Myth Busting - Football Finance

Stoof

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Myth Busting – Football Finance
by Stoof (with help and spiritual guidance from wishkah)

Over the last couple of days my eyes have been opened to the world of international trade finance. I've also been lucky enough to hear first hand about how football clubs handle their finances. Ha, I hear you say, this sounds like another one of your just-about-average essays Stoof. And it may well turn out to be one of them. But, for me, it’s been an education.

Just how do we pay these multi-million pound transfer fees? How are they received? Myth Busting time ...

OK. I'm going to use two transfers in this example. One transfer is Justin Edinburgh from Spurs to Real Madrid for £35 million. The other is Chris Waddle from Marseille to Spurs for £15 million.

PLEASE NOTE THAT THESE TRANSFERS ARE PURELY FICTITIOUS. (OBVIOUSLY).

I’ve tried to break this down as if explaining it to my Mum – so I’m sorry if this is common knowledge or if it comes across in my trademarked patronising style …

1) Bank(s)

We have a minimum of three "accounts" involved across these two deals from: Marseille's Bank(s), Spurs’ Bank(s) and Real’s Bank(s). Spurs have more than one bank involved in their financial dealings. Historically companies do this so that one bank doesn't expose itself to all the risk in, say, a £3 million loan to the club. A bank would prefer to loan £1 million and have two other banks do the same in a syndicate. They will almost certainly have a "set" of products with certain banks, depending on how attractive their differing product ranges are (credit cards, overdrafts, payment systems etc.). I'll come back to the relevance of the multiple-bank issue in a bit. In summary, we have more than one Bank on the books (as it were).

2) Chris Waddle Transfer - Letters of Credit

When the Chris Waddle transfer is agreed between the parties, Spurs' Bank will issue a Letter of Credit to Marseille’s Bank. A Letter of Credit is a document that guarantees that Spurs' Bank will pay money to Marseille's Bank in exchange for "goods". It will include the specific description of what is required to happen for the £15 million to be transferred (in whatever number of instalments) between the banks, i.e. that the "goods" here are in fact Chris Waddle's registration being to be transferred from Marseille to Spurs. To be clear – this is not a "bid". This is a method of transferring money to satisfy a payment that is due.

The beauty of the Letter of Credit, and the comfort for the Seller (Marseille) can get is that a bank is guaranteeing that it will pay another bank. It takes the football club (Spurs) virtually out of the picture. Marseille will be happy because their income is guaranteed by Spurs' Bank.

3) Instalments

But can't the incoming money from Justin Edinburgh's transfer just be offset against Chris Waddle's transfer directly? The truth is, most football clubs (including us) pay transfer fees in instalments - except the very few cash rich clubs (like Manchester City). This is fairly common knowledge, and there are lots of quips about Daniel Levy's flair for creative instalment plans. But technically, it may not matter terribly ...

4) Justin Edinburgh Transfer – Invoice Discounting

As an example, let's say that Real Madrid agree to pay Spurs the £35 million over 7 years (£5 million a year). That means we'd only receive £5 million in the near future and be waiting an age for the rest. For example, funding the Waddle transfer may require a big payment up front or we may have other targets on the go. But, through the wonderful world of "invoice discounting", even though the full amount will not be paid until years from now, Spurs' Bank would be content to front up to 90% of the total amount that will be paid (90% of the £35 million) for Spurs to use in further dealings straight away. So, this will allow Spurs to enter the transfer market with funds which may not actually have technically arrived.



5) Syndication, Guarantees and Cross-border involvement

You may ask, given the economic climate, why Marseille's Bank may take such a guarantee from Spurs' Bank? Well to start with a guarantee from another bank is fairly solid - more so than a football club - most still have fairly decent ratings too. But, let's return to the idea of multiple banks. Let's say one of Spurs' Banks, in its syndicate, is HSBC (UK) and one of Marseille's Banks is HSBC (France). In this transfer, you could easily have HSBC (France) guaranteeing a payment to HSBC (UK). HSBC (UK) would be very comfortable with this sort of risk given that HSBC is, in effect, guaranteeing to itself that it will pay itself the money. Risk thoroughly reduced.

6) Combining the Concepts and Reducing the Risk

The aim of the game from the any bank's perspective is to reduce the risk it exposes itself to. So this is where they can get creative. From reading the above examples it may seem that Marseille might be out of pocket, waiting on our instalments for the Waddle transfer. However, it is completely possible that off the back of our Letter of Credit (from Spurs' Bank to Marseille's Bank) that Marseille's Bank can invoice discount a high percentage of those proceeds (the £15 million) for Marseille to use in their dealings. After all, the Letter of Credit from the Waddle transfer is a valuable guarantee from Spurs' Bank that money will be coming in.

Conclusion

I think the most interesting thing to take away from all this is that Real Madrid may be paying 7 lots of £5 million to their Bank for Justin Edinburgh, but Spurs' Bank are happy to "invoice discount" 90% of the total amount due for Spurs to use in their own transfer dealings straight away; for me, busting the myth that football clubs are hamstrung by lack of cash awiating instalment payments.

There are a number of costs to Spurs for using these finance products – that's after all how the banks make money - but this allows us to pay the sums of money that we don't have (but that we will have) and without depriving selling clubs of immediate funds to be able to use.

Clear as mud?

PLEASE NOTE THERE MAYBE SOME MINOR INACCURACIES IN THE ABOVE PIECE, WITH THE INTENTION BEING THAT YOU READ THIS TO GET AN OVERALL UNDERSTANDING ON HOW MONEY MOVES IN FOOTBALL AND HOW THE BANKS COME IN TO PLAY.
 

Singaspursofsixspence

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Is this one of those 'case is real but the facts and names changed to protect the innocent' kinda things?

Aka marseille remy, and Modric Real?

Thanks for the explanation again though, Stoof!
 

beats1

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Iirc in FFP Uefa want to ban paying transfers fees in instalments as they don't get payed when a club hits the rocks
 

nidge

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Top work Stoof and wishkah. (y)

Certainly makes more sense in how Football clubs a able to 'pay' the large fees reported in the media.

In fact I am a little surprised that the media haven't covered this in the past?
 

knilly

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Very good read Stoof (and Wishkah), proving every day is in fact a school day and we can even learn from ITK.
 

scottishbairn

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So if the banks guarantee transfers (at a cost to the club) how does a club still owe another club money for transfers?

Take Rangers for example. They have just paid all outstanding debts to football clubs for player transfers. How could they still owe a club transfer money when the bank has guaranteed/released the cash?
 

beats1

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So if the banks guarantee transfers (at a cost to the club) how does a club still owe another club money for transfers?

Take Rangers for example. They have just paid all outstanding debts to football clubs for player transfers. How could they still owe a club transfer money when the bank has guaranteed/released the cash?
I think the issue arises when a club's shit hits the fan and they used that money else where to survive hence not paying the fees, which is why fifa is trying to outlaw instalment transfer
 

Stoof

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So if the banks guarantee transfers (at a cost to the club) how does a club still owe another club money for transfers?

Take Rangers for example. They have just paid all outstanding debts to football clubs for player transfers. How could they still owe a club transfer money when the bank has guaranteed/released the cash?
These are products available to football clubs. Not the de facto method that ALL clubs use. We certainly use them.
 

Stoof

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I think the issue arises when a club's shit hits the fan and they used that money else where to survive hence not paying the fees, which is why fifa is trying to outlaw instalment transfer
Not sure where you've heard that? Any pointers (I've had a quick Google) would be appreciated.

Mainly because these sorts of products help clubs' cashflow.
 

beats1

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Not sure where you've heard that? Any pointers (I've had a quick Google) would be appreciated.

Mainly because these sorts of products help clubs' cashflow.
Yeah I tried to do find out a link to it and couldn't but I have definitely heard that was outlined as a issue and that is one of the reason why AC financial director(apparently a guy who had a hand in writing up FFP) believes transfer fees will come down in the future
 

Stoof

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Yeah I tried to do find out a link to it and couldn't but I have definitely heard that was outlined as a issue and that is one of the reason why AC financial director(apparently a guy who had a hand in writing up FFP) believes transfer fees will come down in the future
Oh reducing overall transfer fee levels are definitely an objective. But I'd be very surprised if they outruled instalment transfers. Very surprised.
 

wishkah

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Yeah I tried to do find out a link to it and couldn't but I have definitely heard that was outlined as a issue and that is one of the reason why AC financial director(apparently a guy who had a hand in writing up FFP) believes transfer fees will come down in the future
what you need to understand is if banks had a currency, (corp banks not investment) it would be RISK. so why in hell would we do these products for a pompy or a rangers. its quite clever, and something Stoof correctly hit, when you actually guarentee your own payment. but in rangers case who can you cry to when you owe yourself.

the banks have something called a PG/DG/RATING which is very simply how close you are to default. 1 is v strong, 21 is pomey. if, on the invoice discount, i was to discount a rangers cashflow. i might charge 80% commission as i have no belief i would get the funds.

where, if you are to think slightly outside the box, spurs go well. is that DL always leaves the club in good stead, so why, as his relationship contact in a bank, would i not lend to DL (thats not my job btw). but you get my point.

lend to DL - cool. Lend to Rangers = NOPE - and when i say lend i;m talking about the bank making an exposure to pompy via product, not cash per se.
 

wishkah

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I think the issue arises when a club's shit hits the fan and they used that money else where to survive hence not paying the fees, which is why fifa is trying to outlaw instalment transfer
on the invoice discount i believe (not my expertise) that if at a later date, the bank doesn't receive all owed funds you can reclaim against the entity that took out the discount. i'm not 100% on this, but i do recognise that this factor, alongwith how likely the payer is to fall over, is factored into the margin the bank would take against the total amount.

aka against madird, 4% charge, against YOU, 18% charge.
 
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