In light of Manchester City’s ban from Uefa competition for breaching club licence and Financial Fair Play Regulations (FFP), I thought it was time we visited a related issue closer to home.
In June last year, Rangers International Football Club (RIFC or Newco) held a General Meeting to approve the conversion of shareholder loans into RIFC shares. Page 10 of the subsequent prospectus noted, “The Loan Conversion will significantly improve the balance sheet of the company and ensure it complies with The Uefa Financial Fair Play Regulations.”
The debt conversion was necessary for the club to comply with Financial Fair Play Regulations.
What is allowed under FFP?
Clubs are allowed to lose €5m each season without breaching FFP. Some costs are deductible: spending on youth development and depreciation (often incurred to improve facilities) can be deducted from your loss. In addition to this, clubs can convert up to €25m debt into shares, raising the maximum allowable loss for any period under consideration to €30m.
The monitoring period for FFP covers the three seasons before the most recent, or current, season. This summer, clubs under monitoring will submit information on seasons 2016-17, 2017-18 and 2018-19.
In their most recent annual report for the year to 30 June 2019, Newco reported two share issues during that period. These allowed £16.6m of investor loans to be converted into shares and raised £1.6m cash. The report noted that after the year-end, “£17.2m of investor loans were converted” to shares. That is a total of £33.8m debt converted to shares, or €40.4m.
While this helped Newco pay bills, only €30m of this loss-fueled debt-to-share conversation can be considered for Uefa Financial Fair Play purposes.
Newco have run an operational loss for each of their seven years. That loss has been substantial for the last two seasons, 2018: £14.341m, 2019: £11.277m. It is very likely they will return another significant loss this season, however, they have little headroom if they want to comply with Financial Fair Play regulations.
In the graph below I have noted Newco’s financial position for the two seasons to June 2019. Figures for net loss and depreciation are in their accounts, I have (generously) estimated their spend on youth development at £1.8m.
After depreciation and youth development costs are subtracted from losses, Newco made an FFP loss of £18.860m across these two seasons. This converts to €22.531m, which, after the maximum allowable debt-to-stock transfer, leaves them headroom to run a loss for FPP this season of €7.469m, or £6.251m, lower than the £7.942m FFP loss they made last season.
There are a few items to consider when comparing last season’s position to this season and any on-going matters:
This season has at least one more Europa League home tie.
Ryan Kent and Filip Helander deals make this season their highest ever transfer spend.
In July, Sports Direct won a court case against Newco. The liability could be anywhere between £5m and £10m. This ruling happened post-year-end and no contingent liability was not noted in the accounts.
They have a liability for breach of contract, which they admit, over abandoning plans for a Memorial Garden for the Ibrox disaster. The hearing to settle the £1.3m claim is due in court in March. Again, no contingent liability appears in the accounts.
As CQN reported last week, Hummel rescinded their agreement with Newco (resulting in the Hummel Training Centre branding disappearing this week) and commenced legal proceedings.
By the time Newco report on season 2019-20, which will not happen until July 2021, the costs to settle these legal claims will be established.
A few points are clear:
Newco face a serious challenge to meet Financial Fair Play regulations for their trading during the current season. It is likely they will need to sell players, possibly before their 30 June year-end, if they want to avoid punitive repercussions.
Rumours have existed about fresh investment from the Far East for many months without anything so far materialising. There is nothing to stop fresh investment to fix the roof or install a hover pitch, but new share capital cannot fund more football costs and count towards their FFP trading position. There can be no new money for football purposes.
This is the end of the road for debt-fuelled football for Newco. If they want to compete in Europe, they have to live within their earnings – that means significant downsizing – without delay.
At the AGM on November, Dave King alluded to fresh investment, in part to assist during the January transfer window. Any prospectus would need to acknowledge the various contingent liabilities facing the club, as well as the reality that they have run out of road when it comes to investing debt or share capital in the playing squad. The phrase, ‘Rangers International Football Club PLC Prospectus’, which I think is Ulster Scots for ‘Bend over and touch your toes’ has not been uttered since the AGM.
What is likely to happen?
Clubs that are not compliant with FFP are not automatically excluded from European competition. Uefa state: “Non-compliance with the regulations does not mean that a club will be excluded automatically, but there will be no exceptions. Depending on various factors (e.g. the trend of the break-even result) different disciplinary measures may be imposed against a club.”
The governing body recognise the variable nature of football revenue and, as long as the “trend of the break-even result” is consistent with FFP, they can “take a rehabilitative approach… with numerous restrictive conditions”. There are seven lesser disciplinary measures open to Uefa than exclusion from competitions.
Newco’s trend has been consistently loss making. Even if they were given lesser punishments, such as a fine and agreeing to take rehabilitative action, the consequences on the football field will be the same: this is the end of debt-fuelled football, the party is over, get rid of your high-earners and live within your means……as it should have been from the start.
What living within their means looks like, when the various legal liabilities have to be paid, is difficult to imagine. Dave King got a standing ovation when he gave his valedictory statement at November’s AGM. I cannot help but think he somewhat underachieved.
I started CQN 16 years ago to explain football finances, why Rangers spending was unsustainable, that they would inevitably crash and burn, and that Celtic needed to follow a different path. Eight years later, Rangers were liquidated, predicted on these pages before anywhere else. The prognosis for Newco is perilous, they even have the same compliant media fearful of running the Hummel story.
Here we go again!