Is Sheffield Wednesday In Financial Distress?

Information on the internet recognising the signs of business organisations in financial distress are ten-a-penny; a simple Google search will lead you to many in seconds. For the purposes of this blog, the eight criteria articulated in this article are utilised to determine if Sheffield Wednesday is in a position of financial jeopardy.

Please note, the information used in this blog is fully in the public domain. There is no insider information.

Let’s look at each sign the article mentions in turn.

1 - Cashflow

Cashflow is key to the survival of a company. A profitable company can fail if it has poor cashflow, but without access to the club’s bank account balances, other indicators have to be used. The recently reported delay in the payment of player wages is a very strong sign that cashflow is an issue. A company always pays the staff wages unless it has serious cashflow issues as the company is reliant on its workforce if it is to continue to operate. It would be easy to just equate this problem with the impact Coronavirus has had on football finances, but the late payment of player wages was first reported in November 2019 prior to lockdown.

Another sign of cashflow issues is the loan taken out by the club (for the purposes of this article we have used the term club here, although the stadium is now owned by Sheffield 3 Ltd, itself owned by Mr Chansiri). This loan secured on Hillsborough stadium is similar to a mortgage, whereby if the amounts are not repaid on time, the club could lose possession of Hillsborough. Taking out a loan to fund short-term cashflow issues is not unusual and is not necessarily a bad thing as long as the debt of £6.4m can be repaid or extended on 30th September 2021. If this cannot be achieved, SWFC face the real prospect of losing ownership of Hillsborough.

There are other indicators of there being cashflow issues at the club. In the January 2021 transfer period, the club did not sign any players (for a transfer fee) despite its perilous league position. Another way a company acts when it has cashflow issues is to reduce or stop maintenance on its equipment as reported in the case of undersoil heating at Hillsborough resulting in the postponement of the match versus Swansea on 13th February due to a frozen pitch.

2 - Falling margins and poor profits

Other than the financially engineered profit in the 18/19 period due to the sale of Hillsborough, the club has not made a profit since 2008, which was due to player sales. These continued losses need to be funded, usually via club owner loans and payments. Not many clubs in the Championship make a profit, however, being continually unprofitable adds more stress to the company and make it more susceptible when there are unforeseen circumstances such as the Covid pandemic.

3 - Poor sales growth or decline in revenues

More recently outside of the club’s control due to lockdown restrictions, attendances and matchday revenue had been declining in the period prior to the recent global health pandemic. Having no fans in Hillsborough for over a year will obviously have had a huge impact on revenues and cash. This will only add pressure to an already unprofitable club.

When fans are allowed back to Hillsborough, the club needs to the look at ways it can attract the fans back to the games to ensure gate receipts improve. The Trust has written some reports which deal with ticketing and pricing, which can be found here, here, and here.

The club need to be innovative in attracting fans back to Hillsborough. As well as having as many fans as possible cheering on the team, the club need to secure its short and medium-term revenue as quickly as possible following the lifting of lockdown restrictions.

4 - Extended payment days

We are not party to whether the club is extending payment terms with its suppliers. However, we do know that the club refuse to either communicate a deadline for when refunds for the 19/20 season will be completed or an update on their progress. This amounts to an unofficial extension of payment terms to avoid cash leaving the company.

The club initially communicated the options for season tickets refunds In June 2020. At the time of writing (March 2021), not all season ticket holders who have requested a refund have yet to receive one.

5 - Defaulting on payments

In similarity with above, delayed player wages and incomplete 19/20 season ticket refunds, amounts to a (albeit possibly temporary) default on payments by SWFC.

6 - Increase in interest payments

As mentioned in the cashflow section, the club has taken a loan out secured on Hillsborough with a company called New Avenue Projects Ltd. This is not unusual in itself. The Registration of Charge paperwork does not specify the interest rate, however, the interest rate for this type of loan is likely to be above the current market rates exacerbating profitability pressures through increased costs. However, the real risk of this transaction is if the payment is not made in September 2021 then the club could lose possession of the stadium which is its biggest asset. This would have massive implications for the club as it would become effectively homeless. This higher risk option would not be taken if there were lower risk alternatives. This gives an indication of how lenders see the risk of the club.

7 - Relationship with the bank

Complete unknown.

8 - Difficulty in raising capital

Mr Chansiri said in his latest press conference on 31st December that “many representatives have come to me. Some ask to buy the club, I don’t have intention to do that unless it is an offer I cannot refuse. If you want to be a shareholder, they must be able to help us.”. It has been reported that former advisor Erik Alonso has made a bid for the club. However, Mr Chansiri has declined to enter into negotiation. With Mr Chansiri not even talking to Erik Alsono, it would indicate that either he does not think the offer is genuine or he has no desire for outside investment. Mr. Chansiri has since stated at the press conference to unveil the appointment of Darren Moore as manager that he had no intention to sell.

Instead, Mr Chansiri has decided to raise capital via debt, which is usually more expensive than via shareholders. See the sections above on the loan secured on Hillsborough

9 - Legal and contractual non-compliance

The club has just released its accounts for the period ending July 2019 and these will be filed with Companies House shortly. These accounts were a large number of months late to be filed with Companies House. This would have led to fines from Companies House and as per the Companies House section of the Government website, is a criminal offence (HM Gov. 2021). Not having current publicly available audited accounts would increase the risk profile of any company with any potential lenders or investors. The perception could be what is the company hiding or why will the auditors not sign off the accounts? The real effect of this is that any raising of capital will become more expensive – see section above on the loan secured on Hillsborough.

Sheffield Wednesday like other football clubs, is not just a company. It is an organisation supported by tens of thousands of fans. Having transparency of how the club is being run, can bring the club and fans closer together. The first step of this is to publish audited, fully detailed accounts showing the financial position of the club. The second is to have open, fully transparent, regular communication with the fans.

10 - Stress in management and employee turnover

Although football management probably has a lower average tenure than most other professions, the club has had four managers already this season. This compares to three managers in the first three and a half years of Mr Chansiri’s reign. Also, an advisor to Mr Chansiri has just left the club citing irreconcilable differences although for balance Mr Chansiri played down the importance of him leaving the club. The club has also seen senior executives leave in the past such as Joe Palmer and Katrien Miere.

11 - Business and market risks

Obviously, the current situation with COVID and not having fans in the ground is putting a huge amount of pressure on revenues and cash. It is still not clear what the impact enforced absence will have on long-term attendances. The biggest risk facing Sheffield Wednesday, a football club whose matchday revenue is a significant proportion of its turnover, and in turn wages are way above turnover (160% in 2018/19) is that the fans don’t return to Hillsborough in the same numbers they were attending prior to Covid. To mitigate this risk, the club need to be innovative in attracting current fans back to Hillsborough, as well as attracting new fans who may have not attended Hillsborough before (see Trust reports above).

It is clear the current COVID situation has put a lot of football clubs in a very serious financial position and Sheffield Wednesday are not the only club to be affected. Although the financial situations of other clubs were not investigated in great depth, the Trust is not aware of many other clubs which have demonstrated the clear evidence of the factors mentioned above.

The Trust calls on the club to have a clear long-term plan to survive the current situation and then to return the club to financial stability and sustainability. The club should demonstrate transparency and share the plan with its supporters. The notion that football is a different industry and leaders can only plan for one year into the future is nonsense.