Bleak prospects at Derby

No football fan can be happy with what has happened at Derby County, but it is a blatant case of financial mismanagement.   Championship clubs too often overspend in the hope of trying to reach the Premier League, but Derby have also tried to bend the rules.

The Athletic has been speaking to people with knowledge of the club’s financial position and they have not been very upbeat.

“It’s 50/50 they get liquidated,” said one source, while another said: “I can’t see how they get out of this — they’re ****ed.”  The picture they painted in such depressing tones was one of a club that is worth less than nothing. Much less. 

They said any prospective buyer would need to shell out more than £50 million simply clearing Derby’s debts before spending a penny on rebuilding the club and putting a competitive team on the park.

This is because the club has football creditors, who must be paid up to £10 million in full, as well as secured debt of £20 million owed to an American private equity firm and a tax bill of almost £30 million.

Until late last year, that last bill would have not have been such a cause for alarm to a bidder as it would have been added to the pile of unsecured debt and paid off with pennies in the pound. 

HM Revenue and Customs has been complaining about that for years and the government’s post-pandemic need for rebalancing its books meant somebody in power finally heard the taxman’s pleas. The Finance Act 2020 gave tax debt preferential status in insolvency cases. At least two-thirds of Derby’s tax arrears must now be settled in full, just like the money they still owe to other football clubs.

Under Mel Morris, Derby aimed for the stars but wound up in the gutter. Play-off defeats at the semi-final stage came in 2016 and 2018 before coming closer still in 2019, beaten by Aston Villa in a Wembley final it transpires they could not afford to lose.

That was the year Morris began to look for a way out but the damage was already done. The club’s annual wage bill had been allowed to climb to £47.8 million for 2017-18, according to the last set of accounts filed at Companies House. That equated to 161 per cent of the club’s turnover. 

Morris looked for ways to stay on the right side of the EFL’s ceiling for permitted losses, £39 million over three years. Costs were hived off into new subsidiaries, giving Derby a tangled corporate structure, and then, two days before the end of the accounting period for the 2017-18 season, he sold Pride Park to another new company he controlled for £81 million. 

It was a lever other Championship spendthrifts would pull — Aston Villa, Birmingham City, Reading and Sheffield Wednesday — but nobody paid nearly as much for their own home as Morris. 

Staggered by Derby’s valuation of the stadium, the EFL charged Derby for breaching their rules in January 2020 but the club was cleared of wrongdoing by an independent panel six months later. That was only half the story, though, as Derby also faced a second charge for their novel approach to accounting for transfers. The argument over that one went into injury time of extra time, with an appeal panel eventually ruling in the EFL’s favour four months ago. Derby were fined £100,000 and forced to submit restated accounts for the three seasons between 2015 and 2018.

It is worth noting that without the stadium-sale windfall, which gave Derby their first pre-tax profit for a decade, they would have lost £26 million in 2017-18, following losses of £8 million and £15 million in the two previous seasons. Clearly, that adds up to more than the £39 million losses allowed over three years under EFL rules. 

As well as the £120 million of loans from Morris that sit on Derby’s books, MSD Partners, an investment firm with links to American IT billionaire Michael Dell, has lent the club £20 million, with Pride Park and the training ground used as security. Morris is understood to have also provided the firm with personal guarantees for its money.

Morris has referred to “two or three” credible buyers waiting in the wings — although we have heard that before — and their ability to settle MSD’s debt will be key. 

“I still have the stadium,” said Morris. “That’s not going to be something I get recovery on because I want to make sure the club is sold to someone who can move forward on a really good basis."

As founders of the Football League, Derby have a great history and I hope a solution is found, but the more general issues raised need to be tackled.