Cardiff and Hull breach UEFA's FFP Break Even rules

Cardiff City and Hull City both appear to have breached UEFA’s Break Even Requirement; should either qualify for European competition (eg via the FA Cup in 2013) it is quite possible that they wouldn't be permitted to compete in the Europa League next season.

When people talk of UEFA's Break Even Requirement, they often think only covers overspending (i.e. spending over 45m euros over 2011/12 and 2012/13 seasons). However both clubs have fallen foul of a stipulation in the FFP ‘Break-Even’ rules that requires club owners to inject funds (equity) to cover losses made during the 2011/2 and 2012/13 season. Records lodged at Companies House show that neither club has made the required injection of funds.

The following graphic explains the UEFA timeframe in respect of the Break Even seasons and the equity requirement:

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Premier League clubs apply to take part in next season’s UEFA completion during the course of the current season (2013/14) and are essentially assessed based on financial criteria over the two previous seasons. UEFA’s Club Financial Control Body will determine whether the FFP rules have been met and whether clubs can compete in the 2014/15 competition. The key date for Hull and Cardiff was 31 Dec 2013 – this was the deadline for club owners to inject equity to cover losses made in 2011/12 and 2012/13.

UEFA has issued a Toolkit which gives examples ‘requirement breach’ scenarios. Scenario 4 (on page 90) is the one that applies to Hull and Cardiff:

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Under the FFP rules, total losses made during the 2011/12 & 2012/13 seasons combined had to be kept below 5m euros (£4.1m) unless the owner injected equity (i.e. hard cash) to cover the loss. Where the owner injected equity, clubs could record total losses after exclusions* of up to 45m euros. The issue for both clubs is that their accounts make it clear that they exceeded the 5m euro loss but have not injected the equity.

The requirement to inject equity into the club was created by UEFA to ensure that club debts cannot grow significantly. Cardiff and Hull’s owners were required to put their hand in their pocket and pay cash into the club, rather than simply extending their loans to the club. Club owners have been historically reluctant to put hard cash into their clubs - generally they have much preferred to grow the club debts. Essentially the owners can only get equity back when they either sell the club, or if the club makes a profit and they are paid a dividend.

Changes in club’s equity must be registered within 14 day at Companies House (via form SH1). Although other Premier League clubs that had made losses above 5m euros have injected equity, no such increase in share capital has been registered for Hull or Cardiff prior to this deadline.

The following table outlines the losses reported by the clubs and the equity that the owner should have put into the club by the end of 2013 deadline:

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Although UEFA have intimated that it might initially be lenient with overspending clubs, Cardiff and Hull's situation is rather different. Whereas the owners of Manchester City and PSG prevent debt from increasing by injecting equity to effectively pay-off any losses, UEFA pronouncements make it clear that they take an extremely dim view of clubs that simply increase their debt. UEFA sees debt reduction is the key target used to monitor the progress and success of the FFP rules. It seems inconceivable that UEFA would permit a club which fails the equity requirement and has appreciably increasing debts to compete in their competitions.

Any clubs that breach any aspect of the Break Even requirement have until the end of March 2014 to supply additional projections for the 2013/14 seasons – however in Cardiff and Hull’s case this appears largely academic as they missed UEFA’s key deadline. Although it is possible that the CFCB might be sympathetic if the clubs inject equity before March 2014, UEFA takes deadlines seriously and it is unlikely that they would receive much sympathy.

Hull City's owner recently threatened to 'walk away' from the club if the FA does not approve the name change to Hull Tigers - the club were £72m in debt at the end of 2012/13 season. This illustrates the rationale behind UEFA's hard-line approach on club debts - if the owner allows the debts to grow, the club is left in a perilous position and it only takes a change in fortune or owner desire for the club to potentially collapse.

Perhaps the biggest issue here is one of transparency. Many will feel that the fans should be made aware of the position before they decide to buy their tickets for their FA Cup games. It is interesting to wonder at what point the fans, managers and players would be made aware of the issue by the club. The Premier League don’t currently get involved in whether a club meets UEFAs equity injection requirements (although this will change from next season following the new Premier League spending constraint rules). Consequently clubs have historically been able to grow their debts with little challenge. The Premier League is a members’ club and has left it to their individual member clubs to communicate with supporters (or not) as they see fit.

This coming weekend's FA Cup ties includes Southend v Hull, and Bolton v Cardiff. Rather unusually, this second tie pairs two clubs that have both failed the UEFA’s Negative Equity criteria (Bolton are currently £163m in debt and would almost certainly fail UEFA’s Break Even test as well). A scenario where neither side in an FA Cup tie would be allowed into the Europa League if they were to win the Cup possibly hasn’t happened for 25 years (when English clubs were banned from UEFA competitions)

This position must be both embarrassing and frustrating for the Premier League. Last January a rather damning Parliamentary Select Committee report was issued which threatened government intervention if measures were not taken to make football clubs more financially sustainable (link - pages 25 to 30 are particularly interesting in the context of this article). The Premier League responded with some well thought-out Financial Constraint rules. However, 12 months on from the report, it appears that 10% of the Premier League's clubs have failed to meet UEFA's equity requirement; the two rogue clubs are a total of £190m in debt (Cardiff £118m, Hull £72m) and one owner is threatening to walk away from the club. For all their good intentions, the Premier League's plans to demonstrate it grasped the 'sustainability' imperative must have been severely dented.

Note: I have given both clubs opportunity to respond to enquiries about this issue but they have declined to comment. I will be more than happy to correct any aspect of this article if it proves incorrect. It is also possible, I suppose, that one or both have fundamentally restructured their club and holding company and injected equity into a holding company – however if that was the case we would have expected Companies House records to reflect this (and I would have expected the club to respond to my enquiries to this effect).

*Clubs are able to exclude youth development and community costs plus depreciation on fixed assets from this calculation

http://www.financialfairplay.co.uk/latest-news/cardiff-and-hull-breach-uefa-s-ffp-break-even-rules

 

Winning the FA Cup, then getting blocked from entering the Europa League would probably be a decent outcome.