Thursday 30th April 2020

How might COVID-19 affect Arsenal’s financial position?

Recent weeks have seen much discussion about the finances of football and how Arsenal might be affected. The following AST analysis attempts to provide some update and thinking on this. It should be stressed that this is a very uncertain time and that all estimates and assumptions can rapidly change in light of policy changes by both the Government and football authorities such as UEFA and the Premier League.

AST analysis

The following analysis of Arsenal’s financial situation is set out in a simple table format.

The second column (Actual) reports Arsenal’s actual financial performance for the year ending 31 May 2019 from the figures made available on Arsenal.com in December.

The third column (AST – estimate before suspension) for the current financial year 2019-20 before COVID-19 saw the season suspended.

The fourth column is a revised estimate for the current financial year 2019-20 with the assumption that the season is completed Behind Closed Doors (BCD), even if these games are completed after 31 May, which is the financial year end.

The fifth column is an estimate of what season 2020-21 could look like if all matches are played BCD.


£millions    

Year to May 2019

Year to May 2020

Year to May 2020


Year to May 2021

Revenues:

Actual

AST estimate – before suspension

AST BCD estimate

AST BCD estimate

Matchday

96

92

80

0

Broadcast

183

169

169

169

Commercial & Retail

111

146

132

100

Player loans

5

5

5

5

Football revenue

395

412

386

274

Property

1

-

-

-

Total revenue

396

412

386

274

 

 

 

 

 

Costs:





Football costs wages

235

230

227

210

Football costs other

86

86

86

81

Amortisation of squad

91

110

110

110

Depreciation

15

15

15

15

Property & loans

1

-

-


Total costs

428

441

438

416

 

 

 

 

 

Operating loss

(32)

(29)

(52)

(142)

Player sales and JV income share

12

45

45

10

Interest

(12)

(12)

(12)

(12)

Profit / (loss) before tax

(32)

4

(19)

(144)

Matchday revenue was estimated to be £92m for 2019-20, but is reduced to £80m as a result of the club having to refund ticket holders for the final four Premier League games of the season.

This figure also includes refunds (not Cocid-19 related) to season ticket holders for two pre-paid cup credits that will not be used. If 2020-21 is played BCD there will be no matchday revenue.

Broadcast revenue – this is estimated to remain the same at about £169m. There has been a slight uplift in the value of Premier League’s overseas broadcast deals which explains the estimate  being the same despite Arsenal exiting the Europa League in the round of 16 and likely finishing in a lower position in the Premier League than the fifth place in 2018-19. We have assumed the same broadcast revenues in 2021 (with Arsenal qualifying for the Europa League). Broadcasting revenue is an income stream that might be under pressure, with many potential variables including a shortened 2020-21 season and overseas rights holders seeking reductions in payments or being unable to make them.

For Commercial & Retail we have made a working assumption of a reduction of 12.5% in revenue from sponsors as some will seek refunds and deferrals. This is a very hard figure to estimate as it will be reliant on whether Arsenal and their sponsors come to a voluntary agreement on how to share the ‘pain’ of the season’s closing and the extent to which the main sponsorship agreements with Adidas and Emirates have force majeure clauses that the sponsors could invoke. It is now extremely unlikely there will be a summer tour which is an event that particularly benefits the large sponsors.  We would expect a much bigger impact to sponsorship revenue in 2020-21 if the season is played BCD and have estimated a fall in revenues of one third.

Football costs: wages – we’ve reduced our previous estimate of £230m to £227m. We believe that payroll figures for April and May 2020 will drop by about £2.5m in each month as a result of most of the players agreeing to a pay cut of 12.5% and the club’s 14-person senior executive team agreeing to a cut of 30% (for up to 12 months). However, assuming Arsenal qualify for the Europa League, which we have for this analysis, the players will only take a wage cut of 7.5%, with the other 5% added to 2020-21’s salary bill.

Other football costs would be expected to fall by a small amount as a result of having no staging costs for matches at the Emirates and savings from the teams not travelling. We expect that if games are played BCD that there will be additional costs attached to the delivery of a bio-secure environment and so we have left this estimate unchanged overall for this year. In season 2020-21 we allow a reduction in other football costs of £5m to cover reduced operating costs although would anticipate further savings could be made to this cost category.

We estimate a modest £10m in player sales in summer 2020 as we just do not see which clubs in Europe will have large transfer budgets and expect the market to be mainly swaps, free signings and loan deals.

 Cash position

 In an analysis for the AST in February 2020 of this year Simon Hill set out his analysis of Arsenal’s cash position which showed that after the last summer transfer window Arsenal had residual cash reserves of about £69m.


Cash as at 31.5.19

£167m

Debt reserve (service)

£36m

Working capital

£-m

Net player payments due 2019-20

£30m

Tax and debt payments

£9m

One-off factors

£-m

Available Cash

£92m

Net spent – summer 2019

-£23m*

Residual Cash as at 31.5.20

£69m

 *estimated initial cash outlay from a summer net spend of £92.7m (the initial payments that Arsenal had to make on their signings).

Since this analysis was undertaken, we believe that there will be a significant reduction in the residual cash position, for the following reasons:

  • The club will have seen a considerable fall in cash flow due to the suspension of Executive box / Club Level renewals in March and April and Season Ticket renewals in May 2020. These “pre-payments” normally total close to £70m and provide working capital for the non-matchday months of June, July and some of August.
  • As of 31 May, 2020, Arsenal still owe a net £120m on player transfers. An estimate is that £40m of that is due to paid in summer 2020. It is possible some clubs may delay or default on payments they owe to Arsenal and Arsenal themselves may also seek to defer payments.

In summary

The AST estimates that COVID-19 is likely to take Arsenal from a situation where they would have reported a small profit of £4m for this current season to one of recording a loss of £19m. If BCD becomes an issue that affects all of next season then the club could face reporting losses of £144m.

So we can see that the reduction in income from playing BCD for the rest of the season will knock £23m from available cash at the end of the season as will the absence of season ticket renewals (£70m). The combined impact will leave little spare cash this summer, especially if sponsors withhold part of their advance payments for season 2020/21.

Arsenal’s available cash reserves heading into the summer of 2020/21 could be wiped out and a new borrowing requirement of over £50m being required by the end of July if the club is to meet its commitments to pay other clubs instalments due on player transfers and finance wages in June and July. So we certainly don’t predict a big spending transfer window!

Whilst the money set aside as security for the bondholders (who have lent the remaining £170m of stadium related debt) cannot be touched, it is almost inevitable that Arsenal will be drawing on its short term £50m loan facility made available by Barclays.

Arsenal has been owned 100% by KSE since August 2018 and for many years has operated on a “self-sustaining model” of spending only what was earned. As Arsenal have a relatively high matchday income any reduction in this (quite possibly to zero if 2020-21 season is all played BCD) will see expenditure considerably exceed income, meaning one of two things:

  • A significant reduction in costs – most likely player wages
  • Tangible financial support from the owner (loan or new capital)

or a combination of 1) and 2) above.

There has been press speculation about KSE support, ranging from a “massive cash injection” to “underwriting” of the current situation. Underwriting means a commitment to Arsenal’s lenders to stand by the club’s financial position, which is not altogether unexpected as Arsenal is a key trophy asset in Stan Kroenke’s myriad investment portfolio.

When KSE borrowed £500m from Deutsche Bank in August 2018 to buy the 33% of Arsenal it didn’t already own, the guarantor of this loan was Mrs Kroenke, a part of the WalMart dynasty. This calls into question whether Stan’s “underwriting” of the current situation can be done on an unsupported basis.

In reality KSE could inject funds as a loan (to be paid back) or via a permanent increase in capital (issuing new equity). In extremis KSE could look to raise third-party funds by selling say 10% of the club which could raise £150m (Manchester United have a 10% stock listing in the US).

It is also reported that there is to be a relaxation of Financial Fair Play (FFP) rules that would give greater flexibility to owners.

28 April 2020

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