Financial fair play regulations
Duncan McHardy has asked us to post this response to some comments on his article on the Financial Fair Play Regulations:
I thought it appropriate to elaborate on the FFP Regulations (FFPR) in light of the comments that I am grateful for.
The FFPR afford UEFA investigative powers should they suspect the demise of a club’s financial position. The break-even requirement is detailed under Articles 58 – 63 of the FFPR. Under Article 62(4) UEFA may request financial information/explanations from the clubs if (i) employee benefits expenses exceed 70% of the total revenue; and (ii) net debt exceeds 100% of the total revenue.
In October 2010, Manchester City reported that employee expenses (i.e. player salaries) were at £133m, while turnover was £125m. This would obviously contravene the FFPR. The situation would be compounded however if the club was also servicing debt borne out of the original acquisition of the club and the subsequent purchasing of players. In January 2010, Sheikh Mansour transferred £305m of such debt to equity to ease UEFA woes.
Contrast this situation to that of Liverpool under Gillette and Hicks in 2009 when interest alone per annum was £36.5m (on a debt of £350m). Moreover, Gillette and Hicks could not afford to convert debt to equity. Now that certainly raised alarm bells!
Annex XI of the FFPR elaborate on the break-even requirement in relation to a club’s "Debt Situation". UEFA would consider the sources of debt and the club’s ability to service the principal sum and interest.
While debt may be permitted, should it be shown that the debt is largely attributed to player salaries, UEFA would intervene. As has been highlighted by many, debt (or equity) finance invested in club facilities or youth development would be considered more favourably.
As mentioned in the article, Manchester City and Chelsea recognised that much of their respective debts stemmed from player salaries. In order to ease the situation, debt was swapped for equity.