Finances: In Depth
Given that they had been anticipated for many months, the arrival of Sunderland AFC’s latest set of financial statements into the public domain last Friday was somewhat muted by the events of five days earlier. The announcement that the club was close to being sold and, crucially, that Ellis Short had “paid off all debts owed by the club” had some wondering if the results published last week were something of an irrelevance.
The figures declared showed the club’s financial position as at July 31st 2017, as well as the club’s financial performance in the year up to that date, incorporating, of course, last season’s relegation from the Premier League. And while the eradication of debt does remove a significant weight from the club’s shoulders, the seemingly imminent takeover does not mean that the 2016/17 results are without intrigue – or consequence.
Whilst this consideration of the club’s finances may not be quite as hot off the press as some others, what it will do is seek to (a) avoid some of the inaccuracies spotted elsewhere, (b) attempt to break down the important matters for the club in its current state and (c) unlike a certain fanzine up the road, offer to present findings in a manner that is free from bias wherever possible.
The debt
Ellis Short’s declaration that he had cleared the club’s debts last week was met with wide approval and no little amount of gratitude. After years of neglect and financial mismanagement, some also felt it was the least Short could do, but it remains that it was quite the gesture, particularly given that the chairman is desperate to wash his hands of the club.
Short’s words will be proven true or otherwise soon enough, or at least partially so. Whilst the amounts owed to the American owner himself may well be subject to future contingencies (note: this is not believed to be the case, but it remains a possibility), the charge owed to Security Benefit Corporation (SBC), an external lender, represents a secured loan and is thus registered at Companies House (CH). Hence, should that charge be satisfied, we will be able to view proof via CH. Such evidence should be forthcoming in the the near future.
As at 31st July 2017, that debt to SBC stood at £70.8m. That figure is largely in line with a year prior, with the club having sought to rein in costs in order to be in a position to pay down or, more likely, renegotiate the debt with SBC upon the loan’s expiry on 27th August 2019 (rather than seeking to pay a portion of it down during the 2016/17 season).
While we can now work on the assumption that a renegotiation of debt will no longer be required, it is worth pointing out just how much the SBC loan had come to have a bearing on the club’s activities in recent years. From its commencement in August 2014, SBC have been charging the club interest at the rate of 7.5% plus LIBOR (which has been deemed to be 1% across the loan term so far) – a frankly staggering cost of capital on a secured loan.
To this end, interest comprised over 6% of the club’s turnover for the 2016/17 season. Even after removing the £1.3m of nominal interest charged in the accounts but not actually paid on the internal loan given by Ellis Short, the club’s actual cash interest payments still amounted to the equivalent of over £125,000 a week. Add a Jack Rodwell to that and you’ll find yourself with a lot of money disappearing in double-quick fashion.
As a result, Sunderland paid out an interest bill higher than all but three other clubs in the Premier League. Those three – Manchester United, Arsenal and Everton – all enjoyed higher revenues and higher league positions than the Black Cats. Where other clubs spend money on borrowing to move forward, Sunderland’s costs of financing have simply added to the weight dragging the club down.
By the end of the 2016/17 season, that weight comprised a gross debt figure of £161.7m. As shown below, a steady trend in lending from Ellis Short continued once more, with the chairman loaning the club a further £21.6m last season to foot significant operating costs (more on those later). Short has loaned the club money in every year of his tenure; the only ‘downward’ movement in internal lending came upon his conversion of £33.4m of debt into shares in the 2012/13 season.
Whilst the chairman has pulled the plug in terms of transfer fees, it remains that Sunderland have been wholly reliant on him bridging funding gaps on a regular basis. In 2016/17 his additional loan of over £20m was required due to the club’s outrageous operating losses. Before player sales, the club was losing money to the tune of £748k per week. Though costs were cut substantially upon the drop into the Championship, it remains that losses were still being incurred throughout the current season; the amounts owed to himself that Short has written off are likely to exceed the £91m displayed in this set of accounts.
The above gross debt figure is somewhat misleading. Whilst it does constitute the overall amount the club owes to its lenders, it doesn’t include an investment bond the club holds with SBC which, as at 31st July 2017, was valued at £23.2m. So, whilst interest is incurred on the £70m or so owed to SBC, the actual amounts repayable effectively net down to £47.6m.
The debt has not been the biggest millstone around the club’s neck - that arises in the form of the sums Sunderland have spent on player transfers and wages. But its eradication at least removes another obstacle in any new owner’s tussle to return the club to solid financial foundations.
Revenue
2016/17 saw Sunderland record the highest turnover figure in their history, with the club recording revenues of £126.4m, an increase of £18.3m on the previous season. Yet the entirety of that uplift came by way of a factor that was largely beyond the club’s control: a mammoth new television rights deal for the Premier League.
Of course, through securing survival under Sam Allardyce, the club had earned its right to a share of the newfound riches, but in finishing bottom of the table the following season they ensured those riches were the lowest on offer to the 20 clubs in England’s top division. That still banked the club a hefty £95.6m in broadcasting revenue, which thus comprised over 75% of the club’s total revenues for the year.
Across Ellis Short’s reign, the club’s other revenue streams have scarcely budged. Indeed, the club’s gate receipts have actually fallen since he arrived at the helm, with last season’s total of £9m representing the club’s lowest level of matchday takings since the 2004/05 season. That statistic is slightly misleading given that the club adjusted how it measures its gate receipts from 2014/15 onwards, but it still remains that, for a club with a 48,000 all-seater stadium, Sunderland struggle to eke out much from their attendees.
As shown above, taking into account attendances across all home games in each of the respective seasons, 2016/17 saw the club take in its lowest revenue per head in its ten years in the top flight. That corresponds with a reduction in season ticket prices, but Sunderland were already starting from a low base. In 2015/16, their revenue per attendee per game stood at £12.22, the lowest in the division; for this to have fallen yet further, to £10.97, is galling. The club has often endured accusations of giving away reams of free, or cheap, tickets, and such figures will do little to help any argument against such claims. The club’s inability to extract greater sums from its customers is indicative of a number of factors, including the difficulties of being surrounded by what is – at least relative to the rest of the UK – a deprived area, as well as the sizeable task of encouraging people to come to watch a football team that doesn’t win many home games.
Despite the fame and coverage afforded by a ten-year stint in the world’s most watched football division, Sunderland have struggled to grow their commercial revenue streams. The club did manage to almost double its conferencing income between 2012 and 2016, but a drop-off of £3m in 2016/17 was representative of the struggles that have been endured in recent years.
Again, this feeds into wider neglect at the club. The club’s primary aim during Ellis Short’s reign has been to retain its Premier League status, with all other areas of the business largely ignored. Fleeting, half-hearted attempts to branch out have long since fallen by the wayside (Invest in Africa, anyone?), and it shows in the club’s stagnant commercial exploits. Though finishing bottom of the table obviously reduced Sunderland’s overall revenue take against other club’s, the fact that they bettered only Watford, Middlesbrough, Burnley and Hull City – all clubs promoted either in 2016/17 or the season before – is indicative of the club’s failure to capitalise on several years in English football’s top tier.
Whilst no one should expect Sunderland to compete with the hundreds of millions that the likes of Manchester United can bring in on top of gate receipts and TV money, it is still clear there is significant scope for improvement. The club has actually done quite well in terms of sponsorship in recent years, with the current Dafabet deal now said to be worth £6m per annum, but it is hard not to feel that insufficient use is being made of the resources available to the club – namely the Stadium of Light.
Since 2008, just 4% of the club’s funds have been spent on capital items. Unsurprisingly, the bulk of expenditure has gone on player purchases, as would be expected, but such a low level of investment in long-term items is indicative of how the club has hopped from one crisis to another in recent years. It is borne out in how the Stadium of Light, now over 20 years old, is looked tired and worn. Little wonder that the club struggles to grow its wider streams and, given that most of the executive boxes half looked empty during the current season, a further drop-off looks almost certain.
Staff costs and player trading
Despite finishing bottom of the Premier League in 2016/17, Sunderland ‘boasted’ the 13th-highest wage bill in the division (though Crystal Palace have yet to unveil their results). The club’s wage bill actually increased, even in spite of a spate of uninspiring summer signings thought to have been signed on a budget (see: Lescott, Joleon and Pienaar, Steven), albeit only by 0.6%. Due to the large uplift in revenue, the club’s wages to turnover ratio fell to 66.8%, down from a high of 82.1% five years earlier, and within the 70% threshold recommended by UEFA.
That is a positive, but the fact that the overall wage bill stood at £84m is troubling and hints at just why the club embarked upon such drastic cost-cutting measures in the Championship. That at least six clubs could pay less out in wages than Sunderland and finish higher than them in the table is a continuation of the club’s waste in recent years. Moreover, the 2016/17 season was the first in six years that passed without a manager being sacked; such terminations increase the club’s staff costs, therefore making the continued high wage bill all the more concerning.
It was not only costs on player wages that turned up a surprise in these accounts. Much had been made of David Moyes being hamstrung in the transfer windows in which he was in charge, yet the club expended gross transfer fees of £47.1m on players between 1st August 2016 and 31st July 2017. That pales in comparison to plenty other sides, yet it still represented the 12th-highest spend in the league.
In fairness to Moyes, many of those fees were structured so as to be paid in instalments over an extended period of time, as shown by the fact the club holds a sizeable transfer fee creditor at the date of the accounts. But it is still worrying that, after so many recruitment slip-ups in the past, the club was willing to expend such sums of flops like Papy Djilobodji and Darron Gibson. Even Didier Ndong, at a club record of £13.4m, was a wild punt, one which it has to be said has failed.
Sunderland’s problem in recent years has not been an unwillingness to spend money, rather it has been the wasting of large sums of it. Numerous summer overhauls have come with the requisite costs; none have borne fruit. Similarly, when the club has spent big on individual players, they have enjoyed little in the way of returns.
Since 2008 and Short’s assumption of a controlling interest in the club, Sunderland have spent 103.7% of their turnover on staff costs and player amortisation (amortisation is an indicator of the club’s spend on transfer fees, with those fees being spread – or ‘amortised’ – across the length of a player’s contract). Put simply, before even considering other costs such as overheads to run the stadium and the Academy of Light, the club has already spent the entirety of its revenue and then some besides. This goes a long way to explaining just how the club has found itself mired in such substantial levels of debt.
One way the clubs can seek to recover the extortionate amounts they spend on players is by extracting similarly large sums from other clubs when they come to sell those players. 2016/17 actually saw Sunderland buck a trend in this regard: their profit on player sales of £33.1m was more than their previous five seasons combined.
Much of that came via the sale of Jordan Pickford to Everton near the end of the financial year. Pickford’s sale was widely reported to have cost the Toffees £30m, but the accounts suggest that this would only be received by Sunderland if various conditions are met in the future. That is because that £33.1m figure also includes the sales of Patrick van Aanholt, Sebastian Coates and Vito Mannone, all of whom were sold for an accounting profit.
Based on the below workings, it would seem that the guaranteed price agree for Pickford was closer to £20m.
(Note: the above are very rough workings calculated by this article’s author. They are based upon ‘best guesses’ at both purchase and sales prices, and do not include signing-on fees or agent fees payable upon new incoming transfers and new contracts. The purpose of the above is to determine a rough estimate of the club’s profit on individual players in the 2016/17 season – it is based on numerous assumptions, and should not be referred to with any great confidence given the likelihood of errors being present.)
As has been widely reported, Sunderland did not just spend big on player wages. For his role in overseeing a vast cost-cutting exercise, and supposedly keeping the playing squad fit for purpose, club CEO Martin Bain received total remuneration of £1.244m. Bain took office prior to the beginning of the financial year, thus this figure represents his salary – and any bonuses – only, and any “golden handshakes” on offer (there is no evidence that any were) were received in the 2015/16 financial year.
That makes Bain the highest-salaried director in the club’s history by some distance. The figures above from previous seasons are skewed by two amounts payable upon termination: £850,000 to Margaret Byrne in 2015/16, and £1.996m to Niall Quinn in 2011/12. Though Bain (presumably) does not set his own salary, it is staggering that the club continues to see fit to throw vast sums of money at directors that are overseeing a failing business.
To put it into perspective, Sunderland paid their CEO the fourth-highest sum in the Premier League, behind only Spurs - whose figure is hugely inflated by a large bonus payable to Daniel Levy for improving club revenues and overseeing the new stadium project – Arsenal and Manchester United. That is despite the club finishing adrift at the bottom of the table, wasting yet more millions on poor transfers and, furthermore, doing little to increase its revenue outside of a broadcasting stream that is largely beyond their control.
It was not just Bain who benefited from Sunderland’s generosity in the boardroom. Per-Magnus Andersson, a director at the club since January 2011, charged the club £175,000 for his services in 2016/17. Quite what these were are anyone’s guess. As Sunderland fan Giles Mooney pointed out on Twitter, even if Andersson attended board meetings once a month and all 38 of the club’s Premier League games (which seems unlikely), that would still amount to £3,500 per appearance. Jack Rodwell is rightly held up as an example of Sunderland’s wasting of money, but the club’s largesse in the boardroom in recent times, and in effect their willingness to reward failure, is something which any new owners will surely seek to move away from.
Other expenditure
Sunderland recorded a loss of £9.4m last season, a marked improvement on a loss of £33m the year before, but a deficit which was hugely improved by the hefty sales of the likes of Pickford and Van Aanholt. The club’s EBITDA – a measure which strips out accounting estimates to show underlying profitability – was positive at £7m, but every club in the division recorded positive EBITDA. Sunderland’s was worsened only by Swansea City’s, which again reflects poor use of the club’s considerable resources.
Such poor usage is personified by Ricky Alvarez. 2016/17 saw the club lose its legal battle over the Argentinian midfielder, leaving them to shell out £9.7m to Inter Milan for a player they never actually owned permanently. That saw ‘Other Expenses’ rise to a bewildering £32.3m, almost double the previous year. Even after allowing for the Alvarez fee, these costs leapt up by £5.8m from an already sizeable base.
Furthermore, the club incurred (non-cash) impairment costs of £14.3m. Such costs arose upon relegation where, realising the loss in value that would occur for the players on the club’s books, Sunderland were forced to write down the values of certain players. The likelihood is that the bulk of this impairment belongs to Fabio Borini and Jeremain Lens, two players who had plenty of time left of their contracts and for whom the club were highly unlikely to see a recovery of the original transfer fees paid.
Going forward
What does this all mean for the club now?
In some ways, elements of these accounts can – assuming Ellis Short is true to his word – be consigned to the club’s history. The debts owed to both himself and SBC are no more, and therefore so too will the club’s high interest costs disappear into the ether. What is more, we know that the club has overseen sizeable reductions in its wage bill. Most players received a 40% wage cut upon relegation from the Championship, and few who have arrived since that relegation are believed to be high earners.
Yet there remains plenty from these accounts that will shape the club’s decisions in the future. For a start, much wondering has been undertaken as to what Short has defined as “the debt”. Some have suggested that his clearing of the club’s liabilities will concern not just amounts owed to lenders but also amounts owed to other clubs.
This is unlikely. Whilst not infeasible, the amounts owed to other clubs for players are deemed to be ‘trade creditors’, and it would be surprising if a selling owner was willing to foot such costs. It is almost certain that these payables will fall into the hands of the new owners. As at 31st July 2017, they stood at a whopping £45.2m – reflecting the minimal up-front fees paid for players during Moyes’ tenure.
Of that £45.2m, £23.3m was owed during the current Championship season. During the same season, Sunderland held transfer debtors (i.e. were owed fees by other clubs) of £10m, therefore easing the burden somewhat. But even after the end of this term, the club will still owe £22m in transfer fees, with only £1.4m of debtors to offset against this bill. The likely sales of Borini, Wahbi Khazri and Lamine Kone this summer will do much to help matters, but any hopes that the club will be able to start spending again must first take into account that they need to first pay off those chunky ‘legacy’ payments.
One misconception that has abounded since last week is that the entirety of those outstanding fees of £22m are due before the start of next season in League One. That is not true. Rather, the £22m is due after 31st July 2018. When exactly amounts within that figure are due is unknown, but the likelihood is that they will be spread beyond just the 2018/19 season. That should at least enable new owners to manage the club’s liabilities with a little more freedom.
The plummet into League One will see the club subjected to a wage bill cap of 60% of turnover – though it should be noted that, for the purposes of this cap, the EFL does allow clubs to include profit on player sales in their revenue figures. We shall, in the near future, collate more in-depth predictions as to the club’s up-to-date financial position and future forecasts, but in the meantime it is not unreasonable to forecast a revenue figure, without guessing at player sales, of between £45m and £55m next season, the bulk of which arises from a parachute payment of £38m.
Using these limits, the club would be required to keep wages to £27m at the lower limit, or £33m at the upper limit. Of course, any profits on player sales would increase the club’s scope in this regard, but it remains that this represents an enormous fall from 2016/17. That being said, it is not one that the club hasn’t been aware of; sources within the club have suggested that this season has seen the wage bill fall to around £35m, with further cuts still to come. Given that any incoming players next season will be low earners in comparison to those exiting the club, it seems unlikely that Sunderland have too much to worry about with respect to breaching FFP in League One.
In all, the club’s financial results for 2016/17 simply confirmed what we already knew: Sunderland AFC has been mismanaged for years, and vast sums of money have been splurged for little to no reward. The accounts do not make for pretty reading, but the apparent clearing of the club’s debts does at least give cause for optimism.
Though the club’s wage bill still represents a significant hurdle, and so do those outstanding transfer fees, the removal of debt does at least allow the new owners the opportunity to place the club on firmer financial footing and, hopefully, ensure that Sunderland are propelled back up the leagues without just throwing money at their problems. The latter certainly hasn’t worked in the past.
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Don’t worry we will reach those lofty heights again but until then we can take comfort in the fact that we’re all... still here when we are shit! Hardcore fans and Sunderland till we die, whichever league we are in and whoever owns the club. Players, manager and chairman come and go. Fans remain. We are the club… click here to view product
