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Football, financing, and financial fair play post Covid-19

The finances of football clubs have suffered severely during lockdown and clubs are now urgently seeking capital to shore up their finances and, in some instances, stave off liquidation but they face the additional challenge of complying with financial fair play rules. Janine Alexander and Simon de Broise explore the challenges clubs will be faced with post Covid-19.

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There are three regimes that can apply to English clubs, depending on the league and competitions that they are playing in. The UEFA Financial Fair Play Regulations apply to all clubs playing in European competitions, whilst the Profitability and Sustainability rules of the Premier League and English Football League apply to clubs playing in those leagues respectively. The limits and requirements of the different regimes vary, but (with the exception of the rules that apply to Leagues One and Two, which require clubs to limit their wage bills to a proportion of their turnover) all follow the general principles of a ‘break-even’ requirement (where clubs should not spend more than the income they generate), and the requirement for clubs to balance their books over the course of a three year period.

Breaching financial fair play rules has serious consequences, including exclusion from competitions, points deductions, fines and/or transfer bans. Manchester City are currently appealing a UEFA ruling in the Court of Arbitration for Sport (“CAS”), after the European governing body found that it had breached the Financial Fair Play Regulations and banned it from the Champions League for two seasons. The implications of such a sanction are enormous for a club like Manchester City, that seeks to attract the best players and managers, available. Nevertheless, even if CAS upholds the punishment, they will likely bounce back within a season or two. For clubs in the lower divisions, however, a fine or points deduction could spell the end for the club altogether. A recent report suggested that around 50% of English clubs (across all leagues) are already facing insolvency, unless financial support can be found quickly.

Challenges facing football clubs

Whilst there has been some relaxation of the financial fair play rules (see further below), it remains unclear how strictly the various requirements will be enforced in the current climate. With the attention of the English leagues currently focused on restarting the season and dealing with disruptions to player and sponsors agreements, there has been limited guidance from the governing bodies on how rules will be applied and there is a risk that some clubs could fall foul of the requirements as a result of taking on additional debt during the crisis.

Premier league clubs met last week to finalise plans to complete the remaining fixtures of the season (which has been on hold since 13 March 2020 in response to the pandemic) from 17 June. The EFL Championship is also working towards a return to playing from 20 June.

Stakes are high for all involved and there are many uncertainties about how the planned restart will work in practice, and not all clubs are in favour of the resumption. However, for many clubs, particularly in the top tier, completing the season is critical to their finances, as it will mean that they are able to hold on to more of their broadcast revenue – even if all remaining games in the Premier league are completed, clubs will reportedly be required to repay around £330m to the broadcasters under the terms of their agreement. For the lower tiers, the position is less straightforward, given that a larger proportion of their revenue is taken at the turnstiles. Playing matches in empty grounds means that clubs are likely to be playing games at a loss and so are incurring more debt – hardly a winning game plan.

Football finance

Football clubs commonly raise finance by securing loans by way of charges over, for example, fixed assets and/or future income (such as broadcast rights payments or deferred player transfer fees). Another big income source for many clubs are share purchases (often by majority shareholders) – although there are limits under the financial fair play rules on the extent to which clubs can rely on this as a source of capital.

The current crisis has created something of a perfect storm for football clubs. Firstly, as discussed above, revenues from broadcasters and turnstiles have been lost; secondly, clubs may find themselves in breach of covenants provided under existing loans (if, for example, the underlying security has dropped in value, or has failed to materialise altogether); and thirdly, new financing will be more difficult to obtain given the uncertainties of when and how football will resume (with paying fans in attendance), and whether financial fair play rules will prevent club taking on new loans.

At the European level, UEFA has relaxed some of its reporting deadlines and has suggested that the pandemic will be considered a ‘force majeure’ event excusing performance (that is, the legal concept found commonly in Civil Law jurisdictions, rather than the contractual clause often found in English law agreements) for the purposes of assessing whether the Financial Fair Play Regulations have been complied with. It is anticipated that the English football authorities will also relax profitability and sustainability rules, to give clubs further leeway over the next few seasons. However, time is running out quickly for some clubs and urgent decisions need to be made to ensure their survival. As things stand for many clubs this leads to the unpalatable position of having to guess what will and will not be permissible in the new post- COVID world regarding financial fair play because they do not have the resources to wait for this to be agreed and clarified.

Whilst the sentiments from the football authorities are supportive, the financial realities for some clubs are bleak and they will need clear guidance (and soon) on what is and is not permissible under any derogations from the financial fair play rules. Many clubs will also need support to negotiate restructuring deals with their banks, or other lenders, to manage the fallout from the crisis going forward.

Lenders and investors too will be concerned about the uncertainties regarding what will and will not ultimately be considered to be permissible breaches of financial fair play rules in crisis restructuring of clubs’ finances, thereby making sourcing additional funding even more difficult at a time when clubs are under serious financial strain.

Whilst hopefully clarity will be achieved soon as to what relaxations or amendments to the financial fair play rules will ultimately be agreed the reality is that the result will be a new set of untested rules to be applied in a very unusual practical situation. Moreover in some cases they  may be applied retrospectively – in relation to clubs who could not afford to wait for the new financial fair play landscape to be finalised before taking steps to alleviate their financial distress.

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