Jackpot Dreams in the Last Chance Saloon – Debts and Deficits in the Championship

“We don’t know what everyone else spends, but I think our wage bill would probably be in the bottom half of the teams in the Championship” – Nigel Clough

On the face of it, Derby are one of the biggest clubs in the second division, still drawing bigger crowds than almost anybody else despite years of mediocrity.  Supporters will therefore wonder what the hell is going on – why isn’t our wagebill one of the biggest in the division?

Here’s the answer: –

“You could say most of the Championship is in crisis, with 30% of clubs paying wages in excess of 100% of their turnover” – Trevor Birch, Portsmouth FC administrator

Leicester City are surely one of those clubs.  Leicester Mercury business editor Ian Griffin recently wrote a great blogpost comparing Foxes owner Vichai Raksriaksorn to a slot machine addict chasing a ‘jackpot dream’.  Griffin makes the extremely good point that the £53m the Thai has pumped into the newly-named King Power Stadium is only a loan.  If promotion is beyond Nigel Pearson this season, as seems likely with his team still seven points off the play-offs, “what if [Raksriaksorn] decided enough was enough and called it a day?  How quickly will he want his £53m back?”

David Hills of The Observer reminds us that in 2002, Leicester went into administration with debts of £50m.  That allowed them to escape from an unpaid tax bill of £6m and infamously left the St John’s Ambulance charity out of pocket by about £4,500 – and doubtless, many local businesses suffered as a result.

Ten years later, Leicester’s latest accounts reveal a debt of £46m, with losses of almost £23m built up by their uncontrolled spending binge over the previous two years.  And since the period detailed in the 2010/11 accounts, Raksriaksorn has loaned Leicester a further £25.6m, pushing their total debt way past the levels the club collapsed under a decade ago.

Without the support of Raksriaksorn’s Asia Football Investments vehicle, the club would not be a going concern.  Did the Thai provide these loans because he is a life-long Fox?  Is he likely to do what the late Nigel Doughty did at Forest and write off his ‘investment’, out of love for the club?

Meanwhile, Birmingham City blogger Often Partisan also used a gambling analogy to describe the disgraced Blues owner Carson Yeung, who is currently facing money laundering charges in Hong Kong:-

“It seems like [Yeung is] clinging on for dear life as the rest of his life falls to bits around him, holding on to the one thing he has left that potentially offers him any prestige or power.  He reminds me of a poker player on a losing streak.”

Often Partisan is deeply worried about what will happen to his club if they aren’t promoted this season – and I don’t think they will be – as there is no prospect of Yeung putting in any more money and only a finite amount of parachute payments will come from the Premier League.

Yet another ‘fit and proper’ owner proves to be a false prophet.  Birmingham have now been placed under a transfer embargo for failing to file their accounts on time, which means we don’t know just how much trouble they are in, but we can assume that it’s not good news.

Now that Sacha Gaydamak is taking what he can get back out of stricken Portsmouth by seizing the club’s remaining parachute payments, we see the ultimate nightmare scenario that can unfold when clubs spend money that they don’t have.  Was a single FA Cup success in 2008 and a couple of seasons in the top ten of the Premier League really worth all the pain the fans have been through since?

The Swiss Ramble blog did a useful table on this very topic, using 2009/10 figures (where available), which showed six Championship sides with wages higher than total turnover – Bristol City (124%), Queens Park Rangers (118%), Portsmouth (109%), Ipswich Town (108%), Preston North End (108%) and Nottingham Forest (106%).

Although QPR eventually managed to get promoted by overspending, Preston are now in League One and the other four clubs are all marooned in the bottom half of the league table.  Portsmouth, of course, are in danger of extinction within the next few weeks – that their wagebill was a eye-watering £65m in 2009 helps to explain why.

In 2009/10, Derby had the 10th highest wagebill in the Championship – £16m – but as a proportion of turnover, this was the third lowest (55%).  Only Leeds, whose wages were half of turnover and Burnley, at 49%, came in lower.  Burnley, it should be noted, had a much higher turnover than usual, due to parachute payments.

The total wage bill for all Championship clubs  for 2009/10 was calculated by the Swiss Ramble as £414m, with total turnover for all clubs adding up to £504m.  This means that across the division, wages averaged 82% of turnover.

So the Rams’ parsimonious approach is unfashionable, but arguably miles ahead of the game.  However, it needs to be remembered that in 2009/10, Derby were still in receipt of Premier League parachute payments, which we no longer get.  This is why the wagebill is likely to have to come down further next season, necessitating tough decisions on the futures of Miles Addison and Paul Green, for example.

Addison was seen as part of the plans, hence signing a contract extension last summer, but the emergence of Academy products Mark O’Brien and Jeff Hendrick (with Will Hughes behind them), plus the signing of Tom Naylor, has pushed Miles down the pecking order.  As he is not going to be a first-choice centre back for at least the next two seasons, it makes no sense to hold him back as a substitute or reserve player, as unfortunately, we can’t afford to have too many squad players on the books.  Miles should be playing somewhere and if he does leave in summer, he will presumably command a fee, which can be added to Nigel Clough’s transfer kitty.

GSE have invested money into Derby – and not in the shape of loans, either – but would rather fund the club’s Academy than overspend on senior players in the hope of gaining promotion.  In the Swiss Ramble’s analysis, Derby are in “an excellent position compared to many other clubs”.  Unfortunately, that hasn’t equated to consistent success on the pitch yet, but then again, neither has Raksriaksorn’s irresponsible spending at Leicester City.

A lot of other clubs are going to have to go through the debt-reduction process that Derby have already been through.  How many of them are going to go into administration – not to mention into the lower leagues – in the process?

 

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