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.