Sunderland have big debts
Sunderland have big debts - amongst the biggest in European football. The club are presently fourth bottom of the Championship and set for a period of dwindling revenues and financial restructuring.
Presumably the current aim of the club is to achieve some semblance of stability with the ultimate goal of self-sufficiency from an owner unable or unwilling to invest his own money into it any longer.
But that road to financial resurrection is a long and arduous journey. And investors, lenders and other stakeholders such as supporters and even players tend to be an impatient lot.
Businesses with big debts and twitchy creditors often reach a tipping point when they simply can’t effectively pay their debts and bills. At that stage, an option is to enter administration.
Since Middlesbrough went bust in 1986 and the laws around insolvency changed, dozens of football clubs have done just that and whilst some have re-emerged reformed in a leaner, meaner model; others like Leeds, Portsmouth and Luton have endured significant periods of pain and still haven’t returned to the level at which they were playing prior to their court-appointed restructures.
Rumours that Sunderland are set to be put into administration peaked last week but have lurked during much of the summer. Prior to the talk that owner Ellis Short was in discussions with prospective bidders for the club in June, whispers had suggested relegation would swiftly sound the death knell for the club’s continued operation in its present form and the administrators would be on their way to Wearside.
The subsequent failure of those buy-out talks and the club’s public statement that Ellis Short would “continue to fund Sunderland” quietened the chatter momentarily but with the club’s apparent inability to spend anything more than a small sum in the transfer market, the rumours have again begun to swirl.
For their part, Sunderland AFC appear to have dismissed the chatter with local press outlets publishing stories that the club have privately outright denied that administration is an option.
Administration is a complex process and an emotive one when it concerns football clubs. If you don’t know much about it, check out the FAQ below and have a look at our two-minute video of how it works and the situation at Sunderland.
Sunderland entering administration makes little sense - at the moment
In truth, there is - at present - little logical base on which to suggest Sunderland AFC are considering administration.
Administration is very much a last resort procedure, and very far from a quick and easy way of walking away from debts.
It should also be clear that any administration process would be under the effective control of Security Benefit Corporation (SBC) - the organisation to whom Sunderland AFC owe a hefty chunk of their total debt.
Ellis Short and the other directors of Sunderland could not commence administration without the consent of SBC; and as SBC hold a floating charge - a form of security - on the loan agreement with SAFC, it seems pretty clear that the investment and pension company would control any insolvency process.
Should the club enter administration, it would essentially mean that chairman/owner Short and chief executive Bain - if they have anything to do at all - would do so entirely under the direction of the court-appointed administrator.
So the question has to be asked; why on earth would Ellis Short do it? The owner of Sunderland AFC has made it clear that he doesn’t want to commit any more of his own capital to the club and his stance on selling apparently makes it clear that he wants to walk away from Wearside with as little financial pain as possible.
Under administration, Ellis Short would probably lose the lot; the club’s debt to Drumaville - which he controls - is unsecured, and therefore at the back of the queue for a pay-out under administration; and his £101m share capital would be worthless.
Short could theoretically reacquire control of the club following administration via a prepack (see FAQ 4 below) but he would have to stump up the administrator’s (and effectively SBC’s) price - a fundamental which is hard to square with his current reluctance to put not a penny more of his capital in to Sunderland AFC.
This leaves us with SBC themselves. They have a deed of assignment over monies due to Sunderland from the FA; the value of this security will fall with the value of parachute payments, and this might make them a little more twitchy about the recoverability of the money owed to them. They could insist SAFC enter administration and it wouldn’t take too much for them to be able to do this (see FAQ 2 below).
However, with preferential creditors, which include outstanding transfer fees, ranking above them for distribution, SBC would need to be sure of a huge onward selling price of the club to actually guarantee them more than the deed of future monies from the FA they will continue to benefit from.
In practice, a lender will usually give a borrower the opportunity to try and refinance before pulling the plug, so SBC are unlikely to make any move before much closer to the repayment date of Sunderland’s loan in 2019.
Finally, there is one respect in which administration rumours are actually really unhelpful - even for those now convinced that Ellis Short really must exit Sunderland AFC at all costs; such gossip is actually a deterrent to potential buyers approaching Mr Short. If those pondering a purchase suspect the club is about to go under, it would make far more sense to wait for that to happen, and pick up a debt-free company for much less money.
*Thanks to Grumpy Old Man - who can often be found elsewhere on the internet assisting debate about Sunderland’s finances.
Don’t know your Administration from your Alsation? Here’s what it all means.
1. What is administration?
Administration is a procedure introduced in the Insolvency Act 1986. It is designed to allow a moratorium on a company’s debts while a scheme is devised to achieve the dual aims of keeping the company and/or its business alive, whilst achieving the best chance of creditors being paid eventually. It was introduced in response to evidence that existing procedures were resulting too often in the closure of companies, and that something was needed which was less severe than the existing procedures of receivership (which was available to secured creditors) and liquidation.
2. Who can appoint as administrator?
An administrator can be appointed by the directors of an insolvent company (note that it is not permissible for an administrator to be appointed by directors unless a company is insolvent or likely to become insolvent) or by a lender who holds what is known as a qualifying floating charge over the company’s assets. In the latter case, there is no requirement for the company to be insolvent; it’s enough for the lender to be convinced that the loan is likely to be irrecoverable. The administrator must be a licensed insolvency practitioner; this is important as it guarantees, as far as possible, the professional competence and ethical standard of the administrator. Another point to note is that, if a company has a loan secured by a fixed and floating charge, permission of the lender must be sought before administration can start, and agreement must be reached with them as to the aims of the administration.
3. What happens in an administration?
The first thing to note is that it protects the company from any legal action for the recovery of debts, and any legal actions already begun will be annulled. On appointment, the administrator must take immediate custody and control of the company’s property. He has very wide-ranging powers – in the words of the acts he can do anything “necessary and expedient for the management of the affairs, business and property of the company”. Note that in this context, property doesn’t just mean land and buildings, it means all of the assets. Essentially, the running of the business passes totally into the hands of the administrator.
Within eight weeks of his appointment, the administrator must produce a plan showing how the administration is to proceed. This has to be approved by a majority (in value) of the company’s creditors. The administrator then implements the plan.
4. How does an administration end?
An administration will end automatically after a year, unless an application is made to the court for an extension. In practice, this will always happen, and complex administrations can last for many years. What happens at the end of the process can be any of the following:
a) the cause of the insolvent condition is rectified, and control of the company passes back to the shareholders. In practice, this never happens.
b) agreement is reached with creditors in the form of a creditors voluntary agreement (CVA). In this case, the creditors agree to receive only a proportion of what they are due, or to be paid over a longer period of time, or perhaps waive some or all of their debt in exchange for shares in the company. A CVA requires the agreement of over 75% of creditors (by value). Again, in the case, control of the company is returned to the shareholders.
c) the assets and trade of the company are sold to a new company (newco), which will take over the running of the business. The existing company will then be liquidated, and the proceeds distributed to the creditors. This can be agreed before an administrator is appointed, in what is known as a pre-pack administration. These can be controversial, particularly where the newco shareholders are the same people as the shareholders in the insolvent company. The administrator needs to be able to demonstrate in a pre-pack that it will generate at least as much for the creditors as an open sale, and provides a better chance of the continuation of the company’s business. The existing shareholders will lose their investment, and also control of the business unless they are also shareholders in a pre-pack newco.
d) the administrators are unable to sell the business as a going concern. In the case, the company will simply be liquidated, and the proceeds distributed.
5. How are the proceeds distributed in a liquidation?
There’s a laid down pecking order as to how proceeds are distributed
a) what are known as preferential creditors. These include HMRC and other statutory bodies, and in the case of football clubs, football-related debts
b) secured creditors
c) unsecured creditors
In practice, category (b) will not always be paid in full, and (c) will receive little or nothing.
Shareholders will totally lose their investments.