Don't know how amny of you saw this at the weekend....makes interesting reading though...how much applies to us i wonder....?

Sunday June 17, 2001 The Observer

As Chelsea agreed to pay West Ham £11 million for Frank Lampard last Thursday, they inched closer to Real Madrid as the most indebted club in Europe. Another massive transfer fee underlined Chelsea's continued ambition to be the very best. It was the same commitment to excellence that prompted chairman Ken Bates to describe his club as the 'Manchester United of the south' and compare them to the biggest and best in Europe four years ago, after Ruud Gullit had delivered the FA Cup to Stamford Bridge.

'Why would Ruud want to go to AC Milan when we will be as big as them,' pondered Bates. Chelsea very nearly are as big - at least in the debt stakes. Madrid, backed by the wealth of King Juan Carlos and buoyed by their successes in the Champions League, had medium- and long-term debts that were in the region of twice Chelsea's. But that figure will be wiped out following the sale for £120m of their city-centre training complex to the consortium leading Madrid's 2012 Olympic bid. Milan's debts are more difficult to assess, but are thought to be considerably less than Chelsea's. When Bates elevated Chelsea to Milan's level back in 1997, the new Chelsea Village hotel overlooking the stadium was ready to open and the luxury penthouses about to go on sale.

Now, Chelsea's parent company is running liabilities totalling more than £120m, they have a £75m Eurobond to repay to the City in six years and, according to Bates, the interest payments on that bond - amounting to £19,000 a day - are not presently being covered by the club. Even before the end of the past Premiership season, stockbrokers acting on the club's behalf - Seymour Pierce - had concluded that indifferent form, spiralling wages and the huge bill for redeveloping Stamford Bridge would treble losses this year to £9m. They held some grounds for optimism, however, by suggesting that Chelsea would rebound into the black next year. But Observer Sport can reveal that this is unlikely because of the team's failure to make next season's Champions League and the slow take-up of executive boxes at Stamford Bridge.

Instead of making a £10m profit next year, brokers are saying that Chelsea may - again - not make a profit at all. Seymour Pierce's Catherine Bond said: 'My original calculations were based not only on the team playing Champions League football but the club selling out its hospitality facilities. I am not convinced that will happen at the original selling prices and, therefore, I am having to make quite a radical revision to my forecast. I still require the full figures from the club but without them I can say that the difference may be in the region of £10m.' Chelsea Football Club is wholly owned by Chelsea Village plc, which includes the leisure and hotel complex adorning the redeveloped Stamford Bridge - the complex having cost about £150m. The village umbrella company covers the club, hotels, travel agency and other leisure facilities on the site.

Bates continues to remain bullish and insists the costs of redevelopment are wise. 'Facilities at Chelsea Village could have been built for less than this £150m, but the quality finishes and high standards we have set would have been compromised. This decision by the board is a far-sighted option.' But for Chelsea to 'factor in' qualifying for the Champions League in their financial projections - which they rarely looked like achieving in the run-in to last season - is remarkable. Not even Manchester United, winners of the Premiership in seven of the past nine seasons, do that. Experts claim that the difference between finishing in the Premiership's top three and gaining a Champions League spot and playing in the Uefa Cup can be as much as £12m. However, they argue that it's not only the failure to win games but Bates's decision to create a leisure complex, Chelsea Village, which is at the heart of the club's continuing difficulties.

To get the Bridge redevelopment underway, Bates secured the £75m Eurobond from City financiers USB Warburgs. The loan is due to be repaid in full in 2007, but Chelsea's slide in fortunes is hampering their chances of doing so. In only three years, the club have seen a £2m profit turn into a projected £9m loss and Bates recently conceded that - for the time being at least - Chelsea were unable to cover interest payments totalling £19,000 a day. Writing in the club's interim report, published in March, Bates said: 'Our central overheads, including interest, will not be covered until all operations are fully established during the next financial year.' Analysts say that failing to cover the payments is serious for any business.

Should such a position prove to be more than just a one-off it becomes what one specialist described as 'an unsustainable practice', something that could cause grave concern among City institutions and possibly lead to lenders deciding to call in loans. There is no suggestion, however, that Warburgs have contemplated taking such a course of action.

For Chelsea, the cost of building a team equipped to qualify and compete in the Champions League is rising all the time. Chelsea's total wage bill last year rose from £28m to £44m even though a dozen people left the company during that time. Bates had hoped that the off-pitch assets would turn in a profit, thus subsidising the team. So far that hasn't happened. Last year, the hotel, travel agency and other operations which make up the Village together lost £3.5m and, given the brokers' admission of the serious state of the club's finances, it is unlikely to change over the next couple of years. In a further appeal to Chelsea's more affluent fans to increase turnover, the club had unveiled new executive boxes - named the Millennium Suites - some of which cost up to £1m per season. But, says Catherine Bond, slow sales will have a big impact. 'Effectively, the money generated by the Millennium Suites goes straight to the bottom line of the balance sheet,' she said. 'Chelsea need that income to be able to do things like paying the interest on the Eurobond loan.'

Simon Banks, football consultant for the SportBusiness Group, says the change in forecast for Chelsea's immediate financial future adds to doubt about the viability of Bates's vision. He said: 'There have been questions raised about the wisdom of the Chelsea Village business model in terms of borrowing large amounts of money to build extra assets which would, in turn, increase profits. This scepticism appears to have been shared by the potential backers of Wembley Stadium who were presented with a similar model by Wembley National Stadium Limited, then chaired by Bates, and rejected it. The whole idea of adding hotels and leisure facilities to a club in order to increase profits is unproven. Until Chelsea Village turns in a sufficient profit, it will remain so.'

Chelsea Village plc's chief executive, Michael Russell, said there 'had not been any problems' with their lenders but admitted failing to cover interest payments on their Eurobond was a concern. 'I accept that it's a serious position but we were aware of it,' he said. 'We knew that this year interest was going to be a problem but we are in the process of developing a business and in the early years of doing so, when you're in that development phase, you accept that you may make a small profit or loss until the business is established, when it should begin to make a profit. As such it's about how you manage your cash. We have sufficient cash resources.'

And, against that background, what about the wisdom of buying Lampard for £11m? One football finance expert, Alex Fynn, who helped to design the blueprint for the Premier League, said: 'This is the sort of situation that could only happen in football. Banks are prepared to extend credit almost indefinitely so that clubs can afford to go out and buy players because they see income rising by about 25 per cent each year. But the money spent on wages and transfers gets clubs into more trouble. The proportion of Chelsea's total income made up by its wage bill is far too high. Many Premiership clubs spend 60 per cent of their incomes on wages and that figure is basically unsupportable. Chelsea's is more like 80 per cent.' But Russell claimed the deal was no problem for Chelsea. 'We had the necessary cash resources. We will have paid the Lampard fee within 12 months. We have to under the FA and Premier League rules. From a profitable situation over, say, a five-year deal the transfer is amortised at £2.2 million a year so the impact on our profits is spread.' When asked if Chelsea would have to issue a profits warning, Russell said: 'I'm not going to comment on what our anticipated position will be this year or next year against the brokers' statements.'

Guardian Unlimited © Guardian Newspapers Limited 2001

-- Anonymous, June 17, 2001

Answers

Appearing Prudent....?

-- Anonymous, June 17, 2001

Newcastle's wage bill for the financial year ending in July will be about £25m

-- Anonymous, June 17, 2001

Thanks for the article min.Chelsea's financial situation as described is perilous. Clearly the net cash generated is insufficient service the debt. Years ago I learned that very few companies have been successful in finding other businesses to finance their own core business. It was therefore with trepidation that I read about NUFC development plans. Far better to lease the property and let some hotel developer build and manage. NUFC might negotiate obtain a percentage of the turnover/profits without incurring the risk. We have not been exactly brilliant in managing a football team after over a hundred years of experience. What makes us think we could manage a hospitality complex?

-- Anonymous, June 17, 2001

USB Warburgs eh? now if it'd been UBS Warburgs then I could've had a word with someone and asked them to call the bond in ;))

-- Anonymous, June 18, 2001