Arsenal facing big losses

The authoritative Swiss Ramble explains the background to the latest financial developments at Arsenal.  Writing from his Zurich fastness, he notes, 'Last week Arsenal announced that they will redeem their outstanding bonds, which had been part of the debt taken on to fund the construction of the Emirates Stadium. This will be financed by owner Stan Kroenke’s company KSE.'

The first thing to appreciate is what this transaction does not mean. It will not make the club debt-free, nor does it mean that Kroenke is finally investing into the club. Instead, it is simply a restructuring of the club’s current debt by changing the lender.

The football finance guru explains, 'This is similar to where you take out a mortgage at a certain interest rate with one bank, but a few years later realise that interest rates on new mortgages are much lower, so decide to remortgage with another bank – even though you have to pay a penalty for early repayment.'

Arsenal issued £260m of bonds in 2006 (£210m fixed rate and £50m floating rate, to be repaid in 2029 and 2031 respectively) and have been making annual repayments every year since. Remaining balance was £170m at 31st May 2019, so the Swiss Ramble estimates that the current balance is around £160m.

The £160m still owing on the bonds is the lion’s share of Arsenal's outstanding debt, but the club also has another £40m of debt (£15m debentures and £24m derivatives). Therefore, the total debt as at 31st May 2019 was £209m, down to around £200m now.

Although this is effectively a remortgage, it is likely that the club's debt will increase, as the KSE loan will probably also include penalties paid for early bonds repayment (net present value of future payments, discounted at current interest rate). The AST estimates this as £40m.

The interest rates on the bonds are very high, compared to today’s record low rates. Including guarantee fees to the bond provider, the interest rate for the fixed rate bonds averages 5.8%, while the floating rate bond is 7%. This works out to an £11m annual interest payment.

This £11m annual interest payment is a significant burden to the club compared to most of its rivals. In 2018/19 this was the third highest in the Premier League, only surpassed by Manchester United £26m (Glazers’ leveraged buyout) and Tottenham Hotspur £19m (funding for their new stadium).

In fact, over the last five years the Gunners have had to shell out £61m on interest payments, only behind United £120m and just ahead of Spurs £57m. The other three members of the Big Six paid much less (Manchester City £15m, Liverpool £11m and Chelsea £7m), which gave them a competitive advantage.

One of the requirements of the bonds was that the club had to hold a debt service reserve as security for future payments, accounting for £37m of the £167m cash balance in 2019. This will no longer be required, so can be freed up as a once-off boost to available cash.

Although some Arsenal fans might hope that the KSE loan will drive player purchases, it unlikely to produce the proverbial “war chest”. Instead, it is far more likely to be used to shore up finances in this challenging period, as COVID-19 has had a dramatic impact on revenue.

The KSE loan might help a little, but the transfer budget is more dependent on European qualification (Champions League or Europa League). As Mikel Arteta said, “I am planning for two or three different scenarios. Depending on that, we will be able to do more, less or nothing.”

Even before the pandemic, in 2019 the Gooners posted their first loss since 2002. In fact, their £32m pre-tax loss was one of the worst financial performances in the Premier League with only four clubs reporting higher losses than the Gunners.

COVID-19 will lead to an estimated £37m reduction in 2019/20 revenue, made up of falls in match day £13m, TV £19m & commercial £6m. Similarly, in 2020/21 I have modeled revenue decrease of £89m (games behind closed doors until January) or £147m (BCD whole season).

Based on media reports. Premier League must pay a £330m rebate to TV companies as games are played behind closed doors. The Swiis Ramble states: 'My model suggests that Arsenal's share would be £19m (in line with £20m announced by Manchester United in Q3 accounts). I have assumed same for 2020/21, though could be higher.

Players agreed 12.5% wage cut for next year (down to 7.5% if they qualify for Europa League and zero if they secure Champions League football), while senior executives accepted a cut of around a third. Europa League would mean £17m cut in wages, no Europe £29m. The savings from the wage cuts will be nowhere near enough to offset the steep reductions in revenue.

The club are facing a significant revenue loss of £126m over the next two seasons (2019/20 £37m plus 2020/21 £89m) – but this assumes that fans can attend games as normal from January. If games were to be played behind closed doors for the whole of next season, the 2-year revenue loss would be a massive £184m (2019/20 £37m plus 2020/21 £147m). Given that the maximum annual savings from the KSE loan are £20m, this shows the magnitude of the club’s challenge. (It is also a challenge that faces other clubs).