Real Madrid fiscal health: Pink or pus?

With financial stringency being the vogue in downturn Spanish economy and in European football, it was recently reported that Real Madrid are on the precipice of a massive fiscal collapse should the Spanish club continue to bank on their wanton ‘galactico’ project, as it could derail their long-term ambitions. The analysis went on to suggest that the current fiat held at the club could conclude with the socios (including incumbent president Florentino Perez) losing hold of the club.

A few days ago, renowned Spanish economist Gay de Liebana stated that the size of the fiscal debt incurred by Real Madrid exceeds 500 million euros, which in the long run, would be untenable even for a club as plush as Real Madrid.

Real Madrid have spent over 700 million euros on players in recent times, and are planning to spend another 400 million euros to refurbish their home stadium.

Liebana felt that such massive incurring of debts in these financially tough times could spell doom for the Madrid-based club as there is a liquidity crisis in Spain, which is a part of the acronym PIGS (‘S’ being for Spain here) in the Eurozone who have defaulted in the markets in recent years.

The professor of Universidad of Barcelona explained that despite Los Blancos having 156 million euros in hand, the debt incurred to finance the squad and stadium would ultimately result in fiscal disaster.

The economic harbinger, who supports Espanyol in La Liga, also number-crunched the club’s current fiscal state and derived that the short-term debts, which amount to 338 million euros according to his estimate, are much higher than its current or liquid assets which stands at 239 million euros. Thus, the deficit is an eye-watering 99 million euros in the short-term itself.

He also punched holes in the theory that Perez’s commercial acumen will pull the club through any troughs because he felt that TV revenues, which constitute a large part of the club’s revenues, have plateaued due to saturated TV rights. He also pointed out the stagnation of matchday revenue, and felt that an impending TV-sharing deal, which would compel Madrid to share its profits with the remaining teams in the top tier of Spanish football, could come back to haunt Perez and the socios.

“That (the impending TV revenue sharing model) would be a tremendous problem. Madrid and Barcelona receive way more than anyone else, around 160 million euros. That cannot grow much more,” Liebana said.

Still, questions remain as to whether the figures bandied by the economist are merely a case of smoke and mirrors.

Bullish Madrid

On closer scrutiny of the financial statement of the club, the ‘590 million euros’ can be a deceptive figure as the debt amount has been derived by calculating only the liabilities (which cover unforeseen events as well) of the club. Segregating a few of the dubious provisos reveal that Madrid’s fiscal health is not as bad as it seems. Instead, the popular spin in the media hides a few caveats which we need to wheedle into in order to determine the legitimate figure.

One of the items described as operational debt is deferred income derived from matchday/season ticket revenues for the season. The ostensible debt figure also includes the potential sale of matchday tickets in the coming season, as well as transfer fees which are not be paid in that particular financial year.

UEFA, in their Finacial Fair Play charter, lucidly explains that deferred income (matchday revenue) falls under ‘liability’ because the revenue hasn’t been generated till the matches have taken place. It clearly states that deferred income is merely a liability (which can potentially result in a handsome profit for the club after the match has been played) and not debt.

Further, provisos such as paying wages to staff and keeping a transfer budget for players are also included in the ‘liabilities’ section, which, in turn, bulges the club’s net debt.

Hence, if we account in line with International Financial Reporting Standards (IFRS), and cover only debts that canopy items such as overdrafts, bank loans, bonds and other such toxic elements, the gross debt drawn by Real Madrid gets extenuated to 150 million euros*, which is lower than Arsenal’s (310 million euros) and Manchester United’s (551 million euros).

Furthermore, if you look at the club’s debt coverage, it is easy to see why the socios are not squirming in their seats. Yet. The reason being that Madrid’s gross revenue of 480 million euros covers 81 percent of their saddling debts.

You can shout back saying that a robust organisation should ideally keep its debts on par with its revenues, i.e., in financial terms, the company’s revenues should be able cover the debts. But Real Madrid are comparatively in far better state than their arch-rivals Barcelona, who are marginally worse off at 78 percent, and Manchester United (40 percent) and Arsenal (57 percent).

Just to provide another tangential example, the UK government’s debt-to-revenue ratio currently lies at 114 percent. Yet, the UK’s growth trajectory is on the up despite, if I can make an asinine comparison, the UK being worse off than Real. The UK government’s financial engineering, wherein they reined in wanton expenditure on ancillary overheads, is a good example of how Real can balance their books in the green.

Even when you take EBITDA profit into account (after adjusting the revenue), Real Madrid has the better propensity to repay its debts than Barcelona, Manchester United and Arsenal.

And, to counter Liebana’s claim of Real’s revenue reaching its saturation point as far as TV revenues are concerned, it is estimated that the approaching TV rights deal will deplete Madrid’s coffers by 15-20 million euros. To put that money into context, Los Blancos generated 513 million euros last year. Additionally, Real’s venture in the Asian market is predicted to expand by a further ten percent in the next decade, which would mitigate the blow of losing some of the TV revenue.

La Liga’s response

On Saturday, the Spanish league authorities refuted the doomsday claims and insisted that Madrid’s finances are in ‘excellent’ shape. The league authorities announced that the club is in pink condition, with their net debt amounting to only 18 percent of the value of its assets.

The Spanish league’s statement read: “The club has the capacity to deal with the debt and the figures show that Madrid is economically solvent, within the economic controls established.”

Madrid president Perez has maintained that the club’s debt hovers around 90 million euros, which is well within the stipulated debt limit suggested by UEFA’s Financial Fair Play diktat.

*The figure has been calculated from Real Madrid’s 2011-12 financial statements