For football clubs, the right capital structure is a key ingredient for their sporting & financial success. Whether it is (re)building a state-of-the-art stadium, investing in youth development, or securing top-tier talent, capital is the lifeblood of a club's operations. The challenge lies in determining the optimal blend of debt and equity to achieve their goals while maintaining financial stability. In that sense, there are some main considerations to focus on:
Setting Objectives
Every football club has its unique set of specific objectives. Some may be eyeing immediate success on the pitch, while others could also aim for long-term sustainability and community engagement. The chosen capital structure should align with these objectives, providing the necessary funds for initiatives such as stadium upgrades, talent acquisition, or youth development.
The football business, as it stands, is in a point where the majority of clubs incur on consecutive accumulated financial losses, mainly due to high player salaries and transfer fees given the fierce competition for the same talents, a high bargaining power from their agents and low regulatory measures to control this issue. For that reason, it is prudent for clubs to consider leveraging on debt to implement mostly long-term growth initiatives such as infrastructure and Youth Football development.
Consideration of Financial Health & Internal Environment
The next step in crafting a suitable capital structure is assessing the club's financial health, in order to, among others, understand the borrowing capacity in the market (financing cost), which includes understanding assets, liabilities, cash flow and so on. Also, clubs with strong revenue streams and sustainable wage-to-revenue ratios and Net Profit Margin may find it easier to attract equity investors or take on new debt.
Something of importance that should be acknowledged, is the fact that equity financing (by selling some club’s stake) will lead to a firm’s control dilution, which in some cases should be prevented by using debt as the main financing source. However, it is also important to note that the ownership structure can also greatly impact capital availability, as well as other advantages that may arise from it. Clubs with single investors or shareholder boards may have different options for raising equity capital.
Balancing Risk and Reward
Achieving the optimal blend of debt and equity is a delicate balancing act, as both come with their own set of pros and cons, and risk is an important part of the equation. Debt, often in the form of bank loans or bond issue, can amplify returns on investments but also magnify losses. In that sense, football clubs must carefully consider their risk tolerance and the potential consequences of financial setbacks.
As part of the financial considerations done beforehand, the Weighted Average Cost of Capital (WACC) is a vital metric that combines the cost of debt and equity, as reducing it, by using debt financing, can enhance the club's overall valuation. Although, maintaining a comfortable interest coverage ratio is essential, we should keep in mind that the financing interest/cost that we have to pay is tax deductible, which give us a financial advantage by financing through debt. This ensures that the club can cover interest payments from its operational income, minimizing the risk of financial distress.
As a final note, financial regulations enforced by football governing bodies must also be considered, as these rules usually place constraints on the amount of debt a club can take on.
In summary, crafting the right capital structure for a football club is a multifaceted process. It requires a deep understanding of the club's financial condition, objectives, and risk tolerance. While debt and equity are essential tools, clubs must carefully weigh their options to ensure they can achieve their goals while maintaining financial stability.
Norwich City case - Academy Investment
Norwich City was also among the football clubs that issued a bond to fund its activities. Norwich city had plans of developing it academy facilities to ensure that it could nurture its talent. Therefore, the club issued a 3.5-million-pound bond to the public to fund the improvement of its academy facilities at Colney.
The first target group of the club was its long-term supporters who were allowed to invest before the bond was launched. The 3.5-million-pound bond with a threshold maximum of 5 million pounds had five years of maturity and would have a 5 per cent annual interest rate.
Investors were required to buy a minimum of 500 pounds with no set maximum. Other terms of the bond included a payment of one-off 25 per cent bonus to investors in case the club made it to the Premier League during the maturity period of the bond.
The interest to would be paid by the savings obtained from the improved training facilities while the principal would be paid by setting aside money each year to ensure that the bond was completed within five years.
To facilitate the issuance of the bond, the club contracted sports investment platform called Tifosy, which was managed by Gianluca Vialli, a former Italian and Chelsea striker. The bond was issued on May 25, 2018.
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