sunderland finances – wearside crisis – special issue

by • May 5, 2017 • Uncategorised • Comments (10)5522

For those of you who love a bit of schadenfreude at our relegated neighbour’s expense, you’ll relish every single word of this article. For those of you like my dad, who like to see all the NE teams doing well (howay dad, not in front of my mates eh?), stop reading now.

This article is about Sunderland’s finances. How do they currently look and what is their future in the second flight? I’ll give you a clue. It’s bleak.

Or to put it another way. Sunderland are fucked. You want me to elaborate? Ok, Sunderland are well and truly f***ed.

For well-run clubs, the financial consequences of relegation from the top flight are awful. For financial basket cases like Sunderland, they are simply catastrophic.

Let me highlight their current financial position (for the financial year ending 31st July 2016).

  • The biggest financial loss in their history of £33m, 3rd highest in Premier
  • Accumulated losses over the last ten years now totalling over £200m!
  • Wages out of control (77.6% of turnover).
  • Gross debt is £137.3m, the 4th highest in the Premier League (only Man Utd, Arsenal and Spurs have higher).

And this is with the huge Premier League TV receipts! Next year, even with parachute payments, Sunderland are estimated to lose a whopping £60m in broadcasting income. Ouch!

So how did this all come about?

To understand SAFC’s current plight, we have to go back to Niall Quinn’s Drumaville takeover in 2006 and their subsequent sale to Short in 2009. Since then Sunderland have been trying to live the dream. Unfortunately for club, owner and fans, it’s turned into a nightmare.

Why? Because the running of their club since 2006 was never sustainable. The foundations were built on sand. Sunderland were living a lie and everyone bought into the delusion. We’ll see later that SAFC have spent like a top 6 club but it was all financed by an incredibly magnanimous (or gullible) owner.

Ellis Short’s generosity was SAFC’s once in a generation opportunity to compete at the highest level for the first time in decades. And what do they have to show for it? Ten seasons in the top flight with a highest finish of 10th culminating with a relegation. They are now back in a similar position as to when the Drumaville consortium bought the club except it wasn’t the financial basket case it is now. In 2006, it was actually profitable.

And when the owner decides (or is forced through Financial Fair Play) to pull the plug on his personal financing of the club, it’s going to come crashing even further down.

Ok, so depending on your viewpoint, I’ve set the gloomy or quite frankly glorious scene. Let’s start looking at the numbers. As previously highlighted, we shouldn’t look at the last set of accounts, as bad as they are, in isolation. We need to analyse SAFC’s finances over the last ten years.

They’ve spent extraordinary amounts of money on transfer fees (and wages), made eye-watering financial losses and seen their debt balloon to crippling levels over that period.

Let’s start with their profits or, in SAFC’s case, losses. I stated previously that SAFC simply live way beyond their means on an annual basis. And one statistic illustrates this beautifully. Since the Drumaville takeover in 2006, they’ve accumulated losses of £202m. That’s over a fifth of a billion quid!

A profitable club has been transformed into the football equivalent of Ratners. And as with Ratners, the product is crap.

So with all the media income that has been lavished on the Premier League over the last ten years, how on earth can a football club generate such huge losses season after season? They do it by chasing a dream. Spending money they don’t have. And they rely on a sugar daddy to make up the shortfall.

Three main areas have driven the SAFC losses and we’ll analyse each in turn – transfer spending, players wages and income.

Let’s firstly take a look at SAFC’s transfer spending since 2006 (source – transferleague.co.uk).

SAFC have a net spend of over £150m since the Drumaville takeover. How to put that in context?

  • Over the same period, Everton have a net spend of £72m, Tottenham £68m and Newcastle £34m
  • From 03/04 to 13/14, SAFC had the sixth highest net spend on transfers in England
  • Over the last five seasons, only Chelsea, Man City, Man Utd, Liverpool, Arsenal and West Ham have a higher net spend

It’s been an astonishing outlay. Short (and the Drumaville consortium before him) have backed their managers, all 142 of them, to levels bordering on insane. Short gambled that investing huge sums in the playing staff would eventually result in success on the pitch and subsequent increased revenues. It was an admirable approach but ultimately has left the club in a ruinous position (and made a pretty sizeable dent in his personal finances).

To be relegated following that transfer spending takes a special sort of genius. Enter the “Chosen One” – laughing boy David Moyes.

To attempt to reverse the astronomical losses, SAFC will have to completely change their transfer strategy. From being one of the biggest net spenders in Europe, they are going to have to become a selling club.

But what saleable assets do they actually have to finance a promotion push? Defoe can purportedly leave on a free. That leaves only Pickford, N’Dong and Kone who will command any sizeable fees in the anticipated fire sale. And they’re certainly no Sissoko!

But transfers fees are only one piece of the jigsaw in understanding SAFC’s huge losses (albeit a pretty large one). Let’s take a look at the other pieces.

Players’ wages are the major operating cost for any club. Whilst we’ve established that SAFC have spent huge sums on transfer fees, do they pay big wages? The answer of course is yes (the more unkind observer would ask how else exactly you would persuade someone to sign for Sunderland? “Hi Jermain, don’t worry, you don’t have to live there. Newcastle’s only 12 miles away!!”).

The wage bill in 15/16 was £83.9m, the 12th highest in the Premier League. However it’s the wage to turnover ratio which is key here. It’s no problem having a high wage bill if you’re generating enough turnover to sustain it. The problem is that 78% of SAFC’s turnover goes on players’ wages. That is the 4th highest in the Premier League.

And it’s not a one-off. SAFC have consistently been paying the majority of their income on players’ wages. That sort of expenditure on wages is unsustainable even with the huge Premier League TV money. And when you take away that TV money, it’s pretty calamitous.

So how will this mammoth wage bill impact them next season? Well they should be able to reduce it fairly substantially. Some players are out of contract, others purportedly have relegation clauses reducing their salaries in the event of the drop, the loan players will return and as flagged up earlier they still have some saleable assets. But even with massive cuts, it’s likely that SAFC will still have the highest wage bill in the second flight. How?

The problem is that there’ll be players on big contracts who will be quite happy to see out those contracts picking up £60k a week safe in the knowledge that no other club would be so stupid to offer them that sort of money. It’s what’s known at Newcastle as doing an “Alan Smith”.

And the players they lose in the summer will need to be replaced. Unless they intend to replace solely from the u-23s, they will need to pay decent wages to recruit the sort of player required to bounce straight back.

So let’s next look at SAFC’s turnover. This comprises Gate Receipts, Broadcasting and Commercial.

The turnover mix over the last few years has seen an increasing reliance on broadcasting income. Nothing unusual with that, most premier league clubs are the same. However, as mentioned above, take that broadcasting income away (or significantly reduce it), and all clubs are seriously exposed.

Gate receipts are a small (and reducing) source of income for Sunderland. It’s been a source of much mirth amongst NUFC support in the past (free ticket mackems etc) but it’s hard to draw any other conclusion from the figures. One of the highest average attendances in the division and one of the lowest gate receipts. Norwich, on about 15k lower attendances, generate more income through the turnstiles!!

Again, you suspect that the free ticket giveaways and Northern League ticket pricing is done with the best of intentions. Presumably it’s hoped that it will attract new fans who will become long term supporters of the club. But it’s not sustainable. It’s all false. At some stage, supporters have to start paying the going rate for watching Premier League football.

Whether or not the supporters can be considered “long term” will be tested next season (when they were last relegated, nearly 20k fans disappeared within two years). Or will they just increase the giveaways (are there enough schools in the region?!!).

It must be galling for Short to receive so much criticism for his perceived lack of funding when a huge number of supporters aren’t even prepared to pay the price of a match ticket to watch Sunderland.

Where SAFC have done reasonably well is growing their commercial revenue. For an unfashionable location perceived by their neighbours to be stuck in some sort of time warp, they have managed to treble their conferencing revenue over the last ten years. Newcastle take note.

The problem of course is that sponsors will not pay the same rate in the second flight. Expect new sponsors to pay significantly less and relegation clauses to be exercised in the current deals.

But whilst gate receipts and commercial income will reduce as a result of relegation, by far the biggest reduction will be on broadcasting.

Broadcasting income totalled £71.6m in 15/16. This will increase to about £98m for finishing bottom in 16/17. The parachute payment for 17/18 will be about £40m. That’s a hit of nearly £60m. And if they don’t get promoted straight away, the parachute payments get gradually smaller until after three years, they get nothing from the Premier League. Without parachute payments, broadcasting income in the Championship will be about £5.2m.

And this is why clubs are so desperate to play in the Premier League. The new TV deal which came into play in 16/17 is massive and after years of losses, it could’ve been SAFC’s saviour. This was more or less confirmed by former CEO Margaret Byrne: “This TV deal gives the club a chance to get our books in order”. Without it, they are in a desperate position.

So what happens when you keep incurring losses season after season? You accumulate debt.

Sunderland’s gross debt now stands at £137.3m. This is the 4th highest in the Premier, a millstone around the neck of any club. Only three Premier League clubs had more debt than Sunderland at 31st July 2016: Manchester United, who still have £490 million of borrowings even after all the Glazers’ various re-financings; Arsenal, whose £233 million debt effectively comprises the “mortgage” on the Emirates stadium; and Liverpool, who have invested heavily in improving Anfield.

When Drumaville took over in 2006 the debt was a relatively manageable £35m. It’s now three times that.

Two things to note here. Firstly, structuring of the debt has changed quite significantly in 15/16. The amount owed to Ellis Short (via his company Drumaville Limited) has increased from £58 million to £69 million whilst the external debt owed to Security Bank Corporation (SBC), owned by Guggenheim Partners, has reduced from £83 million to £68m.

The loan from SBC is long-term, expiring on 27 August 2019, and carries an interest rate of 7.5% plus LIBOR. This is a fairly high interest rate, which is a good indication of what lenders think of Sunderland’s financial status. It is also higher than the previous bank loan (LIBOR plus 3%).

In fact, Sunderland’s net interest payable of £6.9 million was the fourth highest in the Premier League in 2015/16, only surpassed by Manchester United, Arsenal and Tottenham.

Secondly, the debt would actually be much worse had it not been for Short’s incredible generosity (I bet he regrets ever meeting the genial Niall Quinn!).

During 15/16, Short put another £70m of capital from his personal wealth in to Sunderland. If he hadn’t done so, the net debt would be £180m. And this is after previously capitalising (basically writing off) a further £101m. So if it wasn’t for the generosity of the diminutive Yank, the debt would be over £280m!!

I mentioned earlier that SAFC were likely to collapse once the owner decided he’d had enough of pouring in his personal wealth. But what is clear is that this has yet to happen. Short is still financing SAFC’s losses.

If Short eventually pulls the plug on his personal financing, the cliff edge for SAFC will be devastating. And the most astonishing thing is that despite this showering of money from Short on their club, there’s a sizeable spoilt brat element who actually want him out!!

On social media, they blame Short for a lack of transfer funds which has resulted in their current predicament. But even after the financial loss in 15/16 and a record debt, he still made money available for players in the summer. Indeed Sunderland broke their transfer record.

And this is what SAFC fans still cannot grasp. When they eventually have to live within their means like proper football clubs, I suspect it will come as a huge shock. Expect much stamping of feet.

An SAFC acquaintance of mine reckoned SAFC fans weren’t like NUFC fans in that they don’t engage in embarrassing and fruitless protests against their owners (conveniently forgetting those against Murray and Cowie). But why on earth would you protest against owners who had bankrolled such a transfer splurge? It’s like Chelsea fans protesting against Abramovich!

So are there any positives for Sunderland? Yes.

Firstly, despite wanting to offload the club, Short is still there. As long as he’s there, he may still be prepared to use his personal wealth to bankroll SAFC’s losses and make a genuine attempt to return to the riches of the Premier League. But make no mistake, if he does intend to do this, the loss in the Championship will be bigger than anything he’s already covered. But the signs are that Short’s patience and generosity maybe running short (pardon the pun). In the January 17 window, he refused to countenance yet more transfer spending instead making a profit on the sale of Patrick Van Aanholt.

Secondly, Aston Villa were in a similar financial mess when they were relegated. Similar to Short, their Yank owner Randy Lerner, capitalised £175m of Villa’s debt and managed to off-load the club to another gullible foreigner. It wouldn’t surprise me if Short tried to do the same.

The problem here is what Short would want for the club. I estimate his outlay on SAFC currently stands at about £269m. If he is prepared to take a huge loss on SAFC like Lerner was at Villa then there may be someone out there prepared to invest.

If however Short is as stubborn as Ashley and is determined to recover every penny before he sells then there is little chance of finding a purchaser. And the only way to make the club more attractive to purchase is by making it profitable and attempting to reduce the debt. If Short goes down this route, it will take an almost complete reversal in the way the club is run. It will make the days of Bob Murray seem like Sheik Mansour was in charge!

But the reality for Sunderland is that relegation is a disaster for them. And if they do not return immediately, the financial consequences will keep on getting worse and worse. As I said, they’re well and truly f***ed.

Happy days.

TOM McMENEMY 

Related Posts

10 Responses to sunderland finances – wearside crisis – special issue

  1. Chris R. says:

    Good. League 1 next for them, hopefully. Accompanied by a slow and painful administration, winding up, and insolvency.

    • Peter Devine says:

      So pathetic. Would we prefer to beat them?

      Id ratber they finished 17th every season

  2. simon sharp says:

    Interesting reading, particularly the comments on transfer fees and net spend. Sunderland haven’t made a profit in the transfer market since 2010/11 and when you look at the players they’ve acquired then what they’ve eventually been sold for, it’s no wonder they’ve got problems. You may not have liked NUFC’s policy of buy low, sell high, particularly with regard to players like Ba, Cabaye, Carroll etc – players we might have built a team around – but I wonder if we’d have been in a similar position otherwise? Unless you’re one of the big 4/5 the reality seems to be that you’re going to have to sell a key player each season for big money (or trust in the generosity of Tottenham – £30m for Sissoko!!!) to remain financially sustainable. Sunderland have bought some real duffers for big money looking at the list of players signed since 2011, there’s assets there whose value would have to be written off entirely as well (e.g Adam Johnson). Trouble ahead.

  3. David simpson says:

    Transfers ?? But none have been any good and none have commanded huge sell on transfer fee ? Oops van arnolt may be one , most retire with there war chest of cash

  4. John Taylor says:

    Newcastle fans wanting 100 million take note. We cannot go spending millions on players we have to be self sustainable. I don’t particularly like Ashley or his methods but we seem to be a financially well run club (not withstanding tax or vat payments)
    The TV money will eventually hit a peak, it has to and when that happens clubs will go to the wall. We have to ensure ours is not one of them

    • Mark Pinckney says:

      Newcastle currently owe the owner 129m and have debts higher than our Mackem neighbours. They are in the top four most indebted clubs in English football. Contrary to popular myth we aren’t well run.

      • Peter Devine says:

        Thats it mate. I cringed reading this. This free tixket thing is ridiculous. Midweek games they cant give tickets away to schools yet pulled in over 40k. Be the bigger man

  5. Mark Pinkenny says:

    Good article, Sunlun are truly in a financial mess! However, lets not get too smug at Newcastle. After yet another relegation, the clubs finances were restructured to increase the debt to Ash!ey from 81m to £129m. That puts our debt to the owner above the Mackems who reduced theirs from last year.

    There is also the small matter of the loss of TV money this year. Swansea who finished fourth last in the EPL will pick up 110m in TV money, NUFC will receive around £45m. There is no way Rafa will have 100m to spend upfront this season.

    I expect a season of struggle and would gladly take 17th place in order to keep on the TV gravy train.

  6. Mark Pinkenny says:

    Also, Newcastle are in the top five most debt laden clubs in English football.

  7. Peter Devine says:

    Jesus christ. How much time have you on your hands. This is the most obsessed article over a rival fan I have ever read. Plus its inaccurrate and biased. We have a bigger debt than the mackems man. Give your head a wobble. Its reasons like this we get laughed at.

    Mackems will make £50m from player sales receieved £100m finishing bittom and get £40m this year, plus there wage bilm will go to £30m after the reductions and sales. Ours was £70m in the championshio mate. We need to get our own house in order first.