Arsenal’s debt burden

My last post promised a look at Arsenal’s debt levels, often the subject of criticism from fans who’d like to see more money splashed out on transfers?  After all, the Emirates cost some £400m to build.  Is the resultant debt a millstone round the club’s neck for years to come?

Well, when last season ended, Arsenal’s net debt (total borrowing, less cash in the bank) stood at just under £100m.   That’s about 3x times underlying cash flow (or earnings before interest, tax, depreciation & amortisation, to give it a more technical name).  In business circles, a multiple like that is usually considered acceptable, though any increase above that level would be frowned upon. 

So far so good.  But the net figure doesn’t tell the whole story.  Let’s look at the two component parts, starting with total borrowing.  The bad news is that there’s a lot of it: just over £250m, most of which represents bonds issued in 2006 to pay for the new stadium.  The good news is that it doesn’t cost too much: the annual cash interest bill is running at about £13m, and annual repayments are only about £5m a year.  True, that’s a combined total of £18m a year and you could buy a good player for that. 

But here’s where the second component of net debt comes in: cash in the bank.  There’s over £150m of it!  Some of it has to stay there, to provide security for the bond holders – but only about £30m.  The rest can be used however the club likes.  That could include blowing most of it on buying players.  But that would take the net debt multiple above 3x underlying cash flow, which – as I argued above – would start to look imprudent.   And Arsenal’s directors seem to think the same way – they warned in the 2010 annual report that significant changes in net debt were “unlikely in the foreseeable future”. 

So, the bottom line is this.  Arsene Wenger can spend whatever cash the club generates each year, but not more, and preferably slightly less – and the cash in the bank will be used, not to buy players, but to pay off a little of the debt each year.  That is the modern-day Arsenal way.  And whilst it may seem rather dull, the truth is that Arsenal are about to start generating serious amounts of cash.  In my next post, I’ll explain why.

Arsenal in 2011-12

This blog has, so far, dealt only with the three big west London clubs.  But the idea has always been to add other clubs to the mix.  So let’s now look at Arsenal.  Who knows – perhaps we can help Theo Walcott decide exactly where to pitch his wage demands.   

First, let’s see how Arsenal’s finances stood at the end of last season – a significant one, in that it was the first year in four that the accounts were not dominated by property development.  Over the three previous years, 2008-11, nearly a third of Arsenal’s revenue came from the sale of housing built on the old Highbury stadium.  That was almost as much as they took in at the gate over the period.  But last season, property sales dwindled to hardly anything. 

Free from that distortion, 2011-12 gave us the first clear read on Arsenal’s finances for perhaps a decade, since construction of the Emirates first became a factor.  And on the face of it, the outcome was unprepossessing: a £16m operating loss.  But on this blog, we’re more interested in cash flow than profit, and in cash terms things were somewhat better: an overall outflow, but only a negligible one. 

That’s respectable enough – but shouldn’t it have been better?  After all, the year began with the sale of Fabregas and Nasri for a whopping aggregate of some £60m.  But offsetting that was expenditure of nearly £50m, chiefly on Arteta, Gervinho, Mertesacker and Oxlade-Chamberlain.  It’s also probable that the Fabregas and Nasri fees weren’t received in full in the year.  Hence cash in from transfers was almost exactly equalled by cash out. 

Does that mean there’s a windfall to come this season, when the balance comes in from Barcelona and Manchester City?  Yes: it looks as though they still Arsenal £16m.  Trouble is, Arsenal in turn owe money to other clubs on previous player purchases: £23m, to be precise.  So the net outflow from settling all those outstanding debts will be about £7m. 

However, there may still be a property windfall to come.  Some of the land adjacent to the stadium has recently been sold to Barratt, for £26m.  And the club still owns undeveloped land on the Hornsey and Holloway Roads, which the accounts suggest may be worth at least £10m.  In my next post, I’ll look at where that leaves Arsenal’s debt burden, often the target of criticism from fans who’d like to see more money splashed out on transfers.