CARDIFF CITY'S KEITH MORGAN EXPLAINS CARDIFF'S LOSSES

Trust chairman gives his verdict on Cardiff City’s finances Keith Morgan


Tuesday March 7, 2017




By Keith Morgan


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

CARDIFF CITY FOOTBALL CLUB (HOLDINGS) LIMITED

COMMENTARY ON THE AUDITED ACCOUNTS FOR THE YEAR

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)

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.
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).
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.
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.
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.
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.
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




Trust chairman gives his verdict on Cardiff City’s finances Keith Morgan

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Mate,who are this?




There is a note that the club was advanced £7.3m from Tormen Finance Inc. – a company which has a common director with the club – at an interest rate of 8% on top of an existing £8.8m taking the figure to £13.5m.

Mate,who are this?




There is a note that the club was advanced £7.3m from Tormen Finance Inc. – a company which has a common director with the club – at an interest rate of 8% on top of an existing £8.8m taking the figure to £13.5m.

Its Mehmet Dalman

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).

Basically it's premier league or bust

Basically it's premier league or bust

Or further cost cutting , particularly the players` wage bill , plus further financial support from the owner.

Value of our squad only £4.8m?

Zahore is worth more than that on his own but when the accounts were done he was worth probably diddly squat.

I appreciate player value is affected substantially by length of contract; what players are nearing end of contracts? Kadeem Harris if he resigns is going to be worth 7 figures I reckon. Gunnersson is worth £2-3m in today's market. Ralls also over £1m.

Value of our squad only £4.8m?

Zahore is worth more than that on his own but when the accounts were done he was worth probably diddly squat.

I appreciate player value is affected substantially by length of contract; what players are nearing end of contracts? Kadeem Harris if he resigns is going to be worth 7 figures I reckon. Gunnersson is worth £2-3m in today's market. Ralls also over £1m.

I would think the current market value of the current players who were also here at 31 May 2016 is far in excess of the figure of £4.8m in the balance sheet at that date. I don`t have access to an analysis of which players made up which part of that £4.8m total valuation.
During this current season the club will have made a big profit on the sale of David Marshall.

The wage bill cant be reduced while still strengthening. Whitts and Manga to of the highest earners gone instantly. Most or all of them out on loan can find new homes if we can get a buyer for them.

The wage bill cant be reduced while still strengthening. Whitts and Manga to of the highest earners gone instantly. Most or all of them out on loan can find new homes if we can get a buyer for them.

Did you mean that the wage bill CAN be reduced while still strengthening the squad (a view with which I happen to agree)?

Unfortunately I don't think some of the players have any value at all in the accounts even though their market value may run into millions.

I may not be completely correct but as I understand the players are valued at the cost to us e.g. transfer fees and possibly signing on fees. This cost is then written off over the life of the players contract. So if we paid £1.5 million for a player and he had a contract of three years, we would write off £500,000 a year. If that player was at end of the first year of the contact he would be worth £1 million.

So players like Ralls, Harris and Zahore will have little or no value in the accounts as we paid nothing or very little for them. Similarly, Gunnarson as he has been with us for approx 5 years and his cost was probably written off a few years ago.

The wage bill cant be reduced while still strengthening. Whitts and Manga to of the highest earners gone instantly. Most or all of them out on loan can find new homes if we can get a buyer for them.

Did you mean that the wage bill CAN be reduced while still strengthening the squad (a view with which I happen to agree)?

opppss yeah I meant Can*.

Unfortunately I don't think some of the players have any value at all in the accounts even though their market value may run into millions.

I may not be completely correct but as I understand the players are valued at the cost to us e.g. transfer fees and possibly signing on fees. This cost is then written off over the life of the players contract. So if we paid £1.5 million for a player and he had a contract of three years, we would write off £500,000 a year. If that player was at end of the first year of the contact he would be worth £1 million.

So players like Ralls, Harris and Zahore will have little or no value in the accounts as we paid nothing or very little for them. Similarly, Gunnarson as he has been with us for approx 5 years and his cost was probably written off a few years ago.

You are correct about how player values are calculated in the accounts. However, I regard it as fortunate rather than unfortunate that they had little accounting value at the end of May last year as it means a greater profit in the accounts on their future sale , and also reduces the risk of a loss on sale.

As a rule of thumb over the most recent 3 year cycle we have lost £8.2m (2014), made a profit of £3.1m (2015) and lost £8.7m (2016). That makes a total loss of £13.8m over the cycle.

From what I understand a club can 'lose' up to £39m over that cycle. Therefore using my clumsy logic wouldn't that mean we could have some wriggle room of £25.2m if VT wanted to throw the kitchen sink at it?

I wouldn't expect that but it would seem that NW's request for £6/7m is not out of the question.

Trust chairman gives his verdict on Cardiff City’s finances Keith Morgan

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).

Keith Morgan, Chair, Cardiff City Supporters’ Trust

Trust chairman gives his verdict on Cardiff City’s finances Keith Morgan

Echo's of Langston Mark II?

Trust chairman gives his verdict on Cardiff City’s finances Keith Morgan

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).

Keith Morgan, Chair, Cardiff City Supporters’ Trust

Trust chairman gives his verdict on Cardiff City’s finances Keith Morgan

Echo's of Langston Mark II?

Hmmmmm?


Tony and with interest at its all time low, a whopping 8%

As a rule of thumb over the most recent 3 year cycle we have lost £8.2m (2014), made a profit of £3.1m (2015) and lost £8.7m (2016). That makes a total loss of £13.8m over the cycle.

From what I understand a club can 'lose' up to £39m over that cycle. Therefore using my clumsy logic wouldn't that mean we could have some wriggle room of £25.2m if VT wanted to throw the kitchen sink at it?

I wouldn't expect that but it would seem that NW's request for £6/7m is not out of the question.

The loss was £12.0m in 2014, £9.1m in 2015 (the recorded profit of £3.9m less the "disallowed" credit of £13m for technical reasons not fully explained by the League), then £8.7m in 2016. That makes a total of £29.8m. £13m a year on average is the allowable loss only if £8m of it is funded by new money put in by the owners of a club. Writing off debt or converting it to shares doesn`t count - it is only new actual cash injected .

Trust chairman gives his verdict on Cardiff City’s finances Keith Morgan

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).

Keith Morgan, Chair, Cardiff City Supporters’ Trust

Trust chairman gives his verdict on Cardiff City’s finances Keith Morgan

Echo's of Langston Mark II?

all clubs borrow money, what was odd about the Langston debt was nobody knew who or what Langston was?

Ahhh remember when we owed Sam about 15m lol

Ahhh remember when we owed Sam about 15m lol

Don't be daft we owed no one any money ? Except tan of course!!

Ahhh remember when we owed Sam about 15m lol

Rather owe 100m to Tan trying to reduce the debt than 15m to Sam taking us to court to wind us up.

Here's hoping Bellamy works some magic with our kids, as we might be needing to call on them in a couple years!

Anyhoo, presumably the club are happy with their numbers given they've agreed to give Warnock more money this summer?

I don't think there's much that surprises anyone there tbh

Those accounts a year behind in theory and I personally expected a loss and it's why when some say I'm a realist wangling Warnock 6m next season is not a foregone conclusion as the money is simply not there

Will be interesting to see the 2016/2017 accounts next year as we have offloaded a lot more players since then but once again low attendances etc will see reduced income streams maybe slightly more from player sales but nothing major

I suppose the only saving grace as mentioned is that the bulk f the debt is owed to one man lets hope he sees his promise through although even then based on total liabilities we wouldn't be totally debt free based on current figures