Trust chair gives his verdict on Cardiff City’s finances

Keith Morgan

Keith Morgan

Football finance expert Keith Morgan, who chairs the Trust, gives his views on Cardiff City’s latest financial accounts



ENDED 31 MAY 2016

There are a few key issues which need to be brought to the attention of readers of the accounts which I will deal with later in this commentary but I will firstly concentrate on a summary of the financial results they reveal.

My commentary is based upon an analysis of the accounts, discussions as to their content with the club`s financial senior management and face to face discussions with the club’sChair Mehmet Dalman and its CEO Ken Choo.

The views expressed in this commentary are my own personal , independent and impartial views.

Overall summary

1) CCFCH made a loss in the year to 31 May 2016 but the level of losses meant that the club was compliant with Financial Fair Play Regulations.

2) A loan write off of £10m by the owner , and a cash injection from him of £7m, plus a further cash injection by Tormen Finance of £7.3m and financial assistance by WMG Funds greatly helped the club`s financial position in the year.

3) A major cost cutting exercise was necessary during the year to try and balance out the club`s drop in income compared to the previous season , and this is likely to have to be repeated in the current season , plus further into the future., particularly when “parachute payment” receipts end in June 2018.

Summary of results for the year

The company (referred to as CCFCH or the club for the purposes of this commentary) made a net loss of £8.7m in the year to 31 May 2016. This compares to a reported net profit of £3.9m in the previous year. An analysis of the main elements causing this deterioration of£12.6m in results is set out below:

£m Note

Reduction in income (7.1) 1

Reduction in cost of sales 9.2 2

Reduction in Admin. expenses 7.5 3

Reduction in “exceptional income” (1.6) 4

Reduction in player sale profits (7.2) 5

Reduction in finance income (12.6) 6

Increase in finance costs (0.8) 7

Total deterioration in results (12.6)

  1. The club`s income fell by £7.1m from the previous season , across all areas of income. Match day income fell by £1.5m to £4.2m (ave. attendances fell from 21,147 to 16,427), central broadcasting income (largely the “parachute” payments) fell by £3.6m to £24.9m, and other commercial income fell by £2.0m to £4.1m.
  1. To help compensate for the fall in income, CCSTH management had to try and reduce costs, including wage costs. Of the total reduction of £9.2m in the cost of sales, £6.6m related to wage cost savings (£5.4m re playing staff and £1.2m re other staff).
  1. Efforts were also made to reduce administration costs. Of the total of £7.5m achieved, £6.5m resulted from lower player depreciation and impairment costs.(Player signing costs are written off over their contract period as depreciation and if this is deemed not to be enough to write down their cost to their likely realisable sales value, there is a further charge made called an impairment provision).This was also a reflection of the benefits of the ongoing work to reduce the cost of the playing squad.
  1. The fall in “exceptional” income is caused by a few factors. Firstly, the amount of debt write off by Vincent Tan in the year was considerable at £10m , but down on the previous year when it was £13m. Secondly 2016 benefitted from a £500k rates rebate which wasn`t there in 2015. Thirdly, the costs of removing managers, terminating player contracts etc. was down from £3.1m to £2.2m.It is debateable whether “exceptional” is now an appropriate definition of these change costs as they seem to happen every year at the club. There was also a cost for this of £2.1m in 2013/14.
  1. The club did not make as much profit on the sale of players as it did in season 2014/15. The figure was down from £9.7m to £2.5m.
  1. The fall in finance income is largely due to the non repeat of a one-off benefit of £13.4m which arose in 2014/15 which I commented on at the time and was a technical adjustment (required to comply with accounting standards but apparently not accepted for FFP purposes by the League) to the value of long terms loans in the balance sheet. Instead of this benefit also being available in 2015/16, the equivalent adjustment figure was a net cost of £1.2m, so a net extra cost of £14.6m in the profit and loss account. This was then reduced by a benefit of £750k in the year which was in respect of settling the Langston claim for £5.0m rather than the £5.75m figure being claimed and provided for.
  1. There was an increase in finance costs in the year, largely due to the fact that the loan made by Tormen Finance increased by £7.3m in the year, attracting interest at a rate of 8% pa.

Overall, the club managed to balance out the fall in income by a corresponding reduction in the costs that it could control. Virtually all of the deterioration in the net results by £12.6m was down to the technical accounting treatment of long term loans referred to in note 6 above.

The balance sheet and cash flows

As a result of the losses recorded in the year , the CCFCH net liabilities increased to £67.7m as at 31 May 2016 – £68.4m of assets and £136.1m of liabilities.

The main asset of CCFCH remains the Cardiff City Stadium at a balance sheet value of £52m. Player total value was £4.8m . It was £12m at 31 May 2015. The main liability remains the debt due to Tan Sri Vincent Tan at £100.8m and this is the first of my main areas of concern. Despite a public pledge in February 2016 that this debt would be entirely converted into shares to make the club debt free (£68m “immediately” then £8m a year over 5 years for the balance then owing), the debt is still shown as repayable in full.

In my face to face discussions with the Chair and CEO ,I have been categorically assured that it remains Vincent Tan`s intention to honour the pledge made as soon as the barriers currently preventing a full debt to equity conversion can be removed. In November 2016, the first of the five annual debt to equity conversions of £8m was completed.

Another substantial liability is a debt due to Tormen Finance Limited, in which CCFCH Chair Mehmet Dalman has a major interest. This company has helped CCFCH by lending it money at reasonable interest rates. However, the accounts say that the loans are secured against company assets when no such charge has been registered at Companies House suggesting that, in fact, the debt is unsecured (such charges should be registered within 21 days of their creation).

In addition to the loans made by Tormen in the year, it appears that a further £7m of net cash was introduced by the owner Vincent Tan during the year on top of a further £10m of debt which he wrote off in full (rather than convert to shares) in the year. Hopefully, this will refute the claims of certain fans that the owner is taking money out of the club – the fact is the opposite is true.

Other matters of interest

The accounts were signed off by the directors on 15 December 2016 and by the auditors on 4 January 2017. In my discussions with the club on this point, I have been categorically assured that the submission of the signed financial statements after the usual League deadline of 1 December 2016 was with the prior knowledge and consent of the League . The formal filing of fully signed off accounts with the League was delayed by the need to obtain formal sign off of key documents by the club`s owner and subsequent approval by the club`s board and auditors.

A second major query and initial concern is a payment of £970k in the year (£1.2m was also paid in 2014/15 but not disclosed at the time as it should have been) to WMG Funds Limited in what is a related party transaction. My initial research showed that WMG Funds Limited is a company in which Mehmet Dalman was a director until June 2015. My direct discussions with Mehmet confirm his interest in WMG and that the payments to WMG were in respect of services provided by WMG in contracting with and settlement of third party liabilities onbehalf of the club in the normal course of club business.

Current season and future financial prospects

Like all fans of the club, I wish that it was financially strong and able to spend lots of money on a load of quality players to improve the playing squad. The financial reality is however totally different.

For the current season 2016/17 just to break even financially the club will have to improve results by £8m compared to 2015/16. And this is against a background of further falls in income across the board. The club is in its third year of “parachute payment” receipts, which will therefore be lower than in 2015/16. Attendances are not likely to have risen much to compensate from the average of 16,427 last season, nor have other sponsorship or commercial income levels.

Further cost cutting has therefore been crucial during the current season and unless income levels somehow increase considerably, will also be necessary next season. The bigger problem arises from season 2018/19 onwards when “parachute” receipts will have ceased altogether.

Some areas where cost reductions may be feasible this season compared to last are as follow:

1) The release of players from the squad, reducing the wage bill.

2) Profit on sale of players (e.g David Marshall) this season will be higher than last year`s figure of £2.5m

3) The club has spent very little on player transfer fees this season (in 2015/16 it spent £2.4m ) and the year end value of the entire playing squad was only £4.8m after those additions. As a consequence, the cost in the profit and loss account this season for player amortisation and impairment will be a lot less than the £9.4m cost last season.

Keith Morgan, Chair, Cardiff City Supporters’ Trust