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Finance options we shouldn’t take

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Happy Saturday people. There are some rumours doing the rounds on the internet that Raul is exploring player financing options via a special fund that was started off the back of a super-agent transfer back in the day. The fund in question is called 23 Capital. They help clients in music, entertainment, and sport gain access to liquidity. This is from their website.

Our capital and solutions capabilities encompass straightforward advances through to more complex, off balance sheet structures. We offer artists, entertainers and professional sports teams the freedom to create, inspire and compete supported by finance that is flexible and most importantly fair.

If you are out of a job right now and struggling to make ends meet, you might find this sort of copy on a payday loans website. The operation looks opaque and it’s quite complicated to explain, but here’s The Guardian making sense of it through the lens of a deal for Silva.

A few days after confirmation of Silva’s move XXIII Capital began trading. Companies House showed a registration of charge document was filed on 11 September 2014 for an unspecified amount. The company was listed as being controlled by the Candlewood Investment Group, based in New York but registered in the tax haven of the Cayman Islands.

So what does all this have to do with Bernardo Silva? His move to Monaco was made permanent in January 2015 for €15.75m but it would be another year before the story became clearer. In January 2016 the Football Leaks website published three documents which revealed details of the transactions between Benfica and Monaco.

The first two concerned the agreement for Silva’s loan and permanent move and the third – dated 10 July 2015 – shows the mandate for the first instalment of the transfer fee: €5.25m. What seemed unusual, however, was that while Monaco were listed as the liable party it was XXIII Capital who were due to receive the funds rather than Benfica.

Other documents later explained that XXIII Capital had purchased the credit from the Portuguese club, a method employed for numerous other transfers in that period, including that of the midfielder Giannelli Imbula’s move to Porto from Marseille in 2015.

Benfica described their actions as “a normal financial operation”, although there was no mention of XXIII Capital in their annual financial report in 2015. That states the profit from the sale of Silva was €12.855m, meaning almost €3m appears to have gone elsewhere.

Given the lack of official documentation it is difficult to know exactly how that money has been distributed. It is likely that at least 10% of the total fee would have been allocated to Gestifute for its brokering services; records state Mendes’ company received €3.995m from Benfica that final year, which also included the transfer of João Cancelo to Valencia for €15m. The question remains how much was paid to XXIII Capital in exchange for the acquisition of the credit, with potentially €1.3m not accounted for from the €15.75m total loaned in three instalments – an amount that corresponds to 9%

The firm, run by a Brit (Spurs fan) and an Aussie, has gained ‘credibility’ for brokering the deals for Griezmann and João Félix. The reason Barcelona used them is because they couldn’t gain credit through normal channels… but again, read this and tell me it doesn’t sound like they’re solving a problem that is there for a reason.

“All clubs will absolutely have the same need and challenge around the fact that their intangible assets, the players, suck up all their liquidity,”

“If you think around the principles of a transfer, you have the selling club who want the money up front, and why not, and you have a buying club who for a whole range of reasons want to defer the payment. We often get involved and can say: ‘We can solve both your needs, help one have their money up front and help the other defer over five years.’ All you need to negotiate is the cost of the finance.”

This looks very much like short-termism that has been allowed to flourish (in normal times) because football clubs are not run like proper businesses. This from football finance expert Kieran Maguire, of the University of Liverpool, sums up why the game is so ripe for this sort of service.

“They have realised that the transfer market and the club transaction market is unregulated, often unprofessional and contains people who see football as an opportunity for an easy profit. If anyone can then come in and run a professional service and effectively provide a one-stop shop, then there is a gap in the market,”

“A boutique operation, and that is what they are, don’t have to go through so many layers of approval, don’t have to go through governance rules you may see at JP Morgan, where a bank of that nature is very risk concerned and will have a compliance department, which to a certain extent is the tail wagging the dog in corporate lending.”

I’ve just finished a book called Den of Thieves that tracks the career of Michael Milken and his rise to prominence in the 80s as the ‘King of Junk Bonds.’ To be clear, I’m not drawing comparisons to the man and the illegal acts he committed, but what does draw parallels with junk bond marketing and this is the ‘this is good for everyone’ vibes that you pick up when you read the press around these transfer fee services. Selling club gets the cash, the buying club gets long payment terms, agents get fees, the finance firm gets fees… everyone is a winner, right?

We are about to find out.

The junk bond market in the eighties gave small companies with limited assets access to the credit they needed to buy huge companies in hostile takeovers. Everyone looked like a winner. Then it all came crashing down, because in the end, someone had to pay the bill when firms were crushed by the weight of interest payments they eventually defaulted on.

Giving football clubs access to the capital they can’t get through normal channels could prove to be problematic. Barca’s £100m purchase of Griezmann; that they couldn’t afford, now looks an unmitigated disaster because the exponential growth of the transfer market has come crashing down along with major revenues streams. In response, most normal clubs have reduced wages by 20%. Barca savaged them by 75% to stave off problems (so did Atletico). The question is, how bad are their financial issues? What we know for sure is they’ll never recoup that Griezmann money if they need it, the transfer market has gone to shit for at least 3 years, but Barca are still left footing a bill for the player and the fees they had to go outside the system to get.

In normal times, no problem, but now? There could be trouble. The reason the Spanish banks wouldn’t lend is because Barca borrowed £500m for their new stadium. To put their financial exposure into perspective, they turned over almost a billion euro (€990 million) in revenue last year and only made £17m in profit. That’s a 1.7% profit margin in the GOOD times. Razor-thin margins like that mean you have little room for bumps in the road, well, that bump in the road has arrived and it’s a meteor landing on the M25 during rush hour.

There aren’t many people that are serious about risk assessment when it comes to finances. We’re optimistic by nature and short-term needs usually override rational decision making, which is why we make dumb decisions. So when someone offers you ‘fair terms’ you sign them. Did all the poor suckers that took WONGA loans worry about terms in the fine print? No. They needed the money and likely didn’t think about the worst case. What they didn’t realise is that no one gives out loans to customers with shit credit ratings without fail-safes and fat profits for the risk. The terms are always weighted to make money, otherwise, there would be no point.

Football is the wild west. It’s a naive industry that has been savaged by vultures. Super agents taking disgraceful fees, rampant back-channel dealing, transfer fee manipulation, and middlemen sucking the life out of the game. It’s all there. It’s barely disguised. Fans just let the party roll on, as long as there are superstars on the pitch. There will be a day of reckoning though. It’s out of control and I suspect we’ll start to see some of that happen over the next year or so as over-leveraged clubs start to make big financial decisions on who does and does not get paid.

Back to my point. I have no idea if Raul is interested in utilizing this sort of fund for transfers. A random twitter account saying they know stuff they don’t is an annual thing Arsenal fans foolishly engage with. What I will say is that it wouldn’t shock me that it’s being suggested. We hired Unai Emery because an agent recommended him when all data and anecdotal evidence pointed to him being a bad pick, we have football leadership that seems susceptible to cajoling by super agents. Borrowing next seasons transfer budget to make the Champions League was a gamble we took last season that will likely fail, but at least it’s money we knew we have. Doubling down on that gamble, but with an outside financier would be reckless, especially in a climate where the natural appreciation of player value has stopped.

These deals and financing offerings only work for the people making monster fees off the back of them. Junk bonds had a day of reckoning, people lost jobs, healthy companies disappeared… but you know who didn’t suffer? The people making the fees off the back of them. Beware the financiers with the ‘too good to be true’ products. There is always a catch and it rarely benefits the consumer (fan).

Arsenal might not have money. We might be struggling with cashflow. It might be a tough couple of years. What we don’t need is a ‘fair’ loan from a company registered in the Cayman Islands. We have a billionaire that runs Arsenal. He has $10b worth of wealth and he could access liquidity in a heartbeat. He’s already come out of this covid nightmare £300m richer. If we need to borrow money at fair rates, let’s go through the normal channels.

See you in the comments.

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