The dramatic news that Manchester U’s sponsors, insurance giant AIG has gone to the Federal Reserve in America, asking for a loan of around $40 billion to avoid being downgraded by ratings agencies, has shocked everyone involved in football finance.
We all know that the financial markets are in a mess – but it is only now becoming apparent how much that is affecting football.
Manchester U (renamed Manchester Bankrupt on these pages following their own inability to pay the interest on their debts last year) rely heavily on AIG for income, and the thought of that income suddenly stopping is sending shock waves around Old Trafford.
Of course, AIG are not the first EPL sponsor to have problems this year. but until now it is only the little teams that have suffered. Northern Rock sponsor Newcastle U and they were eventually bailed out by the British government. WHU were sponsored by XL, the travel company, who have now gone bust. WBA have no sponsor at all.
But the AIG problem will cause Manchester U even bigger problems because of the financial model the club has adopted.
The club is massively in debt, following the purchase of the club by Americans, and the debt is at high rates of interest – hence the inability to repay the interest due last year.
Worse, the club maintains its position at the top of English football by spending £40m or more a year on new players. The quality of the team that has been bought cannot be doubted: as Arsenal supporters we may not like Ronaldo and Rooney, Berbatov and the likes, but they are still class players and are liable to have Manchester near the top of the league most seasons.
However they cost the club more and more both in transfer fees and in salaries, and this increases the pressure on the club further. (Indeed the arrival of Manchester C in the transfer market will make it harder and harder for Manchester U to keep its approach going).
The track record of the Manchester U manager is second to none this century, and such is his power that no one but no one can stand up to him. If he announces the need for another £30 million player in January, the money will be there. Which in good times is good, but it will mean a huge clash of interest and demands the moment the board tell the manager that the pot is dry.
Manchester U’s other problem is that it has more or less maximised its income. Prices have risen in the ground, and the marketing effort (with tours of Saudi Arabia, South Africa and the like all aimed at increasing income) have gone as far as possible. The ground is full, the TV station is established – there is little more to do.
Contrast with Arsenal. Arsenal’s debt is secured against the stadium, at very much lower interest rates. Rather than spending money in recent transfer windows, Arsenal have made money. Although Arsenal, like Manchester U, have a manager to whom no one could ever say no, the Arsenal manager looks much more controlled, and his transfer spending is notoriously cautious. Overseas marketing is much more cautious and there is much further to go. The TV station is only just starting…
Arsenal like Manchester U benefit from a sponsor – but for Arsenal it is a sponsor that is unlikely to be moved by financial problems. While airlines are going bust it is hard to see how anything short of the oil running out is going to stop the Emirates Airline from sponsoring Ashburton Grove.
Arsenal’s problems – the decline in the financial market making it harder to move on some of their property – are tiny compared with those of others. 90% of Highbury has sold, and the club can readily afford to hold some of the other properties until the price rises again.
In the end all Manchester U can do is to wait for a new buyer of the club and a new sponsor of the shirt – but with Newcastle U on offer at the same time, and the insanity of the situation at Manchester C (showing that even massive investments in a club are unlikely to challenge the existing high flyers) investors must wonder if the time has come to look elsewhere. If that is so, the demise of AIG could well be the first step as we see the downgrading of Manchester U and Liverpool (who face similar problems of over-reaching themselves with debt) to match the downgrading of AIG.
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