2008 Accounts

Michael, would the accounts suggest to you that an offer in excess of £10 million for Lescott would be accepted?

I would hope not, Andy. So far, I have not really disagreed with any of Moyes?s decisions regarding the moving on of players ? Johnson, Carsley, Stubbs, McFadden, Beattie, Davies, Weir, Kilbane, Bent, Radzinsky, ... the list is monster. Perhaps Fernandes is the only one I regret us not keeping ? and of course, a certain Wayne Rooney. Oh and Per Krøldrop, who I am convinced would have been immense if his footballing skills had been accepted and nurtured instead of trying to change them.

But losing Lescott at this stage would I think be a serious blow to the concept of "building a squad"... although the fact that core numbers have only declined through the Moyes era, such that we are arguably at our lowest currently in terms of having a decent-sized squad of proven players who can perform for us in the Premier League... well, it ain?t the best. But it does seem to be what brings out the best in Moyes as a man-manager and coach. Which makes it all the more ironic that the "realists" cry on about us not having enough money to comepete... yet here we are 6th in the Premier League. Go figure! And if Moyes had not gone on his Big Sulk, where would we be now? That?s what really makes me sick this season, the squandered opportunity.

But I didn?t really answer your question. We are not a selling club any more... but I don?t believe the accounts themselves would give you much indication on this score. If we were offered something ridiculous, like £15M or £20M, then perhaps that could be looked upon as a chance to profit, but the gamble on bringing in a high-priced player is immense, and Moyes?s bizarre record of destroying strikers through this "Work ethic" bullshit is frightening.

Getting shot of Lescott next month for the profit motive would I think be abominable. But it could be that the whole England thing and being played out of position (another wonderful Moyes trait... NOT!) has pushed him to the edge, and his head is no longer right. Don?t think that explained his bizarre miss on Friday though! But it could be that his head has been turned by the big lights at Arsenal, in which case, getting rid may be our only option at this point.

Only in May will we know if we have missed an opportunity.

I?m more convinced than ever that we will overhall Villa and Arsenal. Moyes should put Lescott out of Arsenal's price range, just as Villa did to the shite with Gareth Barry.

Thanks to Joe for the forensics.

This only serves to demonstrate what a crazy screwed up world football finance is. After what is broadly acknowledged as a good season & with a fair net income from intangible assets (players) the club finds itself even deeper in the mire.

The world and his uncle knows that we do not excel at creative management and maximising our marketing potential, although in saying that the Soccer Prince idea in China sounded (to me) brilliant. But something else seems to be going on here and it?s difficult to accurately explain what.

It seems that only true international or world-wide appeal & fan base can support the real needs of an ambitious premier league club (in the current mad set up). Only 2 teams in the EPL can realistically claim to have that, one is Man Utd and the other one we won?t mention.

Arsenal & Chelsea don?t have this international appeal. Chelsea have not made a profit for decades and are ¾ of a billion pounds in debt. Almost insolvent. Players like Lampard, Terry & Ballack are on over £6.5m p..a basic each. At a rough calculation (based on revenue of £75 per fan per home game) Chelsea need to fill the stadium 7 times just to pay the salaries of 3 players (out of a squad of 25 or more, plus reserves, youth etc). What an unsustainable nonsense.

Arsenal run their ship much better and refuse to pay either ludicrous salaries or ludicrous transfer fees, relying instead on the genius of Arsene Wenger to build teams & valuable playing assets that are occasionally sold. I like Arsenal a lot and they deserve to succeed because of their sporting and their business philosophies.

It seems a couple of other clubs also make a profit. One of them is Tottenham and this club has me puzzled. Perennial non achievers, perennial big money buyers, lower average gates than we have, OK they occasionally have the fortune of someone stupid enough to pay grotesque amounts for their players (who else would have paid £20m for Robbie Keane?), but their income is twice what ours is, their value is similar and they have a waiting list! I don?t know what they out in the water in that part of north London, but it doesn?t add up. It is also,without any shadow of a doubt, THE worst ground I have ever had to get to & from. It once took us 3 hours each way for a 10 mile journey.

So back to the main point and yes, we are seemingly not doing that well commercially. I would like to think that the credit freeze & global financial meltdown might just affect football a little, maybe not Lucas Neil (who apparently wants an increase on his £70k basic as an average right back at West Ham. The business model is grotesque, with so much money being channelled via Sky (but paid by the fans). Then we have managers being sacked weeks into a season because of the equally grotesque self-preservation instinct of not wishing to be relegated.

I wonder how many sports fans can name the single richest sporting event in the world? Many are surprised to discover it is the play-off final between 2 teams that finished between 3 and 6th in England?s second tier of football. Only when it is put in that context does the perverse nature of this premier league bollocks become so blatantly obvious. It?s a nonsense that needs to change and quick. Unless some semblance of reality and, dare I say it, fairness, returns to the scene then I believe the game is going to the dogs.

I fail to grasp why football is SO precious that it can?t adopt change like other sports in order to improve competition, or spectacle, or good decisions or whatever. Salary caps seem to me to be a good idea for a start. Everton, like Arsenal, have an unofficial one anyway. Why should Chelsea be allowed to operate with over £700m of debt? I applaud the aspirations and plans of Michel Platini to reclaim football for the fans and for the spirit of sporting competition. Without these two things the game is dead.

As for EFC; I personally DO NOT want a billionaire benefactor. I would prefer my club to be run like Arsenal than like Chelsea. It?s just personal preference. The taste of success is all the more sweeter when you believe that you deserve it and have earned it, rather than having simply bought it. But I?m still left embuggered by the idea that Tottenham is so much more valuable & profitable than Everton.

Michael,

you are getting more and more cynical with the years..... so long with believing, anything that comes from the club.

Thank you Joe, this is incredibly helpful!

The most alarming figure for me in the report is the figure (highlighted by Joe) of having £51M of cash creditors due to be repaid in the coming year (up from around £30M in the previous year). I am not sure exactly how much the Sky cash will be this year and when it comes, but currently gates are down and we were out of the UEFA Cup earlier than last year.

This is the number that might lead us having to sell the likes of Joleon Lescott to keep ourselves afloat with our creditors. As Joe says, it is scarcely likely that we can roll over or refinance much if any of this credit in the current situation. I’m not sure where else we are going to find this cash.

I fully agree with Joe that this shows what a poor financial situation the club is in, and how we desperately need to secure a cash injection from a new owner and, in the medium term, new sources of revenues from somewhere.

It also makes me wonder with Joe how we are going to be able to afford even the relatively small amount of money required for Kirkby. So without a new investing owner we truly seem to be financially between a rock and a hard place.

But... but... I was told that moving to Kirkby would solve all our problems, not just financial but everything... Cinders shall go to the ball, the tin man will have a heart etc etc

Well Phil, you shouldn’t believe everything you are told! What Kirkby might well do is make us better off in the future - if only we can scape together enough cash to build it in the first place...

Joe thanks for summarising. I was shocked too when I went through the accounts.

Was planning buying one share in EFC as a sentimental rather than business investment and when I was quoted £1,350 for one share (thereby valuing the club at approx. £47m!), I wanted to see what the actual accounts look like. To say the least looking at the numbers made me run a mile!

Added to the fact that revenue will be significantly down this year (no Uefa Cup, no Carling Cup semi etc) as well as the extra £4-5m in wages alone (Moyes?s new contract and Fellaini's contract), EFC will most certainly make a big loss as at May 2009 (unless we offload some players for a hefty profit!). Remember, as noted above, EFC had a really good season last year and only BROKE EVEN!

The financial side of the club may have been mismanaged in the past but the present is the present. If we can finish top 5 and manage to bring in loan players of quality, I will be over the moon, a good FA Cup run would be a massive bonus.

Looking at the basics, the club is BROKE! As you said, it will be near impossible to borrow more to finance new players, and looking at the state the club is in, do we really want to take on more debt? (One slight, very slight silver lining is that the Yaks injury will actually save the club a million quid as I believe insurance firms cover some or all of players' wages when they are injured.) I am not holding my breath for transfers this Jan and hope some loan players come in just to boost the squad.

If Everton are in this position, I dread to think what financial position some of the other clubs without sugar daddies are in! There needs to be a serious rethink in the Premier League, starting with a massive reduction in player wages as these are just bleeding clubs dry. There are so many average players on £20-30k a week ? thats £1-1.5M a year, for a 3-4 year contract!

I don't have the answers, but I pray the boys continue to get the results on the pitch and have a decent FA Cup run because, if we start slipping down the table and the prize/tv money starts drying up, we could be forced to sell just to pay off debts.

The numbers make grim reading and apologies for the long post ? hope god hears the prayers!

And then some people are critical of Moyes agonising over a five year deal! Would you, as an up & coming manager, want to be saddled with this albatross?

The thing is, we are all looking at our club but I don't expect it to be that different at most clubs in the Prem. We are in fact probably a lot better off than most of the others.

Why does everyone who moans about players wages come to the same conclusion that the way out of it is to immediately stop paying the high wages? Does anyone think that is going to actually happen? Let?s see if we can get Ozzie to accept a lower wage, and then we can get Timmy to do likewise... it?s a business and the players are paid to play. They aren?t in it for fun, they are in it to make as much as they can in a short period of time... and if I see one more player kiss a badge after scoring I am going to go throw up dinner.

Neil... what do you mean ?might well do?? The Board and its employees have told us it will. Surely you?re not implying they would lie to their own supporters?

The detail in Joe's report has pulled a few of our heads out of the sand... let's face it, we all knew our financial situation was desperate, but the degree to which we are in the shit makes for disturbing reading. But I cant for the life of me understand how selling our best players will solve anything.

No business man in his right mind would consider buying our club, or any other club for that matter in the current financial climate. Astley has taken The Toon of the market today ? which kinda says it all ? so let's ditch the Sugar Daddy idea, it's not happening. The micky mouse competition of Europe will never generate enough wealth to make a difference, nor will the League Cup, so I wouldn't fret over them too much either.

Everton have one shot, Villa are quite simply not good enough and, despite their ability to play any team of the park on any given day, Arsenal are all over the shop and are there for the taking.

Playing CL football is our only chance, thats were the dosh is. The next 4-5 months will go a very long way to determining our future. >We will never get a chance like this again ? yes I?m aware we?ve already squandered one ? we have to do it on the pitch, the club simply doesn't have the personel to kick-start a revival off it.

Clyde, players will take lower wages if the clubs (together) offer them less ? they then have nowhere else to go.

I know it may be fanciful to think that the clubs would work together like this as they all want to put on over each other but I don?t think we?re too far off this happening.

Let the credit crunch take its toll, the sky money will go down and once that happens only the clubs with sugar daddies will be paying the stupid wages currently being offered. And even the sugar daddies are running out (west ham is fooked and the pompey owner wants to leg it).

The wage system is simply unsustainable and I hope it doesn?t take a club to go bust to wake all the others up.

Phil, I have some news for you - the future is never certain. Who could possibly know exactly how many people might attend games at Kirkby in three years’ time? We don’t even know for sure whether we will be playing in the Championship or the Champions League. ’Lying’ simply does not come into it.

Thanks for that, Neil; I didn?t see the breaking news so didn?t realise the future was indefinable. I can assure you, though, that, even with Bill in charge, we won?t be in the Zingari in 3 years

So best of luck to you in the Checkout End! Patronisation Rules OK?

You might be right, Phil, given the state of our finances and the credit crunch. Apologies for the sarcastic comment, but it does get me after a while that people are more interested in endlessly talking about "lying" and allocating blame than about what our club should actually do in its currrent difficult financial situation. I thought Joe’s fantastic work deserved a bit more of a serious response.

For those of you who have no interest in finances or accounting: good for you. Ignore this post. This post is purely intended as a counterbalance to Joe?s analysis, so that those people who have concluded based on his post that the club is near to financial meltdown and/or is poorly run can see the other side of the argument. Note: for all I know, the club could today be near to financial meltdown and/or be poorly run; my only point is that the published accounts (as of 31 May 2008 ? remember we do not have any hard financial information for the last 7 months) do not show this.

"The detail in Joe?s report has pulled a few of our heads out of the sand... let?s face it, we all knew our financial situation was desperate, but the degree to which we are in the shit makes for disturbing reading."

To be honest, I don?t agree with a lot of what Joe says in the report. He is looking a lot at the facts & figures without looking at the underlying reasons and background.

The thing to remember in accountancy is that you can almost always pick and choose figures to fit whatever argument you want, but if you really want to understand properly then you have to be willing to look at each figure in turn and decide not just if it?s good or bad, but whether it is even relavent. Football clubs are bound by the same accounting rules as any other company, but like all industries football has it?s own unique circumstances and simply using standard accounting principles alone will not give you the full understanding.

In the summary at the end, he makes a lot of broad brush statements without relating them to the facts he had given. To an uninformed reader, it certainly would look like Joe has analysed the facts and then reached a reasoned opinion, but in fact there is a jump in logic between the facts and the summary.


"Other expenditure was up from £13.5m to £24.5m by 80%. This increase outstripped the total increase in turnover %."

Comparing the relative increases of turnover and wages isn?t really relevent - as you later state there is an exceptional £9m-ish charge on Finch Farm, which make comparisons to the prior year tricky. I mention this only because of the negative implications of your statement.

"The sale of Johnson, McFadden, Beattie & Naysmith created a profit on sale of assets of £9.4m"

It?s worth noting the Johnson sale was not included, as it took place after year end.

"A £24m (47%) increase in revenue resulted in the club BREAKING EVEN"

This is a strange statement.

Firstly, it implies that a football club only breaking even is a bad thing. On the contrary, this is the normal state of things. A football club will generally spend whatever cash it makes on players at the earliest opportunity, breaking even over the long term. In addition, the club is expanding using it?s newly found debt capacity (available due to the increase).

Secondly, why must an increase in revenue result in a profit? The club lost £10m last year, and broke even this year dispite some exceptional one-off costs (Finch Farm, the stadium etc). That is progress.

Thirdly, I think some people are misinterpreting "breaking even". This is breaking even AFTER player transfers. The club is making a decent profit BEFORE player transfers. Talk of a small decrease in our league (and hence financial) position destablising the club and forcing through player sales is wide of the mark.

Fourthly, the club broke even from an accounting perspective. This, by itself, does not mean that the club made no profit last year in real terms, because this years accounting profit contains expenses that are purely accounting figures that do not reflect on the financial performance of the club in the year. For example, around £2m of the expenses relate to the purchase of Andy Johnson 3 years ago - had we not bought AJ (and nothing else had changed), the club would have made a £2m profit rather than (essentially) no profit.

But would the financial performance of the club have been any different in the last year had we not signed AJ 3 years ago? Of course not, the financial performance would have been unchanged. This is why you have to be very careful when using accounting profit to review a single year?s performance.

"Investments in players saw borrowings on the balance sheet increase from £65m to £83m"

Not borrowings; creditors. There is a big difference. There are lots of things included in those figures, including prepaid season tickets. In accounting terms, people who prepaid for their season tickets are creditors: they are "owed" £17m worth of entertainment which the company (Everton FC) has not yet provided. Labeling this "debt" as "borrowings" is clearly incorrect.

Again, I point this out only because such high "borrowings" are used as scare figures, where people would claim we owe £83m and the banks could come knocking for it at any minute. We don?t owe that much, and they can?t come knocking.

What is correct, however, is the increase of £18m. It would be wrong to ignore the fact that debtors have also increased by £5m, offsetting this slightly.

"If Finch Farm accounts for balance of £9m (as described in accounts) then one can only guess there was a a sale/leaseback scheme
to raise cash and therefore the club has been forced to charge it all through P&L."

It can?t be that, sale/leaseback schemes don?t result in everything going through in one year. It?s more likely to be a combination of
- the increased annual cost of the superior facilities (which will now be the norm for every year)
- one off costs that couldn?t be capitalised
- the one off costs of moving

"Add the credit crunch to this balance sheet and it is highly unlikely that further loans will be made to the company:"

Note that the club did receive an extra £30m line of credit from Barclays. I agree more is unlikely at this moment in time, but it?s important to state that the picture in the accounts isn?t the end of the line as far as new debt is concerned.

"Creditors due within YEAR: -50,931 (2007: -32,483) bank overdraft (up £11m) & creditors (up £5m)"

I quote because of your emphisis on "YEAR", which somebody followed up on. It does give the impression that this money needs to be paid in the next year, and somebody asked where we will get £51m from. In truth, we don?t need to.

£17m is the prepaid season ticket holders? "entertainment debt" I mentioned earlier, which isn?t a money debt. The overdraft was up £11m, but that has now been secured by the £30m credit line and hence isn?t due in the next year. Other creditors are up £5m, but then debtors are up by £5m too, offsetting nearly. Overall then, the club is actually in the same position as it was 12 months earlier in terms of short term creditors.

"A company can fail because of a shortage of cash even while profitable. (Leeds United being a prime example)."

Leeds United were certainly not profitable. They failed when income fell sharply (when they failed to make the Champions League), and their huge costs (and crazy wages) caught up with them.

"In short, in a year of record revenue, cash of £11m flowed out"

Well, yes, but refer to my earlier point: the natural state of a football club is to never have a net cash inflow. If the club had a cash inflow, you would expect them to spend it on players.

The club is also an expanding business - with increased turnover comes increased debt capacity. Again, you would expect a football club to spend money on players when they have cash available, and hence when debt increases you would expect to see a net cash outflow.

I also would reitterate the point I made on profit: the club had a net cash inflow of around £5m before transfers. It is therefore NOT the case that the club is going to be forced to sell players to balance the books (or at least, the accounts show no such thing).

"Remember - the cash position is a snap shot in May - boosted by next season?s upfront season ticket cash."

You wrote this immediately after the cash flow statement; I?m sure you didn?t mean that the cash flow statement is a snap shot (for those who don?t know, the cash flow statement simply shows all cash inflows and outflows in the year; as such, it shows performance over the entire year. The cash balance, which in Everton?s case is an overdraft of £12m, is a snap shot; it simply shows whatever the balance was on the day the accounts are drawn up. Often, this balance can be unrepresentative of a company?s general cash balance - for example a Christmas card company?s cash balance may be at it?s highest on December 26, and may be at it?s lowest in November - so you have to pay attention to the date).

I think your implication in your "boosted..." comment was that the cash balance is at a high point on May 31, due to the season ticket cash. Actually, it isn?t. The clubs main source of income is from Sky TV money these days, and they don?t get that until after September (hence the talk of "bridging loans" to spend this money in the transfer window prior). The clubs cash will be at it?s highest then.

"Since the publication of these accounts a further £15m was invested on a player in August"

Well, 15m euros. And of course Andy Johnson offsets that considerably.



Now, although I?ve stated areas where I disagree, the main body of the article is at least attempting to stick to the facts (albeit, in my opinion, not always the relevent facts). In the summary, however, there are several statements made without any real basis.

"In January we need to pray Man City fancy one of our players"

That statement isn?t backed up by your article. While the preceeding article is factually correct, that kind of statement basically comes out of nowhere. "We need to pray Man City fancy one of our players".... or what exactly? Are you implying our backs are to the wall, or something else? This is essentially an empty statement; threatening worse times ahead without actually threatening any specific ills.

"This year is arguably the worst ?off pitch? performance ever"

Again, on what basis are you making this statement? I?ve dealt earlier with the club not making an accounting profit (in brief, you wouldn?t expect the club to make a profit; accounting profit is a poor measure of a single seasons financial performance; the club made a profit before transfers; you would generally expect a growing company which is taking on debt to fund expansion to make a loss;the club suffered c.£10m in possibly exceptional expenses), having a net cash outflow (they had a cash inflow of £5m before transfers; you wouldn?t expect a football club to have a net cash inflow; some cash inflows/outflows relate to transfer in prior seasons and hence probably shouldn?t be used to judge the current seasons performance), the creditor position (actually the same as last year once the overdraft was secured).

"The accounts suggest there will be any spare cash available to develop a new stadium ... without making sales"

They don?t suggest that at all. Let?s not dig out the stadium arguments here, but the club believes the new stadium will be profitable - if the bank agrees, it will lend the cash (this won?t be for 12 months at least, by which time the banks will almost surely be more liquid). There is no reason to assume that the club would want or need to fund the stadium from a cash balance - I?m not aware of any other football club that saved up the pennies to buy a new stadium, rather than borrowed at the time.

"They also show that as a club we have gone backwards commercially for the third year in a row."

This, the last line of the article, pretty much comes out of nowhere. Gate receipts are up (both per game and in total), sponsorship is up 20%, other commercial activities are up almost 100%. Only catering is down, by about £140k. How are we justifying the club going backwards - specifically for the "third year"? Why specifically 3? What measure are we using to determine this?

Thanks Simon for the clarifications, especially for me on debt payments which we have to make in the coming year. Do I understand you to be saying that the £51M is not accurate because some of it does not actually need to be paid this year, and some of it has already been refinanced via the Barclays overdraft?

Obviously if this is true then the alarm at having to sell players is misplaced. It should also be the case that, especially once credit generally frees up at the banks again, we should be in a reasonable position to refinance more debt. Thanks!

Fantastic post Simon ? thanks so much for the clarifications. Great stuff!

"Do I understand you to be saying that the £51M is not accurate because some of it does not actually need to be paid this year, and some of it has already been refinanced via the Barclays overdraft?"

Exactly. The £51m is made up as follows:

• Secured Overdraft £12.2m (since moved to long term debt)
• Other loans £0.9m (still payable)
• Finance Leases etc £0.2m (still payable)
• Trade Creditors £14.4m (still payable)
• Taxes £6.1m (still payable)
• Accruals $17m (mostly "owed" to prepaid season ticket holders, so no cash is actually payable).

Of those still payable, the increase is about £5m, which is slightly more than offset by the increase in debtors - so the position is basically the same as last year (actually very slightly better).

Note that having some level of short term creditors is normal. In much the same way as you and I pay our gas bills after we have used the gas, football clubs don?t pay for a lot of things in the season they use them. Yes, they have to find c. £30m in 08-09 to pay for things related to the 07-08 season, but there willl be c.£30m of things related to 08-09 that they won?t pay until 09-10 (in much the same way that you and I are always behind on our gas payments. A scarily long way behind in my case, but that?s another story...).

Thanks Simon! So we really shouldn’t be selling players like Portsmouth and perhaps West Ham to simply meet our immediate cash needs. Let’s hope not anyway.

And good luck with the gas payments....

Denis.... I can see your point about wages, but are you really saying that the clubs are going to get together and conspire to hold down wages? They can?t even get together on the idea of marketing themselves together, how would they get together on colluding to hold down wages? And when one of the player agents takes your offer to the big four and they snap it up... you?re done. In order for there to be collusion you need everyone to be colluding. It happened in American Baseball in the '80s, and look where their wages have gone...

A big thank you to both Joe and Simon Skinner for having the patience to spell out and clarify key details in the accounts - it frustrates me sometimes to read the rhetoric on websites and newspapers based on a misleading view of the club?s financial position - whether it is "record turnover" which implies we are in rude health (Several banks in Europe which have been bailed out declared record turnovers in 2007, as an example) or alarm over short term creditors which, in fact, have been termed out, leaving the club secure (for the time being at least ? although this in itself only postpones the need for additional sources of cash further forward in the future, a bit like Gordon Brown mortgaging Britain?s future).

Neither the size of the turnover, nor the size of the short term creditors, on their own, can tell us the financial health of the Club. These need to be viewed in conjunction with other aspects in the accounts and examined over a period of time. I think between them Simon and Joe cover the most salient issues, so a big Thank You for exploding the "myths" that may have arisen from the headline numbers.

One additional point I would make, however, is that scanning Joe?s historic comparison of operating profits reveals something quite interesting. I look back as far as 2004, which is probably when the club began to turn the corner following David Moyes arrival. Between 2004 and 2008, on a combined basis, operating profits before player trading is about £18-20m, i.e. an average of about £4m-£5m per year.

This represents approx 7-9% of turnover. I believe more profitable clubs such as Man Utd and Spurs generate operating margins nearer 15% (and on higher turnover).

To me, therein lies the rub as far as the financial situation is concerned. On its own, 7-9% operating margins on a business is not bad. Since the majority of football clubs ? as Simon points out ? tend to invest the bulk of their operating profits in player acquisitions, this ties in with Moyes's spending on players since 2004. I think in broad terms his net transfer spend (i.e. players bought minus players sold) works out at about £20m over the last 4 years, or about £5m per year. In other words, he has invested what the club has made in operating profits into improving the squad. I think we would all agree that the playing squad has improved considerably during that time and that if the side was broken up the club would probably receive in excess of £20m for the core backbone of the team.

However, on the down side this strategy has meant that the club has not made any in-roads into its long-term debt. Since Kenwright has no equity to invest, the club remains saddled with debt dating back several years. The debt has grown due to those items (such as rising interest bills, one-off restructuring charges etc) which can?t be absorbed by operating cash-flows (otherwise Moyes transfer spend would have been reduced to below £5m per season).

So what then for the long-term? I think the choices have been spelled out before, but are worth repeating in the context of the finances of the club, which are ever more acutely in need of some solution in these dire economic times:

1. New stadium. Ignoring Kenwright?s rhetoric, I think the New stadium ultimately would have contributed to a reduction in debt, but only after 5-6 years (once the initial additional indebtedness incurred by Everton was absorbed). The increase in matchday revenues over the long-term eventually begins to generate enough operating cashflow to be put towards repaying debt ? assuming Moyes sticks to £5m net transfer spend per year and the club finishes in the top 7.

2. Equity. The billionaire investor option. Everton as an investment proposal seems to have been difficult to make a success, even for someone like Keith Harris!

3. Moyes's Magic. It is possible to for the club to reduce its long-term debt without moving stadium or getting a new owner. This would require David Moyes to become a magician. He would need to produce a top 7 side on a yearly basis (which, based on the last 4 years, seems to generate matchday income and television revenues of about £50-60m). The operating profit of £5m is then put towards repaying debt, and the club buys no players. In other words, Moyes brings through youth players or unearths gems. This might be the strategy adopted by Arsenal ? ie trusting Wenger?s ability to find players without spending much and earning a top 4 place. Can Moyes do the same and keep Everton as a top 7 side?

Appreciate there are lot of assumptions here, but it is just my way of looking at the long-term debt. Many will argue that a football club?s primary focus should be to entertain the fans and not worry about its finances. Perhaps the long-term debt may need to be converted into equity (so the Banks become shareholders). I am not suggesting administration and the 10-point deduction ? only that perhaps the only investors in the club are its banks, which have de-facto been supporting the club through the last 10 years. The banks are in dire straits themselves but, given that many are taking equity in property assets and investments already, they may need to consider this option for a number of clubs.

I understand that the 10-point deduction applies only where a club is in administration. Of course, if the banks voluntarily convert their holdings into equity, this is not administration.

Is this a real option? I work for a bank and I can say we have seen it before. Clearly some exit route is needed to convince lenders. If a new stadium for example, were to materialise, then it might represent a long-term exit route for lenders, since their equity will be invested in a club with a potentially higher revenue base.

Would Kenwright agree to dilute to himself? Now there is a question. The way I see it, he has little option. And also, given the worsening economic climate, it would not surprise me if lenders are already making write-offs against their loans to Everton. After all, were the club to go into Administration, history tells us that lenders never reclaim more than 10-20% of their outstandings, so an equity conversion now may actually represent a better recovery option in the long-term.

Clyde ? I understand your sentiment but what I mean is just that the only reason that the wages are so high is because the clubs pay them, and the only reason they can is due to the Sky TVvmoney they get and gate receipts.

As the economy goes into meltdown, I would not be surprised to see the tv money go down and possibly gate receipts if fewer people are able afford tickets. If as a whole most clubs have lower income, they will have to make cuts in expenditure ? which presumably means players' wages as this is forms the majority of expenses.

I don?t think you need to have the Sky Four included as they will always be able to pay high wages (for the foreseeable future anyway). Also if one of them wants to sign a player from a non-Sky 4 club, they will get their man most of the time given the player will want to play for a "better" club and in the Champs League etc.

The main reason (before the pound's fall against the euro!) that players want to play in the EPL is not because its the "best league in the world" but rather that the EPL clubs, on average, pay a shed load more than the continental clubs (I currently live in Germany and the wages here are far lower than the EPL, they also have rules on foreign ownership ? in that it's not allowed. I think a foreigner can only have up to 49% of a club).

If most of the EPL starts to offer lower wages, I cannot see loads of players leaving, they will just have to accept it ? unless one of the Sky 4 comes knocking. Even then, the Sky 4 cannot pay those wages forever, I mean Lampard (if rumours are true) is on £140k a week, on a 5-year contract ? that's £35m over 5 years for one player!!! Nevermind the fact that Ballack and Terry are supposed to be on £130k a week as well! Then again, Abramovich's pockets are deep enough.

But coming back to your point, I agree and cannot imagine the clubs working together as they would likley stab each other in the back given the chance but the simple state of the economy, and reduced revenue, may be enough for some of them to start coming to their senses because they have no choice and simply cannot afford the wages anymore. IMHO anyway, we?ll see.

On another note, as long as the blues carry on winning, dare I say Champs League qualification could be on the cards again (bit early for this I know but dreaming's not allowed).

COYB

"It would not surprise me if lenders are already making write-offs against their loans to Everton."

Amit, I read through your post and to be honest I?m not sure where to begin. But let?s start here. It?s only 4 months since a bank offered Everton a £30m extension on their credit. Yes, a lot has changed since then in the financial world, but Everton are still able to comfortably meet their interest repayments (to repeat: in a year where there were significant one-off costs, they made £5m before player trading).

Even if the situation does worsen, they probably have around £50m in off balance sheet assets (how much would you say Yobo, Arteta, Cahill, Howard, Osman, Pienaar, Hibbert, Anichebe, Lecott and Rodwell are worth combined? Because on the balance sheet they are worth about £7-8m total).

Making a claim like "banks are already writing off Everton's loans" is plain crazy. And even if it WERE true, it doesn?t agree with the rest of your article. Banks are apparently scared that Everton will go into administration; that would make shares in Everton worthless. So do you think that banks would want to convert the debt into equity, i.e. swap debt worth £4m/year in interest (plus the eventual return of capital, plus right dibs on assets if everything DID go bottoms up) for shares that are worthless (no annual income and with no hope of anything at all if the club went bottoms up)?

And to repeat: that?s interest of £4m per year. That?s not crippling the club. That?s less, for instance, than Lucas Neill wants West Ham to cough up for his new contract. And having obtained that debt has, overall, been financially beneficial ? if we hadn?t bought Yakubu, Lescott, Arteta, Cahill and the rest (for all of whom we required debt finance to obtain and keep) we would have been at least 10 places lower in the league, and possibly a division lower. So the debt is paying for itself.

Simon,

I think banks will be considering write-offs. When a business has developed a core of debt and is unable to generate surplus cash-flows in the short term, effectively the bank is looking at a repayment through two sources: from equity, or from the sale of assets.

In a distressed situation, the sale of assets is via administration, where security pledged by the club is enforced. This will not happen in Everton?s case ? in my opinion. This is because history shows banks are not able to recover more than 10-20% of their claim in an administration of football clubs. There have been about 30 in the last 20 years, and many banks including BoS, RBS and Barclays have taken punishing write-offs. There is also the political element of course ? no bank is going to want to take on security enforcement and face the wrath of thousands of fans.

The other source of repayment ? equity ? needs to appear soon. If no investor materialises within the next 12 months, I believe banks must consider whether they can maintain the value of their loans to Everton at par.

The only other possible source is a sale of players. Short of selling the whole core of the team, which cannot happen as it would endanger the club?s Permier League position and hence the whole loan balance, a sale of one or two of the best players still leaves a significant amount outstanding to be repaid.

Banks often take provisions internally without publicising to the external market. It means that when a write-off is taken, no surprises are created as far as earnings are concerned.

My view is that banks will take write-offs on a whole slew of assets, good and bad, during 2009. Exposures to football clubs will fall into this category. A debt-to-equity swap is not the end of the world as far the lenders are concerned ? provided they are able to see a way out in the long-term.

For the debtor, a debt-for-equity swap is unpalatable as it wipes away existing shareholdings and this is here where the greatest angst will lie. Consequently Kenwright?s only option is to sell or else he faces dilution.

Also ? as far as the interest bill is concerned ? swap curves are no longer inverted i.e. long-term interest rates are expected to climb from current levels (reflecting expectations that inflation will return and the BofE will have to start raising rates). This potentially - in my opinion - creates liquidity issues for borrowers with large debt piles such as Everton.

My Conclusion / Opinion: without equity investment or a mass sale of assets, current debt levels may not be sustainable without some kind of arrangement with lenders, possibly incorporating a partial debt-for-equity swap (e.g. 10-20%).

"When a business has developed a core of debt and is unable to generate surplus cash-flows in the short term,"

Can you justify saying Everton are in this position? Everton?s interest bill is £4m a year; in addition they are repaying less than £1m per year in capital. Even after this, Everton are producing an EXCESS cash flow of over £5m (before transfers), in a year where there were substantial one-off payments made.

How have you arrived at the opinion that there is a short-term cash-flow issue?

"In a distressed situation, the sale of assets is via administration, where security pledged by the club is enforced."

Administration? Again, how can you justify such talk? In a page about the 2008 accounts, you haven?t referenced them once.

"If no investor materialises within the next 12 months, I believe banks must consider whether they can maintain the value of their loans to Everton at par."

Again, please explain why Everton are going to be unable to find £5m a year, remembering that wages are nine times that amount.

"My view is that banks will take write-offs on a whole slew of assets, good and bad, during 2009."

Banks will take write-offs on good assets? Doesn?t that contradict the definition of "good"?

"A debt-to-equity swap is not the end of the world as far the lenders are concerned ? provided they are able to see a way out in the long-term."

Which is the point ? there isn?t. You stated in your last post that you?ve seen banks do equity-debt swaps ? not with football clubs you haven?t, only with proper businesses that pay dividends. Football clubs like Everton don?t pay dividends. Football clubs aren?t even REALLY businesses, they are not-for-profit organisations. The only hope for a return for a bank is to sell the shares in future.

But as they won?t be a majority holdings, they lose their appeal to potential purchaser, who would only be interested in buying both the bank?s AND Kenwright?s shares. No high street bank would be interested in this scenario, which is why it?s never happened.


Why? most of Everton?s debt is tied up in long term mortgages, payable over a long period (which is why they are only due to repay about £5m of capital over the next 5 years).

To summarise, compared with wages, debt just isn?t an issue at the moment, and there is no short team concern on repayment. Now, if you can draw my attention to something specific that I?ve missed, then I would be glad to read it; but as it stands, your argument is along the lines of "I state without reference to the accounts that Everton are in short-term financial troubles (and indeed in risk of administration), and that the current financial climate will force banks to take ownership of the club in a structure that?s never been seen before, only Kenwright probably won?t let them. Therefore Everton need equity investment or a mass (how many players is ?mass? by the way?) sale of assets just to sustain themselves", which just isn?t true.

Simon,

You summarised my views correctly and it just my view - not a statement of facts. There, however, a few facts in your post I would like to respond to.

First point. The £5m a year you mention after interest is not surplus cash. Unless Moyes completely finances all player acquisitions from player sales (which he has not being doing), the cash-flows from operating activities on average equal the net transfer spend of £4m-£5m each year over the last 4-5 years. These player purchases are also not discretionary expenditure. This spending has been key in sustaining a top 7 finish in the last 4-5 years, which in turn has generated extra revenues, which has driven the cash-flow generation before player trading and interest.

Second point. A partial debt-for-equity swap does not imply "financial melt-down". It is a step taken by lenders as part of a consensual restructuring, when the capital structure of a company is ill-suited to its cash generation. I believe Everton fall into this category as I don?t believe sufficient cash-flows are generated from the operating activities over and above an adequate annual transfer budget for player trading for David Moyes, which will sustain the club in a top 7 position, which has in the past generated £50-60m of revenues and £4m-£5m of operating cash-flows with it. The club will be dependent on "wind-falls", i.e. the sale of assets at above the balance sheet value (such as the Rooney cash) or a reduction of the transfer budget if it is to build up sufficient cash-flows from its operating activities to repay the long-term debt.

Third point. Write-offs may be taken in 2009 against some "good" assets ? i.e. loans to borrowers which are currently performing ? by lenders where the loan was based on collateral valuations in 2002-2007 i.e. after the beginning of the global asset bubble and before the collapse of asset prices in 2008. Even if a borrower is servicing its debt correctly, loans such as securitised mortgages are being marked down on the books because [a] the loss on the asset in the event of a default is higher, and [b] the probability of defaults in loans in the economy in general has increased. The loans which will not suffer mark-down are those where the value of collateral is significantly in excess of the loan.

Fourth point. What is the current valuation of the collateral posted by Everton? As an example, I will share my opinion on the value of the collateral posted on the original Bear Sterns advance, which was securitised on season tickets. These season tickets are receivables and all receivables (including mortgages) are being marked-down by lenders in their collateral valuations. Why? One way to value collateral is based on a market value of receivables, i.e. if the lender was to sell these receivables on, what would their value be? The mark-to-market price has dropped due to the general fall of asset prices globally. Secondly, specific projections for season-tickets going forward may need to be adjusted downwards as a prudent step, and provided against. If season tickets meet the original forecasted levels, the provisions are reversed. The provisioning against collateral value in this way is a step taken by all lenders during an economic downturn.

My Concluding Opinion: Firstly, I disagree that the club is generating surplus cash-flows sufficient to make capital repayments in the long term. From the existing revenue base of £60m, it is not. The £5m a year does not provide enough cash-flows to cover the transfer budget and, for example, increases in the interest bill. The long-term debts total about £30m and the club is dependent on these being refinanced, unless it secures equity investment or achieves a "wind-fall" from a sale of players. Given that transfers are generally paid for in installments, it would need the sale of more than one or two players to make a real reduction in the loan, especially if a portion of the sale proceeds needs to be set aside to cover the cost of replacements.

Second concluding point: Collateral valuations have fallen. So enforcing the security would lead to a loss for lenders. What?s more, enforcement of security over football clubs has historically been disastrous for lenders.

Final concluding point: My view is that a write-off will be considered by lenders because we are in unprecedented times. Looking at the accounts of Everton, the asset value and cash-flow generation may have been sufficient to allow lenders to maintain the status quo, but the collapse of global asset price no longer affords them this luxury. Given that enforcement is such an unpalatable option, a debt-for-equity swap via a consensual restructuring may need to be put on the table for Kenwright to consider, unless he can find the equity.

As a fan, I hope I am wrong and the club trades normally and, most especially, the finances don?t impact the progress David Moyes has made in the recent past. To this end, I look forward to reading another clean sign-off from the auditors of Everton?s 2008-2009 accounts. I know there will be numerous other companies in the UK which will not be so fortunate.

Just re-read my post and wanted to add the following:

- The value of a loan is dependent on the repayment sources and/or the collateral value.

- In the past, Lender’s were relaxed about repayment sources as they felt comfortable with collateral valuations.

- Collateral valuations have collapsed so lenders are being forced to consider write-downs generally.

- Where the repayment sources are weak, a consensual restructuring is the general way to go to allow the capital structure to suit the cash generation.

- Everton’s cash generation has only been sufficient to cover player expenditure and not capital repayments. From memory, I believe the club’s debts have been in the £20m-£30m range pretty much since 2002 and debt reductions were achieved temporarily following wind-falls, like the Rooney sale.

- 2009 is the year when Banks will take action to deal with reduced collateral valuations by actively provisioning and restructuring their loans. In my opinion, the long-term loans to Everton loan may fall into this category. In such a scenario, Lenders will aim to protect a minimum 80-90% of the loan value and absorb the loss in the short-term, making a recovery in the long-term through a sale of shares or from any "wind-falls" via asset sales (e.g. Rooney). The penalty for Lenders taking a loss is a severe write down on the value of Kenwright’s equity.

However, this is not necessarily a bad thing for supporters. Lenders will not want to damage the £60m revenue base of the club, so it is highly plausible that in a consensual restructuring Kenwright is heavily diluted in return for the lenders accepting a reduction in the loan principal, and Moyes is allowed to continue spending £4m-£5m a year on a net basis as in the past.

This may be a good thing for the club as it reduces the interest bill as the loan balance is reduced.

Not only do I believe that Everton’s loans are candidates for a debt-for-equity swap, but also such a move is not a bad thing for the club/supporters. It is Kenwright who takes the hit. Is that a bad thing in the long-term interests of the club?