Football is back, Mourinho a shadow of the manager he was and Pickford picks out “4 foot 6” Bernard in a last minute attempt at an equaliser. It’s no longer Project Restart, it’s the 2019/20 Premier League season once more.

However the reality is extremely different. In the first three parts of the Football Shorts series I built a case, a forecast, of the possible financial impact Covid-19 will have on the Premier League and its constituent members.

In part III, I looked at the cash flow implications for 2019/20 and 2020/21 for those clubs in the Premier League in 2018/19 and still present. I forecast, based on reductions in match day income, commercial revenues and broadcast revenues with the positive (from a cash flow perspective) impact of reduced transfer activities, cash shortfalls of £266 million for the completed 2019/20 season and over £800 million for the full 2020/21 season.

Incidentally, Richard Masters, CEO of the Premier League forecast “losses” of more than £700 million at a recent hearing of the DCMS Select Committee. I suspect his calculations carry the hope of paying spectators returning to grounds at some point in the 2020/21 season. My forecasts do not. Masters’ reluctance to commit to financial assistance further down the football pyramid spoke volumes, despite the Premier League having claimed before restart that the season had to be re-commenced in order for them to provide financial support to grass roots.

The question is who is worse affected by these projections and how do they fund or mitigate the reduction in cash flows?

What is immediately clear is that the “big 6” are most heavily impacted, their aggregate reduction in cash flow representing 80% of the total amount. These figures include an assumption that the overall player trading volume is reduced by 44% (a 25% reduction in numbers of players being transferred and a 25% reduction in player values – using 2018/19 as a base). Overall, the reduction in player trading positively impacts cash flow within the Premier League even if it reduces profitability.

Short term fixes

With the traditional player trading option (as a means of making good operating losses) much curtailed through the reduction in buyers and the reduced player values, clubs will have to use existing cash resources in the first instance, before looking at debt facilities as a temporary solution.

The debt options open to clubs will be heavily dependent upon their status. Those with the strongest balance sheets and critically those with the strongest commercial partners should find debt financing through their usual banking relationships relatively easy.

Those already indebted and with non blue chip sponsors and commercial partners will find financing more expensive and significantly reduced in scale. When assessing lending risk the banks will look at the strength of the major sponsors – a global bank presents more security than an offshore bookmaker, Nike or Adidas more security than a young or developing kit manufacturer etc.

Of the biggest 6 clubs, Tottenham Hotspur have announced a 12 month, £175 million credit facility with the Bank of England, unsecured and with an interest rate of just 0.5%. Thus their immediate cash concerns are solved but the facility effectively just buys the club time to find further financing in the future.

Manchester United informed the NYSE that they have a £140 million credit facility with their bankers. In addition the 3rd quarter financial results for 2019/20 showed £90 million of cash.

Arsenal had £135 million in cash (source Fitch ratings) in March 2020. Of this £36 million was restricted, held in a debt service reserve account (DSRA), a condition of their stadium financing. However, KSE having refinanced the bonds at one assumes a lower rate, will now also benefit from freeing that cash for general use. In addition to their cash reserves, Arsenal have a £30 million facility with their bankers, arranged prior to the Covid-19 crisis.

Liverpool on the back of very strong results in 2018/19 entered the year in good financial shape having reduced their debt to FSG in relation to the Main Stand to £79 million. In addition they had net bank debt of £12 million. In total, the banking facilities available to them amount to £150 million. Based on my cash flow projections that facility would not be sufficient. The postponement of the Anfield Road extension, to be paid out of existing resources/facilities is a clear indication of the funding squeeze they face.

All four clubs above have addressed their short term requirements. Perhaps they are adopting a “wait and see” strategy to determine their longer term capital needs. However, each of the clubs will either have to resort to longer term debt or a permanent capital injection in the form of equity.

Manchester City and Chelsea are blessed with owners willing and able to fund their business’ cash flow and capital requirements. In January of this year, Chelsea reported that Abramovich had provided an additional £247 million in the previous financial year. No doubt he will continue that support as required.

Who are the lenders?

As we have seen, the biggest clubs have access to the regular banking market with familiar names such as HSBC, Bank of America and Barclays offering secured lending facilities with fixed or floating charges against the assets and income streams.

As is well known, fees for many players transferred between clubs are typically paid over two or three years. As a result the selling club does not receive the full value of the transfer at the time of sale. To overcome this, a number of clubs have used banks to factor the future receivables. Everton have used Santander to factor sums due from Manchester United (the Lukaku sale) and Manchester City (the Stones sale). Other clubs, Crystal Palace for example, have used specialist lenders such as the Australian bank Macquarie to similar effect.

Not all clubs are creditworthy enough for traditional banks, nor have bankable outstanding transfer fees from players to provide significant sums to meet cash flow and working capital concerns. Indeed, the rapidly deteriorating economic situation post Covid makes those banking facilities even harder to come across.

Grey Market

There is however a legitimate grey market that clubs can tap into. Often set up in offshore locations guaranteeing anonymity for a number of years these organisations would lend against future broadcast revenues. Organisations such as Vibrac in the British Virgin Islands became familiar names to those that study such things.

Today, the Premier League forbid clubs to borrow from offshore entities using future broadcast income as security. However clubs can still use companies such as Rights & Media Funding Limited to arrange finance secured against the assets of the club concerned. These facilities are usually renewed annually. West Ham United have a £75 million facility, and Everton having previously had a 3 year £60 million rolling credit facility with Chinese bank ICBC also now use Rights and Media Funding Limited.

Capital Raising

West Ham United carried significant debt prior to the Covid crisis with approximately £45 million outstanding in shareholder loans to Gold and Sullivan plus a facility for £75 million with the specialist football lender Rights and Media Funding. Thus the prospect of finding additional facilities were somewhat limited.

As a result, West Ham United called on its existing shareholders and on 1st July, raised £30 million in an issue of new shares. David Sullivan (51.1%) contributed £15.03 million, David Gold (35.1%) £10.53 million, Tripp Smith (10%) £3 million, Terry Brown, the Harris family and Karen Brady (3.8%) £1.14 million. The prospect of relegation and the already high levels of debt were likely to have left the shareholders with no option.

Bournemouth find themselves in an interesting position. Although their cash flow is among the least impacted (due to their very low match day revenues) the club is heavily indebted to their shareholder Maxim Demin. Significant expenditure in the transfer market meant a significant £81 million was still outstanding at the end of the last financial year, £32 million of which was to be paid in 2020. Current shareholder debt is £100 million. Maxim Demin, in Premier League terms, is not a hugely wealthy man (pre-Covid net worth £900 million). Staying in the Premier League will stretch his commitment further, relegation would be an extremely expensive outcome for the club and owner.

Although extremely well run, and this is in no way a criticism of the club, Burnley demonstrated the real lack of robustness of many football clubs. In early April, their Chairman and 49.2% largest shareholder, Mike Garlick warned that a £50 million reduction in turnover would mean “we as a club will run out of money by August”. This from a club with no debt and only a marginal trade balance in favour of creditors. Given that the season is now almost certain to finish, I project the cash flow impact on Burnley to be significantly less than he might have feared. Burnley, to their credit, can see through this crisis despite not having an extraordinarily wealthy owner (Garlick’s net worth is estimated at £62.5 million) nor being heavily reliant on debt. The sensible manner in which they have been run will reap benefits in the hard times ahead.

In a single article it is not possible to cover every club – I will return to some other the others in a future article. Let me turn to Everton.

Everton

Despite having the fourth largest benefactor in Premier League football in Moshiri – his £350 million of capital injections place him only behind Abramovich, Mansour, and Brighton’s Tony Bloom, our ineffective transfers, huge wage bill, high operating costs and the sizeable costs of preparations to date for Bramley-Moore have put Everton’s finances under huge strain.

That strain is not only regulatory in terms of FFP (should we qualify for Europe) and the Premier League Profit and Sustainability rules, but a genuine cash strain. In this article Business as usual? I projected negative cash flow for season 2019/20 of around £62 million (on the assumption the season would be completed). For season 2020/21 I have projected negative cash flow deteriorating by a further £29 million as a result of operating activities (before any adjustments for financing or player trading activities).

With significant capital commitments (£350 million of debt, £150 million shareholder and naming rights contributions) arising from the Bramley-Moore stadium, should work still begin this financial year, negative cash flow of £90 million cannot be funded by additional debt. It could only be funded by further injections from our majority shareholder.

Thus for the stadium to be funded, and for the club’s working capital requirements to be met to June 2021, based on my projections, Everton need find £350 million in long term finance for the stadium, £150 million to underwrite the difference between the cost of the stadium and the likely maximum amount of borrowing and perhaps £90 million to fund our working capital requirements arising from negative cash flow.

A total approaching £600 million. All of this despite having already received £350 million from the majority shareholder since his arrival 4.5 years ago.

All of the above assumes the cost bases currently seen in the Premier League will continue. I don’t think they can. Clubs are going to have to reduce their cost base in future years. As Everton can bear witness, removing costly players on long term contracts is difficult in the good times, almost impossible in more difficult times. Thus, many clubs will just to have to allow the contracts to run out over time. Where possible those clubs under greatest strain will try to offload, perhaps even selling assets they’d prefer not to sell.

The alternative is to recapitalise the whole industry. Allow those clubs with shareholders wealthy enough and willing to, to repair balance sheets and provide working capital until such a time as clubs can operate profitably (by reduced expenditure more so than future increases in income).

All of the above will present many challenges. For Everton, in particular, whether we start building Bramley Moore this year or decide to defer it, the need for Moshiri to provide additional funding is self evident.

No-one could have predicted that a global pandemic could have created the scenario in front of us. Some may say Everton have been typically unlucky to be found in such a vulnerable position at such a time. The fact that we are vulnerable is worthy of scrutiny and accountability, it is not just unfortunate timing. The scale of the difficult circumstances ahead require additional skills and expertise at board level if we are to achieve our ambitions. The cost for the majority shareholder, Farhad Moshiri, is going to continue to be significant.