An important decision was made in the High Court on 25 May 2012, which passed with surprisingly little coverage given its relevance to our national game. I’m referring to the judgement by Mr. Justice Richards to uphold the Football League and Premier League’s right to prioritise payments to football players and staff and to settle unpaid football transfer payments (the ‘football creditors’ rule) at the expense of other creditors, in this case, HMRC. Under the current Football and Premier League rules, the Premier League has the right to settle football creditors directly, from broadcasting monies, instead of paying to a football club in administration.
The Football League argued, successfully, that by removing this rule there was a risk that football clubs owed monies by other clubs, in relation to player transfers, would refuse to play each other and that a default by an insolvent club could lead to ‘contagion’ whereby one missed payment could lead to another club’s administration, and so on, resulting in a domino effect of insolvencies.
The challenge to this rule was brought against the Football League by HMRC in relation to tax payments owed to the government by Portsmouth FC. This was no doubt spurred on by our government’s recent tough talk about clamping down on tax dodgers in these austere times, and by the fact that HMRC itself has lost millions of pounds in tax revenue due to this rule in recent years.
No doubt the Football League are delighted they successfully defended this idiosyncratic and quite unique treatment, but have they thought through what the consequences are for creditors other than HMRC, and the impact this has on football clubs?
I am, of course, referring to traditional bank debt. Clubs in the Premier and Football Leagues have a material amount of bank debt, at a time when banks are in retreat from this sector given their own problems and the increasing regulatory and capital requirements placed on them by the FSA and rating agencies.
A traditional security package for bank debt would include a floating charge over any cash inflows to the club, including an assignment over the TV broadcasting revenues paid by the Premier League. This is because TV broadcasting revenues are almost always the single largest revenue item that a club receives, capable of accounting for up to half a club’s total revenue. These receipts (roughly £40m with lump sums payable in August and January) are often the principal source of repayment for bank loans taken out by clubs, in order to finance transfer activity in the July/August and January transfer windows.
However, under current Football League and Premier League rules (recently confirmed by Mr Justice Richards), the Premier League can simply redirect these monies away from an insolvent club and pay football creditors directly.
Why then would a bank provide debt to a club when its main revenue stream, and the bank’s main source of security, can disappear at the first sign of trouble? Ironically, a decision against the Football and Premier Leagues in the Portsmouth case would have made it easier to for banks to lend direct, and for longer terms, into clubs secured against a reliable income stream (i.e. the TV broadcast monies). In this scenario clubs experiencing a temporary liquidity problem would likely find it far easier to raise bank debt to tide them over this difficult period. The current situation is that, in the absence of further shareholder support, a club collapses unless a white knight can be found to inject equity in to the club – a far more challenging process than raising bank debt.
The Football League have made huge efforts to bring financial stability to their clubs by embracing UEFA’s financial fair play rules and imposing conservative wages/turnover ratios on their clubs. In my opinion it is this which can have a positive impact on clubs’ financial position, rather than the ‘football creditors’ rule, which does not offer any incentives to a club to operate within its means.
At Investec we are often asked to provide debt direct into clubs, secured against TV monies, but we find it difficult to accommodate all but the strongest of football clubs, for the reasons noted above. This is why we specialise in player transfer finance, where we align our interests with the club, and more crucially with the football creditors rule.
I think the Football League and Premier League missed an opportunity here to make their clubs deal with the realities of the real world, in the same way that other businesses have to. As things stand, clubs can run their businesses into the ground chasing promotion, European football or trying to avoid relegation by spending way above their means, and if a club defaults on a transfer payment the other clubs know that they will still be paid by the Premier league. If the football creditor’s rule was removed, perhaps clubs would have to take more of a collective responsibility for the way their fellow members operate. It would only take one non-payment for a club to be ostracised in terms of player trading (a good form of self policing!) and if a club becomes insolvent because of one missed payment, one has to question whether the club deserves to survive.
An important decision was made in the High Court on 25 May 2012, which passed with surprisingly little coverage given its relevance to our national game. I’m referring to the judgement by Mr. Justice Richards to uphold the Football League and Premier League’s right to prioritise payments to football players and staff and to settle unpaid football transfer payments (the ‘football creditors’ rule) at the expense of other creditors, in this case, HMRC. Under the current Football and Premier League rules, the Premier League has the right to settle football creditors directly, from broadcasting monies, instead of paying to a football club in administration. The Football League argued, successfully, that by removing this rule there was a risk that football clubs owed monies by other clubs, in relation to player transfers, would refuse to play each other and that a default by an insolvent club could lead to ‘contagion’ whereby one missed payment could lead to another club’s administration, and so on, resulting in a domino effect of insolvencies.
The challenge to this rule was brought against the Football League by HMRC in relation to tax payments owed to the government by Portsmouth FC. This was no doubt spurred on by our government’s recent tough talk about clamping down on tax dodgers in these austere times, and by the fact that HMRC itself has lost millions of pounds in tax revenue due to this rule in recent years.
No doubt the Football League are delighted they successfully defended this idiosyncratic and quite unique treatment, but have they thought through what the consequences are for creditors other than HMRC, and the impact this has on football clubs?
I am, of course, referring to traditional bank debt. Clubs in the Premier and Football Leagues have a material amount of bank debt, at a time when banks are in retreat from this sector given their own problems and the increasing regulatory and capital requirements placed on them by the FSA and rating agencies.
A traditional security package for bank debt would include a floating charge over any cash inflows to the club, including an assignment over the TV broadcasting revenues paid by the Premier League. This is because TV broadcasting revenues are almost always the single largest revenue item that a club receives, capable of accounting for up to half a club’s total revenue. These receipts (roughly £40m with lump sums payable in August and January) are often the principal source of repayment for bank loans taken out by clubs, in order to finance transfer activity in the July/August and January transfer windows.
However, under current Football League and Premier League rules (recently confirmed by Mr Justice Richards), the Premier League can simply redirect these monies away from an insolvent club and pay football creditors directly.
Why then would a bank provide debt to a club when its main revenue stream, and the bank’s main source of security, can disappear at the first sign of trouble? Ironically, a decision against the Football and Premier Leagues in the Portsmouth case would have made it easier to for banks to lend direct, and for longer terms, into clubs secured against a reliable income stream (i.e. the TV broadcast monies). In this scenario clubs experiencing a temporary liquidity problem would likely find it far easier to raise bank debt to tide them over this difficult period. The current situation is that, in the absence of further shareholder support, a club collapses unless a white knight can be found to inject equity in to the club – a far more challenging process than raising bank debt.
The Football League have made huge efforts to bring financial stability to their clubs by embracing UEFA’s financial fair play rules and imposing conservative wages/turnover ratios on their clubs. In my opinion it is this which can have a positive impact on clubs’ financial position, rather than the ‘football creditors’ rule, which does not offer any incentives to a club to operate within its means.
At Investec we are often asked to provide debt direct into clubs, secured against TV monies, but we find it difficult to accommodate all but the strongest of football clubs, for the reasons noted above. This is why we specialise in player transfer finance, where we align our interests with the club, and more crucially with the football creditors rule.
I think the Football League and Premier League missed an opportunity here to make their clubs deal with the realities of the real world, in the same way that other businesses have to. As things stand, clubs can run their businesses into the ground chasing promotion, European football or trying to avoid relegation by spending way above their means, and if a club defaults on a transfer payment the other clubs know that they will still be paid by the Premier league. If the football creditor’s rule was removed, perhaps clubs would have to take more of a collective responsibility for the way their fellow members operate. It would only take one non-payment for a club to be ostracised in terms of player trading (a good form of self policing!) and if a club becomes insolvent because of one missed payment, one has to question whether the club deserves to survive.
About Mark Bladon:
Mark currently leads the initiative to make Investec the pre-eminent alternative lender to the Sporting world, with a particular emphasis in developing relationships with sports team owners and high net worth sports men and women. A number of sporting sectors including Football, Golf, Formula 1 motor sport, sporting event finance and sports media are being explored and developed.
Mark joined Investec 6 years ago following a 12 year career at Singer & Friedlander Ltd. His roles included corporate and property lending, and five years as a credit analyst.
Mark obtained his Association of Corporate Treasurers qualification in 2003.
Mark Bladon’s
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