Arsenal will stay within FFP rules - just

Arsenal fans will be delighted with the team’s good start to the season, so are probably unconcerned about the financial implications of their player recruitment, but it is maybe worth looking at whether there will be any issues with Financial Fair Play (FFP) regulations.  The analysis is provided by the Swiss Ramble.

As it stands, Arsenal have spent a hefty £270m gross on transfers in the last two seasons, only surpassed by Chelsea £288m, but ahead of the other top six clubs.  Even more incredibly, net transfer spend of £218m is the highest of the Big Six in the last two seasons, just ahead of Chelsea £217m. That is a fairly remarkable statistic for a club that has not competed in the lucrative Champions League since 2017.

In fact, after many frugal years, Arsenal have been big spenders for a while. In the 5 years to 2021 (most recent published accounts), they had £626m gross transfer spend, which was almost double the preceding 5-year period and 4th highest in the Premier League (ahead of Liverpool).

Like other clubs, spending is restricted by the Premier League Profitability and Sustainability (P&S) rules, which allow a £5m loss a year, boosted by £30m equity injection, giving allowable losses of £35m a year. That makes £105m over the 3-year monitoring period.

It is worth noting that the Premier League has relaxed the regulations to neutralise the adverse impact of COVID, so the 2022 monitoring period assessed the seasons 2019/20 and 2020/21 as a single (average) period.    This is important, as it allowed the club to include £70m profit from 2017/18. On this basis, the pre-tax loss over the adjusted 3-year monitoring period up to 2020/21 (the last published accounts) was “only” £53m, which was £52m better than the P&S maximum allowable loss of £105m.

In addition, Arsenal can make a £93m adjustment for “healthy” expenditure (depreciation £48m, youth development £30m, women’s football £9m and community £6m), giving a P&S profit of £41m, i.e. £146m better than the £105m allowable loss.

The £53m pre-tax loss over the 3-year monitoring period was improved by £93m allowable deductions and £60m COVID impact (reduced by £6m property income) to give £95m adjusted P&S profit. This was £200m better than the £105m permitted loss, a comfortable buffer.

The net result of transfer activity in the last two years is a small £3m cost increase in accounts, with player purchases growing the cost base by £103m, mitigated by £100m reduction from sales. This will be more than offset by £39m profit on player sales (including loan fees).

That said, the club need to manage their player trading well, as they now regularly post operating losses, as high as £91m in 2020/21. Although it is true that most football clubs lose money at an operating level, Arsenal’s loss was one of the worst in the top flight.

Despite rising by £84m since 2012, #AFC commercial growth in the last 10 years is the lowest of the Big Six, so their £136m in 2021 was far behind the top 3, especially Man City £272m, and is actually below Spurs £152m.

Putting all his estimates together would give a £106m pre-tax loss for in 2021/22, as higher revenue following the return of fans to the stadium is offset by higher expenses. The loss is however lower than 2020/21, due to more profit on player sales and much lower interest.

Even with the forecast losses, the club should just about be OK under the Premier League P&S rules, though the margin of safety would fall to only £10m. Arsenal clearly have to box clever to meet FFP targets, but it looks like they have managed to do so (based on these assumptions).

That said, UEFA’s FFP rules are stricter than the Premier League with the allowable losses (“acceptable deviation”) over 3 years being only €30m (including €25m equity contribution), though this will increase to €90m from 2024 (i.e. including 2022/23 as the 3rd year).

Even if Arsenal are fine for FFP, the question remains how they have funded the player purchases, despite revenue falling due to the impact of COVID and not playing in Europe. The club has managed to do this in a number of ways, basically debt and using cash balance.

Gross debt was unchanged in 2021 at £218m, though bonds were redeemed and replaced by a loan from Stan Kroenke, meaning lower interest payments and freeing up a £27m debt service reserve. Club also took out a cheap £120m COVID Bank of England loan, but this has been repaid.

Arsenal have had to show some fancy footwork off the pitch to remain competitive during their extended Champions League absence, especially after being hit particularly hard by COVID, but they would appear to have just about managed to do so while still complying with FFP rules.