Was FFP the reason for high-profile 'Loan&Buy' deals this transfer window?

September 3, 2014

During the Summer 2014 Transfer Window we saw a number of deals where a player was loaned for 12 months, with the option to buy at the end of the loan. There were a number of reports that FFP was the reason for this type of transaction and it is worth exploring the issue.

There are a number of reasons why clubs might want to enter into a 'Loan&Buy' deal:

To get round a spending cap

Under the UEFA FFP sanctions, Man City and PSG were give a net player spending restriction (in addition to other sanctions imposed). One way to possibly work round the sanction might have been to sign a player on loan with an option to buy at a later date - this approach was reportedly considered by PSG for Di Maria. However despite the player's apparent desire to join PSG, the deal didn't take place. We can only speculate about UEFA's reaction if PSG had decided to test their resolve and conclude such a deal.

To manage the timing of Profit/Loss for the 'selling' club 

When a club sells a player,  it will account for any profit or loss (i.e. compared to a  player's book value) in the accounts for the year in which the sale transaction takes place. It doesn't matter when the funds for the player are actually received - the Profit and Loss Account (and FFP Break Even calculation) will record the profit or loss during one account period only.  Under UEFA rules, the Break Even Deficit is measured for FFP compliance on a rolling basis over three seasons and having one season with a large deficit or profit may be undesirable. Any loss-making season would need to be included in three seasons of FFP calculations it is generally going to be beneficial to spread any hit over a couple of seasons. A club might also have known revenue changes in a future season (such as a new sponsorship deal or a new TV deal) and wish to control the year in which the profit or loss from a player sale lands in the accounts.

When Monaco originally signed Falcao in 2013 on a 5 year deal for around £50m, they will have planed to account for the purchase as an 'amortised' expense in their P&L (and FFP calculation) of £10m for each of the five consecutive years of the player's contract. As at Aug 2014, Falcao will be on Monaco's books with a book value of around £40m. If Man Utd take up the option to purchase Falcao next year for £50m, his book value will be £30m and Monaco will report a 'profit on player trading' of £20m. Given that Monaco are likely to be facing some FFP sanction next season, this £20m 'profit' might be more useful to the club than a £10m 'profit' if they had sold the player this season.

It is worth pointing out that when a club sells a player for a large fee, it won't usually receive the cash in a lump sum in year one.  Selling clubs will often get 30-50% of a transfer fee in the first year, with the rest usually paid over two following years (eg 44% in y1, 28% in y2, 28% in y3). Selling clubs will sometimes arrange external financing and engage (and pay) an external 'factoring' company so it can receive the full transaction value in year 1.

To manage the timing of the purchase for the 'buying' club

Many of the issues outlined above for the selling club also apply for the buying club. However there are a few additional factors to consider. A loan fee is usually paid to the club that holds the player's contract - this is very often broadly equivalent to the annual amortisation charge for the player (eg approx £10m for Falcao). In addition the loanees wages will usually be paid by the club that the player joins. Depending on the circumstances a minimal loan fee is sometimes paid (eg where a club wants to get the player's wages off their books, such as when Andy Carroll joined West Ham on loan from Liverpool). Also, it is fairly common for lower-ranking clubs not to cover the full wages of a high wage-earning player (eg when Wayne Bridge was loaned from Man City to Brighton).  However, where a full loan fee is paid and the wages are paid in full, there would be no financial FFP benefit in year one for either club in undertaking a Loan&Buy option. However the option does give a club a chance to look at a player and consider if it really wants to pay a large transfer fee - this might be beneficial to both clubs (and also the play if he carries some baggage or injury worries).

Although there might be no pure financial FFP benefit in year one, the Loan&Buy option does provide the buying and selling clubs
 to manage their cash-flow in line with known future events. Man Utd spent a net £122m during the Summer 2014 window and will have a had to pay out around £54m in hard cash (assuming the club pays around 44% up-front).  By taking Falcao on a Loan&Buy option the club will have avoided having to hand over another £22m (£50m x 44%).  Whether this matters to Manchester United is unclear - however it might have been an issue for some clubs.  Manchester United have a huge sponsorship deal that commences during 2015/16 and deferring the pay-out for Falcao might well make sense from a cash flow perspective.  Many clubs in the Premier League (inc Southampton and QPR) have previously mortgaged their TV revenue as a way to ensure they can sign players and manage their cash flow - potentially a Loan&Buy option might remove the need to do this.

Readers might identify other reasons for the Loan&Buy option and it does seem that the FFP benefits of avoiding a large loss-making season and to ensuring that large profits land at a convenient time for the club has added to the prevalence of this kind of deal. However, other than the potential PSG case (which didn't materialise), it doesn't seem likely that this type of deal is any kind of 'trick' to beat FFP. All costs need to be incurred in full and at best it provides a way to better manage the timing of expenditure and receipts. Having said that....

Falcao's wages and the Premier League's FFP Spending Constraint rules
As we know, Falcao's wages at Monaco are not subject to income tax - however it  is unclear how the mechanics of the Man Utd deal are going to ensure that the player so he does suffer a reduction in his take-home pay. At Man Utd, Falcao will now be liable to UK tax and Man Utd would have to pay the player around £18m a year gross to match the take-home pay he receives at
Monaco. The Manchester club insist he is not being paid that kind of money, so, unless the player is taking a significant wage-cut, it would seem that Monaco are paying the difference. However, this also seems somewhat unlikely as Monaco would be effectively be paying around £9m back to the player (effectively all of the loan fee).  

It is also unclear what kind of dealFalcao will be offered next year - he is currently only one year into a 5 year deal at Monaco and it is difficult to understand why he should effectively want to half his wages.  Under the Premier League's Spending Constraint rules, clubs are not able to raise their total wage bill by more than £4m a season unless it is matched by an increased in commercial income ("own revenue uplift"). Manchester United appear to be fairly close to that ceiling for 2014/15 largely due to a drop in Champions League income) and it may be that paying £18m wages would have actually pushed the club over the threshold. However by paying 'only' £9m wages (with potentially another £9m paid for by Monaco) the club may have have restricted their wage bill (in an arguably artificial manner). The mechanics of the Falcao deal are not yet in the public domain but it is possible that other clubs might cry 'foul' if it transpires that the club have found a way to exceed the Premier League's spending constraint rules.


Championship FFP rules ‘undermined’ by Premier League

May 26, 2014

Last week, the Championship clubs voted on a number of potential changes to the existing FFP rules. However, as none of the tabled amendments could muster the required 75% of the vote, the rules will remain as they are.  Huddersfield issued an excellent summary of the proposed changes and outlined their disappointment that ‘real-time’ monitoring of finances was not approved.

Under the current rules a ‘Fair Play Tax’ is levied on all clubs that gain promotion to the Premier  League but ...

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Reports of record €60m (£49m) fine for PSG and Man City

May 6, 2014

Following recent press reports, we now have a much better idea about the sanctions that are reportedly being offered to Manchester City and PSG. It is now up to the clubs to decide whether to accept the terms or risk a potentially more severe punishment. The punishment reported in the press raises a number of interesting questions:

Why is City’s fine so large?

When City filed their accounts, on the face of it they looked to have nominally passed the FFP Break Even test (after permitted exclus...

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Man City failure of FFP test - a matter of choice

April 30, 2014

So, now we know that Man City (and PSG) failed the FFP Break Even test. However, this was no accident. Man City didn't fail the test because of an oversight - they failed because they chose to fail. The following analogy is helpful: 

I recently handed my son £5 to buy some sweets, telling him to spend no more than £1. Inevitably, he came back with quite a lot of sweets having spent about the £1.50. He didn't exceed the budget because he wasn't able to count - he just evaluated the pros and ...

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The Benefactor Model - permitted in League 1 and 2

April 23, 2014

The Football League has clarified an important aspect of how their FFP rules operate within League and League 2. Interestingly, the FL have confirmed that their Salary Cost Management Protocol (SCMP) rules permit 'benefactor' owners to finance a club's ongoing losses (something that is restricted within UEFA, the Premier League and Championship rules). 

The League 1 and League 2 rules require clubs to submit regular financial forecasts to the Football League. Only if a club is operating within...

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Would Hull City be allowed into the Europa League next season?

March 9, 2014

 Following today’s FA Cup semi-final draw, supporters of Hull and Sheffield United must feel there is every chance that they could secure a Europa League place next season. This could be achieved either by getting through to the final and beating Wigan, or simply by getting through to a final against Arsenal. Unlike the League Cup, the losing FA Cup Finalist will be rewarded with a Europa League place if the winners have already qualified for UEFA competition.  Arsenal would need to finish ...

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Will Liverpool face any FFP punishment?

March 6, 2014

Since Tuesday's release of Liverpool’s annual accounts for last season (2012/13), fans have been asking whether they will receive a punishment for breaching the Break Even rules.  Unfortunately the FFP rules aren’t straight-forward and it is only when you produce a projection of this season’s finances that you can see how the land lies.

As I advised a couple of days ago, Liverpool will be assessed for FFP compliance over three footballing seasons - they will be able to compete in the Cha...

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Liverpool’s accounts raise interesing question of ‘fairness’ of FFP

March 4, 2014

Last Friday UEFA held an FFP update in Nyon which provided some excellent information about the current process – however it also gave rise to a number of interesting questions.

UEFA explained that the teams that potentially faced punished for an overspend during the first Monitoring Period are those professional teams that qualified for UEFA competition in 2012/13 and had a Break Even deficit in the 2011/12 season. Although the Monitoring Period looks at accounting performance over two seas...

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UEFA Financial Fair Play update – Nyon 28 Feb 2014

March 2, 2014

On Friday UEFA held an FFP press briefing in Nyon. The 2 hour session provided number of interesting updates - only a few of which have been reported in the British press.

76 clubs referred for Break Even Deficit

As has been widely reported, 76 clubs were required to provide additional financial information to UEFA. Some media outlets probably not at the session seemed to sensationalise what UEFA were saying in respect to the 76. Essentially the 76 clubs are those that met all the following cri...

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Manchester United unable to spend their way out of trouble

February 12, 2014

In December Martyn Ziegler wrote an interesting piece outlining the financial implications for Manchester United if they don’t secure a Champions League place at the end of the current 2013/14 season. As Ziegler pointed out, the club’s CL income will be reduced next season by around £35m, with the club missing out on a further £10m in gate-receipts. 

Given this probable fall in income, it is interesting to overlay the new Premier League spending constraints and see what impact this fairl...

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