Arsenal’s Stadium Debt – The Inside Track
Welcome to Guest Wednesday! Today I welcome Calvin Masterson (Follow @calvinmasterson) who joins us to take a look at Arsenal’s stadium debt from a professional point of view.
As this season for Arsenal comes to an end, people start to look forward to the transfer window. This is the time when we can all dream about the additions that will make Arsenal into the title challenging side we all desire. However, as many fans remember all too well, the last few summers have produced primarily heartache, angst, and pain for Arsenal fans (tempered with a dash of Mesut Özil). The Wenger Outs have argued that Arsenal have been cheap, failing to spend so the club can make a profit for Mr. Kroenke. The Wenger defenders have argued that funds haven’t been here. I am here to try and discover the truth.
Everyone knows that in 2006, Arsenal left their old stadium, Highbury, and moved into a new ground called the Emirates. What most fans also know is that this move was expensive. However, most fans don’t know how expensive the move was. The stadium cost £390 million, with the club contributing £130 million and borrowing the remaining £260 million. That is where my expertise comes in.
I work in real estate finance; my company provides loans to clients to help them buy properties and improve them. While I am not actively involved in construction lending like the Emirates Stadium, the principles are very similar. What most people don’t know is that the lender in this case has huge authority to compel the club to repay the loans. While the laws in the UK are different than those in the USA (where I reside), the basic premise is the same: you have to pay the lender if the funds are available. Arsenal raised the £260 million through a combination of bond offerings and bank loans. Both function fairly similarly: the club receives a large sum of money up front for the promise of paying regular interest, plus paying the initial amount received back (the principal) over a period of time. Assuming the average interest rate on the £260 million of debt the club took on was 10% (not unreasonable at the time) Arsenal would owe £26 million every year to the lender. Now, since these loans were most likely not interest only, Arsenal would also owe a percentage of the principal back to the lenders. Thus, it is easy to see how these loans were responsible for the club having to make £30 million a year in “profit”. While it appeared as net operating income, it failed to actually flow through to the club’s coffers as it went to the lender instead.
The real question then emerges: did Arsenal have to do this? The answer is yes. If Arsenal had decided to spend £30 million on a player during that period and were not able to pay the lender, they would have been in default of the loan. The lender would have had various options, from garnishing Arsenal’s match day revenue (having it flow directly to the lender), or at the worst case foreclosing on the loan and taking over the club (or a portion of it). As we have seen with other clubs taken over by financial institutions (Coventry City) this is disastrous. So, while Arsenal may not have wanted to sell players, they were forced to in order to avoid a more disastrous situation.
So what has changed now? Arsenal still have lots of debt to pay. However, the club has been able to boost revenues thanks to increased media rights deal (the recent TV deal for EPL rights in the USA was exponentially bigger than the previous one) and additional commercial revenue (PUMA kit deal, watchmaker, tailor, etc.). Going forward, Arsenal should be able to keep making debt payments while also making squad investments. Whoever the manager is going forward, they should be thankful to Arsène for ushering the club through this challenging period and leading it to a new era of financial freedom and prosperity.
Calvin Masterson is an Arsenal fan living in Atlanta, GA. A fan of the Gunners since 2008, he has never seen them win a trophy, but expects the drought to end soon. He is a fan of outlandish rumors, John Terry falling over, and late winners.
Incredibly succinctly put, Calvin. It’s certainly something many don’t know or choose to ignore and explains the £70m kitty rumours from last summer when others were claiming there was £100m to spend – £30m of that may have been earmarked for stadium debt.
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