The Financial Implications of the Great Recession and the Variable Speed Recovery

[Canuck Oranje]

Being economic analyst by profession and soccer fanatic both, the topic of the financial impacts of the financial crisis on the game worldwide interest me. I am starting this thread to help collect thoughts, press reports, stories, and other data on the subject.

We read from time to time of certain clubs in trouble and speculation about trends coming out of the recession.

First, here are some basic economic facts.

The European countries referred by some as the PIIGS (Portugal, Italy, Ireland, Greece, and Spain) are judged by most economists have having the weakest economies in Europe. The UK is also not that strong but has enough to avoid being is expected to face an extended period of slow growth. Other European countries fall somewhere in the middle.

South America also has been affected by the financial crisis but to different degrees. Brazil is already back into high growth mode while Argentina continues to face serious financial issues.

At present, the financial impacts are only beginning to be seen in the sport of soccer. We've heard about the difficulties that the organizers of the World Cup 2010 are having in selling tickets.

And more and more reports are being presented about difficult financial situations are various clubs.

Economist are talking about a global economic transformation that is beginning to take place. I encourage all to share their thoughts, stories and the press reports about how this is all affecting the game of soccer around the world.

Here are some of my initial thoughts on the subject to begin:

- Second tier clubs and leagues in Europe are likely to get hit first. We are starting to see that in Spain and the UK. The leagues in Greece and Portugal are likely to face more difficult times than than say the German league. Big Five leagues in general should do better but individual clubs in these league may face difficulties.

- Argentina is a mess; but Brazilian soccer is on the mend.

- Debt loads going in are giong to be a determining factor in how a club deals with the changing economic environment. Even in Brazil, clubs with high debt loads will struggle.

- Regions within a country will face differing local economies. The English northeast is likely to be hit worse than some other parts of England. Similarly, the high growth agricultural regions of the state of Sao Paulo in Brazil will likely rise faster than most anticipate as well as clubs supported by consumer-related companies.

More later....

[Canuck Oranje]

Ok to begin with, let's start with what is essentially the starting point before the financial meltdown which occurred in late 2008. The following is from a report presented in the Guardian in June of last year on the currently situation with clubs in England.

http://www.guardian.co.uk/football/2009/jun/03/english-premier-league-debt

Debts are borrowings from banks, financial institutions, owners or other sources.

Arsenal

Accounts for the year to 31 May 2008

Turnover £222.5m (Up from £200.1m: 11.4%)

Gate and match-day income £95m

TV and broadcasting £68m

Retail £13m

Commercial £31m

Property development £15m

Player trading £0.5m

Wage bill £101.3m (up from £89.7m: 12.9%)

Wages as proportion of turnover 45%

Profit before tax £36.7m

Debts £416m

Interest payable £26m

Aston Villa

Accounts for the year to 31 May 2008

Turnover £75.6m (up from £37m in 10 months to 31 May 2007: 105% increase)

Gate and match-day £18.5m

TV and broadcasting £46m

Commercial £11m

Wage bill £50.4m (Up from £22.5m: 124% increase)

Wages as proportion of turnover 66.7%

Loss before tax £7.6m

Debts £73m

Interest payable £5.8m

Blackburn Rovers

Accounts for the year to 30 June 2008

Turnover £56.4m (up from £43.3m: a 30% increase)

Gate and match-day £6.2m

TV and broadcasting £41.2m

Commercial £9m

Wage bill £39.7m (up from £36.7m, an 8% increase)

Wages as proportion of turnover 70%

Profit before tax £3m

Debts £17m

Interest payable £1.5m

Bolton Wanderers

Accounts for the year to 30 June 2008

Turnover £59.1m (up from £51m last year: 16% increase)

Gate and match-day £6.8m

Hotel £8.7m

TV and broadcasting £34.2m

Corporate hospitality £2.4m

Merchandising £1.2m

Sponsorship and advertising £3.5m

Other football income £2.3m

Wage bill £39m (up from 30.7m in 2007, a 27% increase)

Wages as proportion of turnover 66%

Loss before tax £8.4m

Debts £52m

Interest payable £3m

Chelsea

Accounts for the year to 30 June 2008

Turnover £213.6m (up from £190.5m the previous year, a 12% increase)

Football Activities £189.8m

Hotel/Catering £8.9m

Merchandising £9.6m

Other commercial £5.3

Wage bill £149m (up from £133m in 2007, a 12% increase)

Wages as proportion of turnover 68%

Loss before tax £84.5m

Debts £701m owed to Roman Abramovich

Interest payable Nil

Everton

Accounts for the year to 31 May 2008

Turnover £76m (up from £51m the previous year, an increase of 50.1%)

Gate and match-day £20.5m

TV and broadcasting £46.6m

Other commercial activities £8.9m

Wage bill £44.5m (up from £38.4m the previous year, an increase of 16%)

Wages as proportion of turnover 59%

Profit before tax £26,000

Debts £39m

Interest payable £3.9m

Fulham

Accounts for the year to 30 June 2008

Turnover £53.7m (up from £39.7m last year, a 35.2% increase)

Gate and match-day £9.6m

TV and broadcasting £34m

Commercial activities £4.9m

Sponsorship £3.6m

Other operating income £1.6m

Wage bill £39.3m (up from £35.2m the previous year, an 11.6% increase)

Wages as proportion of turnover 73%

Profit before tax £3.2m

Debts £197m, included £174m owed to Al Fayed

Interest payable £1.8m

Hull City

Turnover (In the Championship) £9m (down from £9.5m the previous year, a drop of 5.6%)

Wage bill £6.9m (up from £5.2m the previous year, a 33% increase)

Wages as proportion of turnover 77%

Loss before tax £2m

Debts £1m

Interest payable £52,000

Liverpool

Accounts for the year to 31 July 2007 (accounts for 2007-08 are now overdue)

Turnover £159m (up from £134m the previous year, an increase of 18.6%)

Gate and Matchday n\a

TV and Broadcasting n\a

Commercial activities n\a

Visitors' Centre and Official Supporters Club n\a

Wage bill n\a

Profit before tax n\a

Debts £280m

Interest payable £21m (estimated)

Manchester City

Accounts for the year to 31 May 2008

Turnover £82.3m (up from £57m the previous year, an increase of 44%)

Gate and match-day £13.6m

TV and broadcasting £43.3m

Commercial activities £25.4m

Wage bill £54.2m (up from £36.4m the previous year, an increase of 49%)

Wages as proportion of turnover 66%

Loss before tax £32.6m

Debts £147m

Interest payable £10.7m

Manchester United

Accounts for the year to 30 June 2008

Turnover £256.2m (from 210.1m the previous year, an increase of 22%)

Gate and match-day £101.5m

TV and broadcasting £90.7m

Commercial activities £64m

Wage bill £121.1m (up from £92.3m the previous year, an increase of 31.2%)

Wages as proportion of turnover 47%

Loss before tax £44.8m

Debts £699m

Interest payable £69m

Middlesbrough

Accounts for the year to 31 December 2007

Turnover £48m (the same figure as the previous year)

Gate receipts £11.1m

Sponsorship and commercial £7.5m

TV & broadcasting £27m

Merchandising £2.4m

Wage bill £34.8m (the same as the previous year)

Wages as proportion of turnover 73%

Loss before tax £8.3m

Debts £93m

Interest payable £7.2m

Newcastle United

Accounts for the year to 30 June 2008

Turnover £100.8m (up from £87m the previous year, a 16% increase)

Gate and match-day £32.3m

TV and broadcasting £41.1m

Commercial activities £27.4m

Wage bill £74.6m (up from £56.7m the previous year, a 31.6% increase)

Wages as proportion of turnover 74%

Loss before tax £34m

Debts £106.2m (£100m is owed to Mike Ashley)

Interest payable £6.6m

Portsmouth

Accounts for the year to 31 May 2008

Turnover £70.5m (up from £40.2m the previous year, an increase of 75%)

Gate and Matchday £12m

TV and Broadcasting £51.2m

Sponsorship £4m

Retail £3.3m

Wage bill £54.7m (up from £36.9m the previous year, an increase of 48.2%)

Wages as proportion of turnover 78%

Loss before tax £17m

Debts £57.7m

Interest payable £6.6m

Stoke City

Accounts for the year to 31 May 2008

Turnover (2007-08, in the Championship) £11.2m (up from £7.9m the previous year, an increase of 41%)

Wage bill £11.9m (up from £7m the previous year, an increase of 70%)

Wages as proportion of turnover 106%

Loss before tax £5.6m

Debts £2.3m

Interest payable £49,000

Sunderland

Accounts for the year to 31 July 2008

Turnover £63.6m (up from £26m the previous year, an increase of 144%)

Gate and match-day £13.6m

TV and broadcasting £35.6m

Sponsorship and royalties £8.3m

Commercial activities £6.1m

Wage bill £37.1m (up from £23.7m, an increase of 57%)

Wages as proportion of turnover 58%

Loss before tax £4.9m

Debts £69.2m

Interest payable £3.9m

Tottenham Hotspur

Accounts for the year to 30 June 2008

Turnover £114.7m (up from £103.1m the previous year, an increase of 11.34%)

Gate and match-day £28.6m

TV and broadcasting £40.3m

Sponsorship and corporate hospitality £27.8m

Merchandising £9.7m

Commercial activities £8.3m

Wage bill £52.9m (up from £43.8m in 2007, an increase of 20.8%)

Wages as proportion of turnover 46%

Profit before tax £3m

Debts £65m

Interest payable £3.95m

West Bromwich Albion

Accounts for the year to 30 June 2008

Turnover (2007-08, in the Championship): £27.2m (up from £24m the previous year, an increase of 13% mainly due to increased parachute payments)

Gate and matchiday £7m

Merchandising £2.2m

TV and broadcasting £14m

Other commercial income £4m

Wage bill £21.8m (up from £17.4m the previous year, an increase of 25%)

Wages as proportion of turnover 80%

Profit before tax £11.3m

Debts £8.9m

Interest payable £91,000

West Ham United

Accounts for the year to 31 May 2007 (accounts for 2007-08 have been delayed)

Turnover £57m (down from £60.1m in 2006, a drop of 5.2%)

Gate and match-day £17m

TV and broadcasting £24m

Catering and corporate hospitality £5m

Commercial activities £9m

Retail and Merchandising £2m

Wage bill £44.2m (up from 31.2m in 2006, an increase of 41%)

Wages as proportion of turnover 76%

Loss before tax £22m

Debts £36m

Interest payable £2m

Wigan Athletic

Accounts for the year to 31 May 2008

Turnover £43m (up from 27m the previous year, an increase of 59.2%)

Wage bill £38.4m (up from £27.5m the previous year, an increase of 39.6%)

Wages as proportion of turnover 89%

Loss before tax £11.2m

Debts £66.4m

Interest payable £1.7m

[Canuck Oranje]

Regarding the debt situation in the UK, it isn't necessarily the clubs with the highest debt load that will be the one with the greatest difficulty. Some have more assets and others have a billionaire benefactor.

Nevertheless, it appears the financial mess in the UK is about to directly affect the EPL:

http://www.guardian.co.uk/football/2010/feb/10/portsmouth-administration-avram-grant

http://www.cnn.com/2010/SPORT/football/02/10/football.finances/?hpt=Sbin

[Canuck Oranje]

Even with trouble on the horizon, it is still far from clear how the world of club football will change both in Europe and across the globe. Again before digging into this, I think it is useful to look at club values as ranked by Forbes in 2009. It should be noted that this valuation largely uses information from the 2007-2008 seasons so again, it serves as a starting point.

http://www.forbes.com/lists/2009/34/soccer-values-09_Soccer-Team-Valuations_Rank.html

As for how things are likely to change going forward, i think the economic futures of different countries provide a strong suggestion or how different domestic leagues will evolve. However, it also should be noted that the biggest leagues and clubs in Europe are essentially global brands so it is unlikely that they will be affected as much as middle tier leagues especially in Europe.

Nevertheless, if I were to speculate, both German and Brazilian leagues should be expected to gain relative strength. This is already noticeable at a superficial level.

http://www.guardian.co.uk/football/2010/feb/07/corinthians-ronaldo-brazil-football

This article in the Guardian does go deep enough. There are underlying changes happening in Brazilian soccer that few even Brazilian fans have noticed. Some of the change is fueled by high debt loads and others by rich benefactors. Time will only tell what the outcome will be. Here is some data on Brazilian clubs.

Debts of the largest Brazilian Clubs by revenue 2008

# Club Euros

1 Vasco 145,739,000

2 Flamengo 128,529,000

3 Fluminense 123,668,000

4 Atlético-MG 109,252,000

5 Botafogo 102,380,000

6 Corinthians 98,423,000

7 Palmeiras 76,076,000

8 Internacional 68,237,000

9 Santos 67,719,000

10 Portuguesa 60,018,000

11 Grêmio 59,651,000

12 São Paulo 57,237,000

13 Cruzeiro 50,755,000

14 Vitória 35,223,000

15 Coritiba 20,442,000

16 Náutico 19,232,000

17 Atlético-PR 14,283,000

18 Paraná 10,532,000

19 Figueirense 4,220,000

20 São Caetano 1,210,000

21 Barueri 207,000

http://www.futebolfinance.com/as-dividas-dos-clubes-brasileiros-2008

Based on 2008 financial information, the 12 most valuable clubs in Brazil (2009):

1. Flamengo – R$ 568 million (226 million Euros)

2. Corinthians – R$ 563 million (225 million Euros)

3. São Paulo – R$ 552 million (221 million Euros)

4. Palmeiras – R$ 420 million (168 million Euros)

5. Internacional – R$ 231 million (92 million Euros)

6. Grêmio – R$ 214 million (85 million Euros)

7. Cruzeiro – R$ 139 million (55 million Euros)

8. Santos – R$ 135 million (54 million Euros)

9. Vasco da Gama – R$ 122 million (48 million Euros)

10. Fluminense – R$ 109 million (43 million Euros)

11. Botafogo – R$ 97 million (38 million Euros)

12. Atlético Mineiro – R$ 92 million (36 million Euros)

http://www.futebolfinance.com/os-12-clubes-mais-valiosos-do-brasil

[beachesl]

Thanks for this, very interesting.

Some very astute observations, from what I know and see.

[Canuck Oranje]

Some more stories worth reading about the situation in Europe:

http://www.channel4.com/news/articles/uk/football+in+crisis+as+transfer+window+slumps/3522837

http://blogs.reuters.com/soccer/2010/01/27/uefa-to-call-time-on-loss-making-clubs/

http://bleacherreport.com/articles/334192-four-english-clubs-now-facing-administration

http://www.ft.com/cms/s/0/1fd1d0d2-15e3-11df-b65b-00144feab49a.html

[Canuck Oranje]

After giving what must seem to be a gloomy picture, I thought I would indulge myself by speculating a little as to how things might unfold. First, this post make some suggestions,based on broader economic rationale how the key soccer leagues in Europe may reformulate.

In club soccer, the key leagues in Europe from a global perspective are in England, Spain, Italy, Germany, and France with other leagues of significance being in Portugal, Greece, Turkey, Russia, and the Netherlands.

To start with, it needs to be said that through the history of soccer in Europe, clubs and leagues that rise to the top of the game are very unlikely to stay at the top forever. That doesn't mean that they fall into oblivion but for various reasons, they may step back from the peak. Some return in later eras and others fall back further. My sense is that the England and the EPL is about the face having to step back one or two steps. The following link provides one opinion:

http://timesonline.typepad.com/thegame/2010/02/patrick-barclay-responds-premier-league-should-learn-lessons-from-germany.html

European Leagues that are likely strengthen

First of all, it is important to understand that everything is relative. Clubs and leagues that strengthen during this crisis may still have their own issues to deal with and may also actually see a decline in expenditures. The point is that they probably will not be hurt as badly. Second, Leagues that are relatively weaker may still appear competitive in Europe only less dominant.

The German Bundisliga would appear to be the league that will rise the most competitively in Europe. While some clubs have to deal with debt issues, they generally are going to benefit from a relatively stronger economy. As a result, even with the likely decline in the transfer market, its clubs are more likely to be able to benefit from the availability to high quality talent.

The Dutch league should also not be hurt as much but it has fallen significantly since the mid-1990s. While it may rise in quality, it will still unlikely acheive top league status because its domestic market is too small.

Leagues that will weaken

The EPL is likely to step back from being, as many believe, the world's best league. While some clubs with strong financial benefactors (Chelsea, Manchester City, etc) may still be among the top clubs in Europe, other debt burdened clubs (Manchester United, Liverpool, Arsenal, etc.) will, while still among the top, fall back. There also may be some other clubs that in the past wouldn't have been considered EPL quality that suddenly appear as regular contenders (don't know who they would be yet).

La Liga in Spain has to have some serious problems at present and should be expected to take a step or two back. While we hear of some clubs, the problem has to be much broader. While clubs like Real Madrid and Barcelona will continue to be dominant teams in Spain, I would expect that they will pare down their rosters and generally, budgets will be cut.

Serie A in Italy has slide back a little already compared to La Liga and the EPL. It should be expected that it will weaken a little more but it may not appear so when compared to the EPL and La Liga. Nevertheless, I don't expect Italian teams to be driving up transfer fees in the player transfer market.

The Portuguese and Greek leagues are likely to fall back the most. They don't have the international appeal of the EPL, La Liga and Serie A. While the big clubs in these countries will likely continue to be competitive in Europe, their domestic competitiion will likely weaken further.

Leagues likely to appear neutral

The French League hasn't really been among the top leagues. While this league may not appear to be seriously affected, it probably will not be able to take advantage of the weakness in other key leagues. In other words, the French league will likely continue to hold its competitive position in Europe.

Who Knows?

The Russian League is a league that appears to already have cut many to its higher salary foreign imports. I suspect it will continue to be what it is today competitively.

The Turkish League will always have limited its appeal among European players. At the same time, who knows? Money talks.

Transfer Market

Generally, it is clear that the era of record transfer fees is likely over for the time being. It would seem that domestic leagues will become much more domestically based in Europe by default rather than any actions taken by UEFA.

I would also expect fewer South American players in Europe. That's not the say that the big stars from South America will not come to Europe. I suspect it will affect the mid-level stars and average players that had gone to small European clubs in the past.

South America

The Brazilian League is undergoing a massive transformation just like Brazil's economy. However, it is not as simple as it is often painted by the European press or the Brazilian press for that matter. Time will tell what it looks like. As an occasional resident, I give my thoughts in a separate post.

Mexico has fallen back to Brazil a little over the past few years but I would expect it to be able to continue to retain its domestic players while having to compete more for players from other South American countries with the Brazilian league.

The Argentinian League is a mess just like the country itself economically. Its saving grace is that it is home to many world class players who may choose to stay at home. Still, over time, it is likely going to face stiff competition for players from Brazil and Mexico.

[Canuck Oranje]

Brazil

To try to explain how all the financial turmoil in European soccer will affect the Brazilian leagues, I think it is important first to understand what is happening Brazil today economically. Then, it is important to understand the state of the Brazilian soccer going into the European crisis. From that, I hope my thoughts will make a little more sense.

The Brazilian Economy

From my experience, it is very hard to give people who haven't spent time in Brazil recently an appreciation for what is currently happening there. Here I will try to do so in a couple of paragraphs and in a way that will help present how it will affect the domestic game.

To start with, most economists who look at Brazil predict real economic growth continue at about 5% for a number of years. Inflation is likely to continue to average at 4-5% (incredible given Brazil's past). The most amazing part of Brazil's economy though is the growth of its consumer economy. Consumers in Brazil have never used a lot of credit. Today because of the stable and growing economy, consumer are now being offered more credit while the rest of the world is cutting back. As a consequence, car sales in Brazil in 2009 reached a record high. A recent report also stated that it estimated that there were 175 million cell phones in Brazil (Brazil has between 190-200 million people). The current unemployment rate in Brazil is about 6.8% and employment levels are higher today than they were going into the global financial crisis. Finally, it is also important to consider that while proverty exists in Brazil, the middle classes and up now stand at over 100 million people.

Another key economic factor consider is that Brazil has widely different regional economies. The State of Sao Paulo is by itself an economy the size of Poland and greater than that of Argentina. On the other hand, the economic fortunes of the northeastern states have not been as bright.

The future of the Brazilian Clubs

I would divide the Professional clubs in Brazil into three main categories.

1. Traditional Big Clubs

2. Traditional Second Tier

3. New Clubs

Traditional Big Clubs

I would consider this group to be essentially the group referred to by themselves as Club dos Treze. Ironically, it is a group of 20 clubs. The group has in the past attempted to exert its power in Brazil with some effect. However, it is unclear, at this point, whether it has the power it once had.

The fortunes of this group of clubs going forward depends a lot on the debt these clubs were carrying going forward as well as the fan bases they can mobilize. Some like Flamengo, Corinthians, Sao Paulo FC, and Palmeiras are virtually to big to fail. Others like Internacional and Club Atletico Paranaense are financially strong. Clubs with moderate risk because of debt loads are Gremio, Cruzeiro, Goias, and Santos. The rest of this group are in the high risk category because of debt.

Second Tier Traditional Clubs

To be continued...

[Unnamed Trialist]

Little of what you have said about Spain or most of southern Europe regarding Football has much relation with reality. What top level Spanish team is struggling and why? Valencia did not pay players only due to an internal battle over control, not because of real economic difficulties. Debt? All clubs have it, but take a look at one of the clubs with most debt, Deportivo Coruña: still a competitive side because it is run intelligently.

A bad economy does not mean problems in football, at least not immediately and not necessarily in any structural way over the short term. If TV stations merge to strenghten their capacity to bid for games, and the public continues to look for entertainment of the highest level, the higher tiers will continue to be strong. Same happens with elite restaurants, with theatres, with some luxuries: high end sectors are only marginally affected by the "crisis". Same for high end football.

IN Spain the economic incentive spending from government has given us literally dozens of new field turf surfaces on all levels. Not to mention face lifts of municipal stadiums and sports facilities. Just an example of how the "crisis" has helped the game.

Financial stress affects mostly modest teams in lower divisions, from 3rd tier down, that depend a lot on corporate sponsors and have a weak fan base. Small sponsors giving a 30 to 200 thousand to a team pull back and out, not large-scale ones who cannot risk giving up their privileged sponsorships of elite teams.

And the current situation has a much bigger relative impact on salaries and budgets in semi pro than in pro. One result is that teams that are club-based, with an academy structure, and are well run and have brought up youth players, have kept salaries down, are pushing for promotion, while formerly famous teams fallen into lower divisions are struggling more, because their costs are higher and their expectations exceed reality.

[Canuck Oranje]

Regarding Spain, my comments are more related to where things are likely to go in the future. As for the concerns around debt among clubs in Spain, I'll point you to the following links:

http://www.independent.co.uk/sport/football/european/spanish-football-debt-mounting-as-recession-looms-1025690.html

http://www.independent.co.uk/sport/football/european/spanish-football-facing-financial-disaster-1671775.html

Again, as I said earlier, it may not mean a flurry of collapsing teams but teams cutting back on their player budgets which, if the clubs are well managed and spending their money wisely today, should lead to some reduction in overall quality because less money is being invested.

[Canuck Oranje]

Another story about clubs in trouble in Europe:

http://www.nrc.nl/international/article2468486.ece/Haarlem_football_club_goes_bankrupt

[Canuck Oranje]

To continue with my description of what is happening in Brazil...

The Traditional Second Tier

For the most part the second tier clubs are likely to face a growing challenge as the cost of fielding a competitive team are likely to go up while revenues are more likely to go the larger clubs. I expect to see significant changes happening at this second tier level.

At the same time, there may be some of these clubs that may be able to negotiate through all the economic changes with help from outside financial sources and a strong local economy. Without going into depth, there are three of these clubs that will currently play at the top level this year. They are Avai, Ceara Sporting Club, and Clube Atletico Goiaense. Another club to watch in this category because of the strength of its local economy is Botafogo of Ribeirao Preto (currently doing well in the top level of the Sao Paulo State tournament).

The New Clubs

While new clubs come and go, there is a breed to new club in Brazil that represents a wild card in the changing fortunes of it traditional professional soccer clubs. This is primarily because most are privately owned and some of those represent levels of wealth that easily match the biggest clubs. A small number of these have already worked their way up the pyramid. I refer to them as wild cards because they are likely to instigate change. The clubs to watch among the new clubs for various reasons (in brackets) within the State of Sao Paulo alone are:

1. Gremio Barueri (in Serie A and competing in Copa sulamericano in 2010)

2. Guaratinggueta (in Serie B in 2010)

3. Pao de Acucar EC (supported by Pao de Acucar group and its billionaire owner Abilio Diniz)

3. Votoraty (supported by corporate interests in Ribeirao Preto)

5. Desportivo Brasil (represents the soccer interests of the investment fund of a number of wealthy individuals)

6. Red Bull Brasil (represents Red Bull's interests in Soccer in Brasil

Next... Putting all these clubs together in one system...

[Gordon]

Debt is not, in and of itself, a bad thing. It is neither good nor bad, it just is. It is a tool upon which great companies, projects and your house and mine were built. Foolishly used, it can be a disaster. Properly used, it can lead to great profit.

http://www.arsenal.com/news/news-archive/arsenal-holdings-plc-results-for-year-end-ma

[Canuck Oranje]

I think the argument made by most observers of European football is that many clubs have over-leveraged. While the levels of debt they took on may have seemed right at the time, these levels may no longer be under the current economic conditions. My comments should not be seen as making arguments against the use of debt but to recognize that the transformation of the global economy has significantly changed what level of debt is optimal. Many clubs in Europe now face the need to reduce debt loads to remain sustainable. That doesn't necessarily mean that these clubs will fail. It may simply mean that their normal activity in the transfer market will change in order to preserve cash.

http://soccernet.espn.go.com/news/story?id=739452&sec=england&cc=5901

[Canuck Oranje]

The Importance of Club Finances - Putting all these clubs together in one system

Debt Loads in Brazil

To understand the emerging trends in Brazil, it is important to understand the importance of the global transfer market to Brazilian soccer as well as the current debt position of traditional clubs.

As mentioned in an earlier post in this thread, many clubs in Brazil are over-leveraged with debt, even with the improving fortunes of the country's economy. Many of these clubs have used various strategies to manage tight cash flows. An important part of the cash flow strategy of many clubs is to sell players to Europe. With the declining opportunities to sell into the transfer market, these clubs will need to rely on other means to generate cash flow. Clubs with huge fan bases may be able to offset some of this loss of revenue through improving gate receipts, while others that are too highly leveraged (debt and financial partnerships) may continue to struggle. One example is Vasco da Gama where the club rushed to make pay up the salaries of its players that were already in arrears before its cup match in Rio de Janeiro this weekend.

[Canuck Oranje]

Emerging Trends in Brazil as a result of tough economic times in Europe

Here are some of the trend that are beginning to emerge in Brazilian soccer and some events that could turn into trends if they continue:

Players Returning from Abroad

It appears as though 2009 was a tipping point as far as Brazilian players going abroad and players returning. The peak in terms of the number of players going abroad from Brazil appears to be 2008 when, according to the CBF, 1,176 Brazilian players transferred out of Brazil. In 2009, 1,017 transferred out which is still a high number but lower than 2007 and 2008. At the same time, the number of players returning to Brazil reached 707 players in 2009 which would likely be the highest number on record and certainly the highest number in the past five years. Given the level of activity in the transfer market this past January, 2010 will likely continue the trend of increasing the return of players and the decreasing the exit of players from Brazil. While the attention is always on the big stars, the real changes are happening at the second tier of talented players.

Growing Revenues

Cash flow considerations will continue to have a significant impact on Brazilian teams. Most fans in Brazil have little knowledge of the extent to which some clubs have gone to secure the services of players because of the financial postion. Even the largest clubs have acquired the players wished for by fans through the use of sponsor-paid salaries and outside-investor paid transfer fees. In other words, the playing rights of many of the star players listed on the rosters of some of the largest Brazilian clubs are not owned by the clubs themselves but by outside financial partners. That goes for players returning to Brazil as well as young players that are beginning to acheive star status. For example, both Diego Souza and Cleiton Xavier of Palmeiras are both star players at Palmeiras whose playing rights are held by Desportivo Brasil (also a new club at the bottom end of the pyramid).

Attendance at games in Brazil is beginning to increase. Ticket prices are also beginning to rise. That of course means that gate revenue is also rising.

Similarly, sponsorship revenue appears to be rising again after a difficult year on the sponsorship side of things in 2009. According to Futebol Finance, the average value of a shirt sponsorship in Europe's big six leagues is about 3.5 million Euros. To compare a recently announce sponsorship deal at Corinthians will generate the equivalent of approximately 5.0 million Euros (after a number of adjustments to make the numbers comparable) which would still place it under the elite sides but significantly higher than the average. Flamengo have a similar deal with a slightly lower number. Expect this revenue source to become more and more signicant.

Those clubs that can offset lost transfer revenue with increased gate revenue and sponsorship revenue will be sustainable while those who cannot will continue to have trouble on the horizon. Those large traditional clubs considered at high risk in a post earlier in this thread are ones most likely to continue to find it difficult. Clubs to watch in the high risk category are Vasco da Gama, Botafogo of Rio de Janeiro, Fluminense, Clube Atletico Mineiro and EC Vitoria. All of these have large fan bases and high debt loads. The financial success or failure of these clubs will likely be a barometer for just how much change will happen on the domestic scene.

The cost of competing is likely to rise

Evidence is already mounting that salary levels for elite players in Brazil are on the rise. As well, the degree of sophistication in assessing young players is increasing and that means technical staff will also need to be expanded and properly compensated or they will move to a club that will. The cost of competition will also put greater pressure on clubs with high debt loads and will increase the need for greater financial investment and revenues. This will also put pressure on a number of the new clubs to find a growing fan base.

Changes as a Result of Regional Economic Differences

Some second tier traditional clubs may replace some of the high hisk big clubs primarily because of where they are located and the access to investment capital that these locations can offer. For example, Botafogo of Ribeirao Preto is a club that has fallen over the past decade and now may benefit from the rapid economic growth experienced in the city of Ribeirao Preto. There may be a few others that may also benefit. However, it's unlikely that many will be able to make the jump because it would only be able to be done with access to enough investment to compete.

Presidente Prudente is an example of a city in the State of Sao Paulo that has determined that its economic strength could be used to acquire a Serie A club (a North American approach) like Gremio Barueri. At the same time, Gremio Barueri is looking for a fan base which it did not find to a sufficiently in Barueri. Presidente Prudente has a history of passionate fan support for soccer and with no club in the national levels. To be introduced to just what Presidente Prudente is like see the following video. It may dispel some preconceived assumptions (also check the guy at the 1:00 minute mark) about Brazilian cities of the interior. This city isn’t what most visualize when they think of a Brazilian city in the interior.

[Canuck Oranje]

New Clubs already are an important catalyst

Generally, new clubs represent new money to Brazilian soccer and many of these new investors want control and more transparency when making investments. For that reason, new privately incorporated companies are attractive because traditional clubs represent a lack of transparency and mismanagement. At the same time, these clubs will be pressured into finding revenue sources within Brazil to offset the decline in the transfer market. There are three main drivers behind the creation of new clubs in Brazil with virtually all new clubs falling in among them.

1. The Competition: The new clubs with this primary objective vary in their success depending on the availability of financial resources and technical knowledge of the sport. Often they include former players and are encouraged by the city where it is located. Examples are Gremio Barueri (Prudente), Guaratingueta, and Votoraty. There have also been some financially weak traditional clubs that have converted into privately incorporated clubs like Paulista. Generating fan bases and other sources of domestic revenue will a challenge for these clubs

2. Wealthy Sponsors: These clubs begin with a war chest of financial resources. They will typically acquire the technical skills needed to succeed and will usually focus on building a team from the bottom up (youth academy first). The classic examples of new clubs which pose the greatest threat to the establishment would be Pao de Acucar EC and Red Bull Brasil. On the other hand, it remains to be seen whether they can attract a fan base.

3. Investment Return: These clubs begin with the purpose of developing players as assets to be sold. Again, the financial resources will vary as will the approach. Typically, these clubs originally began as youth academy-focused teams or as investors in the playing rights of young players. When the rules changed regarding club affiliation when participating in youth tournaments, these clubs entered into senior competitions at the lowest level. Often location is irrelevant because the primary business is trading player rights. The wealthiest of these clubs would be Desportivo Brasil, Ole Brasil, and Tombense. Again, with the decline of the international transfer market, these clubs will also need to find new ways to generate profit domestically. That could mean profit from a developing domestic transfer market or from competition.

[Canuck Oranje]

Back to Europe:

This link outlines the UEFA response:

http://blogs.reuters.com/soccer/2010/01/27/uefa-to-call-time-on-loss-making-clubs/

[Canuck Oranje]

The Wall Street Journal's take on the slowdown in the Transfer Market:

http://online.wsj.com/article/SB10001424052748704722304575037182196312038.html?mod=WSJ_hpp_RIGHTTopCarousel

[Canuck Oranje]

More data expected in UEFA's Report are out.

http://www.guardian.co.uk/football/2010/feb/23/premier-league-clubs-europe-debt

[Gordon]

I think the argument made by most observers of European football is that many clubs have over-leveraged. While the levels of debt they took on may have seemed right at the time, these levels may no longer be under the current economic conditions. My comments should not be seen as making arguments against the use of debt but to recognize that the transformation of the global economy has significantly changed what level of debt is optimal. Many clubs in Europe now face the need to reduce debt loads to remain sustainable. That doesn't necessarily mean that these clubs will fail. It may simply mean that their normal activity in the transfer market will change in order to preserve cash.

http://soccernet.espn.go.com/news/story?id=739452&sec=england&cc=5901

I agree generally but disagree specifically with your inclusion of Arsenal. Here is there latest financial as of November 30, 2009: http://soccernet.espn.go.com/news/story?id=747245&sec=england&cc=5901. That is a huge profit during a period of economic downturn and a substantial debt reduction as well. Perhaps their model worked...

I should also note that Arsenal has a reserve fund of 100 million pounds specifically dedicated to player purchasing. The fund was created out of the profits made from the sale of players. Wenger, an economist, has always subscribed to the buy low sell high philosophy and Arsenal would have been much enriched by that. In addition to the obvious: Adebayor, Henry, Anelka, Overmars, Viera etc. there are the scores of young players, the David Bentleys, Justin Hoytes and Jeremie Aliadieres of the world.

[Canuck Oranje]

If it seems like I'm lumping Arsenal in with all the others, then I am being misleading. In fact, I think my point has been that Wenger in one of the most level-headed observers in England and has taken the right strategy. That is not to buy high and be very careful in how you use the transfer market. In many ways, if all the worst offenders took the Arsenal approach, transfer values would naturally fall.

In the end, we may agree more than than at first thought.

[Canuck Oranje]

More on Spanish football debt in today's Guardian:

http://www.guardian.co.uk/football/feedarticle/9084278

[Gordon]

Arsenal's latest. Man U seems to be doing OK too despite huge debt, while Chelsea remains a money pit (only slight reference to both of those teams).

http://soccernet.espn.go.com/news/story?id=826331&sec=england&cc=5901&cc=5901

Edit: The reference to Man U's debt is not a shot at the theme of this thread, btw, more an expression of surprise.