In their 2018 Annual Review of Football Finance Deloitte stated ”2017/18 represents the fifth consecutive season where there have been no insolvency events in the Football League, demonstrating some reason for optimism about the long term shift towards financial stability.” Possibly, but as any Leyton Orient fan can tell you, insolvency, administration and even winding up have not been excised from the English football landscape, simply relegated to lower divisions of the pyramid.
Since 2012 the UK economy has enjoyed a somewhat anemic recovery from the Great Recession of 2008 and its aftermath, and English football has benefited from successive gargantuan increases in the sales of EPL broadcast rights. With the European economy starting to slow, the perils of Brexit, and expectations that EPL rights value will not increase significantly in the current round, the economic waters are looking a little choppy.
Judging from the recent UEFA Club Licensing Benchmarking Report, there’s also reason to be concerned about the effect of downturn on the financial position of some of the weaker European clubs. Just under 10% of clubs in the top divisions in Europe declared losses in excess of €10 million in 2017. In years past UEFA used to report the percentage of clubs whose auditors expressed a “going concern” qualification, meaning that, without an injection of capital from outside, the club would likely be bankrupt in the foreseeable future. The last time UEFA reported the figure, in 2011, it was one in six of the top division clubs in Europe. The continuing silence of UEFA on this statistic does not suggest that the percentage has diminished significantly.
For much of the last decade I have been researching financial distress in football, focusing on clubs in three national systems- England, France and Germany. Financial distress can be taken to mean the following – insolvency (the inability to pay scheduled debts), followed by an administrative procedure seeking either to restructure the business, by writing off some or all of the debt, or wind up the company (liquidation of the company). Most European countries have a similar legal process nowadays.
You can view the papers here:
- English football insolvency
(Szymanski, S., 2017. Entry into exit: insolvency in English professional football. Scottish Journal of Political Economy, 64(4), pp.419-444.)
- Insolvency in French Soccer
(Scelles, N., Szymanski, S. and Dermit-Richard, N., 2018. Insolvency in French soccer: the case of payment failure. Journal of Sports Economics, 19(5), pp.603-624.)
- Insolvency in German football
(Szymanski, S. and Weimar, D, forthcoming. International Journal of Sports Finance)
This research has led me to six broad conclusions:
- The principal cause of insolvency is the underperformance of the football club, either in terms of its ability to achieve playing results given the quality of players on the staff, or in terms of its ability to generate a level of revenue consistent with performance in the league.
- This underperformance must persist for a number of years before the insolvency event (e.g. entering administration).
- Underperformance that leads to insolvency is not predictable – it is like tossing a coin five times and coming up heads five times- an unlikely and unpredictable yet perfectly possible event.
- A key factor in this process is relegation. Underperformance increases the probability of relegation, and relegation almost always leads to a significant drop in revenues, which further undermines the financial position of the club.
- Precisely because the process usually involves relegation, insolvency is typically a problem among lower division clubs that once played in higher divisions. How far down the pyramid the problem of insolvency is concentrated varies by country, but for England, France and Germany the phenomenon is almost unknown for clubs while they are playing in the top division. By contrast, it is quite common in the third tier in each country.
- Countries which have long imposed regulatory constraints on club finances, such as France and Germany, are no less susceptible to this pattern of financial distress of football clubs than countries which traditionally have not (England).
Point 3 is probably the most important one. Note that this explanation is at odds with the common narrative one sees expressed by pundits and others, namely that insolvency is a consequence of profligacy, maladministration and poor planning. All these faults may be found in the management of football clubs, but the evidence suggests that even the best run club, through a series of adverse and unpredictable results, can be driven into insolvency.
I have noted elsewhere that clubs entering insolvency seldom disappear and are typically revived by local benefactors and fan groups. Nonetheless, the process does lead to considerable distress among the fans because of the uncertainty it creates, and the process of recovery can take years. By the same token, no football fan wants to abolish the system of promotion and relegation, even if it is inextricably linked to the processes leading to insolvency.
There is, however, a practical policy response that could be adopted by the football authorities which could significantly reduce the adverse consequences of insolvency. The implication of my insolvency research is that all clubs are potentially at risk, either in the short run or the long run, and so, like any population facing idiosyncratic risks, they have the potential to insure themselves by pooling the risk. Like house insurance or car insurance, football clubs could mitigate insolvency risk by contributing to a fund which would pay out in the event of insolvency.
Conventional insurance companies are not well placed to offer this kind of insurance, so a different mechanism is required. In the past, the PFA in England has helped to bail out clubs, but the players’ unions should not be responsible for underwriting the clubs.
Any insurance mechanism would need to account for the “moral hazard” problem. Moral hazard describes the situation where someone is insured against risk, and is therefore is inclined to take more risks than is sensible. In this case, a profligate owner might takes risks that end up driving a club into insolvency, knowing that the club can claim the insurance (moral hazard is implicit in any insurance scheme, and so should not be thought of as a specific problem for football clubs).
One model for providing insurance would be for national associations to impose a small levy on clubs as a percentage of revenues in order to contribute to the insurance fund. As a result most of the funding would come from the larger clubs, who are better able to afford the expense.
To deal with the moral hazard issue, it is useful to note that the national association is concerned with the survival of the club, and not with bailing out the existing owners of the club. Thus access to the insurance fund could be predicated on the existing owners giving up control of the club. New owners could then be identified who would be allowed to draw on the insurance fund in order to revive the club. It would make sense in this situation for the national association to promote ownership by supporter groups, while also making sure that the new ownership group was also supported by qualified financial managers.
Such a scheme need not be very expensive. Because most insolvencies occur among the smaller clubs, the scale of the financial liabilities relative to football industry as a whole is relatively small. Right now, when the financial position of clubs appears relatively stable, would be a good time to set up an insurance scheme. The future may not be as financially unstable as the past, but just in case it is, a little insurance would be worth investing in.
For a discussion of the current financial state in Europe, see this blog post.