With all the talk around amortisation, it is easy to forget a key component of transfers – clubs either need to have the cash in the bank of credit / loan facility available to actually pay for the player.
Whilst amortisation allows the cost of transfers to be spread over the length of the players contract within the annual accounts, teams still need to stump on the entire transfer fee upfront. That is, of course, unless they can agree on instalment terms with the selling club. And this is what Arsenal have done with Martin Zubimendi.
Rather than paying the £51 million release clause upfront, Arsenal have agreed a deal in the region of £56 million, spread over a reported 3-years.
That will mean this summer our cash outlay on Zubimendi will be around £19 million. A short-term “saving” of £37 million.
Now some will criticise Arsenal for “overpaying” for Zubimendi and merely “pushing debt down the road”. But there are some important factors to take into account.
Cash balance
Arsenal’s most recent financial results (year ending May 31, 2024) showed a cash balance of £66.8 million.
This is the time of year when our cash balance is at its lowest – almost all costs for the season have been paid for, and the next batch of season ticket money, broadcasting and sponsorship has not yet hit the accounts. However, much of this incoming cash already earmarked for existing costs (next years salary, stadium running costs, existing transfer amortisation costs).
It is easy to say “We can spend £200 million, amortise it over 5-years and it only costs us £40 million”. But whilst this is correct for the accounts, you still need to have the £200 million upfront. And that is a huge chunk of cash to have in the bank.
What about a loan?
Most football clubs have loan or credit facilities that they are allowed to draw down on.
This facility is not like a loan you and me will get, where we need £10k, go to the bank and get given a £10k loan. What clubs have is a loan facility of, say, £100 million. But they do not get given the £100m straight away (like we would in the loan). What they essential get is a line of £100m credit which they can then access as and when they need it.
But that credit is not interest free. And also why use a credit or loan facility if you do not need to?
Often, paying a little bit extra to the selling club can cost less than the interest associated with drawing down on your credit facility.
And likewise, you want to keep a credit facility for “emergencies”. If you can do a deal with the selling club with instalments, you then do not dip into your available facility and still have that available. The next deal you do, the selling club may not wish to do a deal in instalments.
But why would the selling club accept instalments?
It is often asked why selling clubs would sell a player and then receive the money over 3 or 5 years.
Back in 2020, we wrote an article about how clubs may use “factoring” companies to get 100% of the fee paid to them upfront.
The simple version of the article is that the selling club sells the debt to a financing company. The club will usually recieve 5-8% less than the money owed to them, with that margin being the financing companies profit. Therefore the buying club has to pay over the agreed minimum release clause to cover the cost of factoring.
In this case, Real Sociedad would still get their £51m this summer. Arsenal get to spread the deal out over 3 years freeing up cash (and credit facility if reuiqred) to make additional signings, and the factoring company makes a cool £5-6m for servicing the debt.
So when do we expect Zubimendi to be announced? I would either say today or Monday.
Keenos