An Analysis of Arsenal's Financial Position

An in depth look at Arsenal's finances including the debt commitments; wage bill issues and why FFP could be a factor in time

Estimate of Arsenal Holdings plc Accounts for the period 1 June 2018 to 31 May 2020

This analysis has been produced by AST member Simon Hill.

Firstly, a simplified overview of the Arsenal’s accounts is set out in table format. The figures are drawn directly from the club’s accounts for 2018, with the full year to 31 May 2019 and 2020 being Simon Hill estimates.

£millions Yr to May 18 Yr to May 19 Yr to May 20 Act Est Est Revenues:





Matchday 99 96 94 Broadcast 180 170 175 Commercial 82 93 128 Retail 25 26 26 Player loans 6 0 0 Football revenue 392 385 423 Property 11 0 0 Total revenue 403 385 423







Costs:





Football costs wages 240 230 240 Football costs other 88 86 86 Amortisation of squad 92 95 95 Depreciation 16 16 16 Property less JV share 8 0 0 Total costs 444 427 437 Operating profit/(loss) (41) (42) (14) Player sales* 120 0 0 Interest (9) (12) (12) Profit before tax 70 (54) (26) Estimated Cash generated for new players 140 44 72

*Estimate works on the baseline of no player sales to show the position as of now. It may be that Arsenal can secure some player sales which would strengthen the position when it comes to buying players but I do not see that much capacity in this area given the current profile of the squad with the exception of Lacazette who has a strong asset value based on his age and contract value.

Overview

The year 2017/2018 saw Arsenal endure the loss of Champions League football and a resulting £40m knocked off football revenues. Yet in this period wage costs expanded by £40m following three big new signings, one huge renegotiation and the termination costs for Arsene Wenger and his support team.

Player sales covered up the operating loss at this time and generated huge profits (£120m). Even more was invested in new signings than was raised from sales. Cash balances were bolstered by upfront payments from sponsors for the new commercial deals which commence in season 2019/20. Some of this cash was spent on squad signings in summer 2018 (£61m was spent on new players including future instalments due in 2020 and beyond).

2018 / 2019 offers no revenue growth despite the controversial Rwanda shirt sleeve deal and run to the Europa league final as TV revenues from the Europa and Premier league will fall slightly (the former as we have to share revenues with Chelsea, the latter from less televised games). Costs remain high as the wage base has a full year impact of the high wages being paid and player amortisation is similarly inflated by all the spending on new players in winter and summer 2018. A huge loss of about £54m is locked in and minimal cash is generated for transfers in summer 2019 (I estimate £44m). Arsenal’s die was effectively cast on the cost of the signings made in 2018.

2019 offers no revenue growth despite the controversial Rwanda shirt sleeve deal and run to the Europa league final as TV revenues from the Europa and Premier league will fall slightly (the former as we have to share revenues with Chelsea, the latter from less televised games). Costs remain high as the wage base has a full year impact of the high wages being paid and player amortisation is similarly inflated by all the spending on new players in winter and summer 2018. A huge loss of about £54m is locked in and minimal cash is generated for transfers in summer 2019 (I estimate £44m). Arsenal’s die was effectively cast on the cost of the signings made in 2018. 2019/2020 sees help arrive in the form of new sponsorship deals agreed in 2018 with Adidas and Emirates and a new EPL TV deal cycle which offers some overseas rights growth. All in all, we estimate close on £40m of additional revenue will come in to almost balance the books generating surplus cash of £72m (see table above). As a result a small modest increase in the wage bill of (£10m) is allowed for which net of squad departures (players leaving and returning loanees) means around £500k a week can be invested in the squad in summer 2019 from around £40m-£50m of cash and future commitments.

The one caveat to this level of spending is a need to keep an eye on Arsenal’s FFP position. As a reminder, clubs need to keep to under an FFP measured loss of E5m over three years though they can use surpluses from year’s four and five to get them out of trouble. The main difference between an accounting loss and an FFP one is an allowance for spending on infrastructure and the academy (estimated at around £20m for Arsenal). Posting two year adjusted FFP losses of £40m means Arsenal are sailing close to the wind so they may decide not to boost salaries that much and/or decide to take profits on player sales to plug any hole now, though theoretically they have a couple of years to raise those profits as 2018 was a bumper year for transfer profits and will count for FFP purposes until May 2022.

To truly get the financial capacity to rejuvenate the squad, Arsenal need to get back in to the Champions league which would add some £50m to the bottom line net of wage increases (through a mix of commercial deal uplifts, higher ticket prices and the higher TV revenues on offer in the Champions league). This would potentially allow bigger name signings to be made without big name sales to finance them.

Cash balances

There is a general misconception that Arsenal are debt free and sitting on spare cash. This is incorrect. The analysis of the May 2018 accounts published back in March showed that whilst there was substantial cash held at that time (£231m) it was largely spoken for:





Cash £231m Debt Service accounts £36m Working capital £50m Net player payments due 2018-19 £0m Debt repayments £9m One off factors £17m Spare Cash £119m Net spend – summer 2018* -£31m Residual Cash £88m





*Assumption that 50% of the net payment due of £61.4m is to be paid within 12 months with the remainder in future year installments

This estimated £88m of residual cash is balanced by a further £92m of net future payments still due on players in 19/20 and beyond.

Given the known conservative approach from Arsenal it is accordingly estimated that the only spare cash available at present is that which has been generated in the season to May 2019 (before players sales). As the first table above shows this in the region of £40-50m.

Arsenal’s debt commitments

Arsenal’s big three debt commitments are:

Fixed rate bonds (£122m) costing 5.8% pa and amortising at an increasing rate starting from £9m in November and rising by app £0.4m pa. The bonds will be fully repaid by 2029 (10 years) – at an average repayment of £12m pa. With interest they cost cash flow an average £16m pa. Early redemption now would be at the gilt price equivalent which would be a substantial premium to book value (40%!!! Or £50m). So KSE are stuck with these and the annual commitments to pay interest and principal until 2029.

Floating rate bonds £50m swapped at a fixed interest rate cost of 7% maturing in 2031. The swap obligation is in the books at £25m and would have to be settled now in cash for early redemption of the bonds. Annual cash cost £3.5m is locked in and £50m needs to be found in 2031 to repay or refinance the loans.

Debentures to supporters (Bonds C&D) due 2028 rolling up 2.75% interest will be almost £20m at redemption

Debentures (Bonds A&B with value £14.5m) are non-interest bearing and not repayable for over 100 yrs and hence not relevant to this analysis

Refinancing could be undertaken now by KSE but early redemption comes at a considerable cost (£250m). This would save on average £20m per annum and free up cash flow to help resolve FFP pressures if financed by pure equity (something considered unlikely to happen with this owner) or debt servicing the refinanced amount on better annual terms.

In summary

Arsenal are cash strapped, boxed in by FFP and saddled with existing debt obligations of £200m that would cost £250m to refinance early. Their rival clubs have much more free cash flow to invest in transfers and salaries and arguably start with stronger squads so it is going to be an uphill struggle to narrow the gap.

Meanwhile it is hard to see much capacity for KSE to justify extracting cash short term (dividends or management fees) at least until the existing debts are refinanced and the losses stemmed. I hope the AST will be keeping a close eye on what happens here.

When Usmanov owned 30% of Arsenal he proposed a rights issue (July 2009) to raise £150m to off some of the existing debts and improve cash flow for player investment but KSE said no and so unlike other clubs like Chelsea, City and Liverpool who invested in their grounds with owner finance or equity to support the cost, Arsenal will remain burdened by these debt related cash outflows outflows (£20m per annum) for the next 12 years whilst trying to stem these losses and bridge the gap on their immediate competitors.

The importance of Champions League qualification is evident.





Simon Hill, June 2019



