Matt Scott: Beggars can’t be choosers

“‘Go West, young man, go West…’ ‘That is medicine easier given than taken.'”
Reported conversation between Horace Greeley and Josiah B Grinnell, 1833

Just as the new frontiers of a developing United States were synonymous with new riches in the early 19th Century, in the early 21st Century European football has developed a fascination with lenders registered in exotic locations thousands of miles to the west. Many clubs have sought the liquidity gushing forth from the offshore entities registered in tax havens like Barbados, Bermuda or the British Virgin Islands, and it seems this will only become more important for clubs in the years to come.

The Financial Times today quotes a report released by Fitch Ratings, one of the leading credit-rating agencies. It claims in 2011 and 2012 that European banks have reacted to the strictures of new global banking rules by reducing the amount they lend to companies by 9%. That meant the amount loaned to corporate borrowers fell by €440 billion over the period.

“Basel III [banking rules] already appear to be influencing banks’ capital management, exposure allocation and credit strategies,” the FT quoted Fitch’s Martin Hansen as saying.

Football clubs, despite the enormous amounts of cash they generate from guaranteed sources like sponsorship and TV incomes (as explored here a fortnight ago []), would not feature highly on the list of bankers’ ‘high-quality credit risks’. The threat of relegation and the general vicissitudes of a weakened consumer economy would weigh heavily against loan requests from clubs.

So traditional sources of loans are drying up. This seems to have real-world consequences for clubs. Tottenham Hotspur received (their second) full planning permission for a new 56,250-seat-stadium development in February 2012 but nearly two years on have still not raised the £400 million project finance.

It is clear the cash that built the Football Association’s Wembley National Stadium, Arsenal’s Emirates Stadium and even the younger Juventus Stadium came from a different era. Enormous capital projects are highly unlikely to find their funding from offshore and so the cranes are not finding their way to sites, presenting clubs like Spurs with major opportunity costs.

But at a more modest level of lending, liquidity from offshore entities has been freely available. Clubs like Cardiff City have found cash from British Virgin Islands via two offshore lenders with convoluted corporate structures. Erskine Finance Limited and Edgedale International Limited both have ultimate beneficial owners using a Singapore address occupied by the law firm Abraham Low LLC. They are administered by the large Asian tax-haven-services firm, Portcullis Trustnet Limited, and both have the same ostensible shareholder, Ensol (Singapore) Pte Limited.

We would know nothing more about them had Cardiff’s accounts for 2011, the financial year in which the loans were created, not helpfully described them as “undertakings with which certain shareholders are associated”. Named as the lenders behind Erskine and Edgedale’s £14.835 million advances were Vincent Tan, Dato Chan and Tan U-Jiun. According to the associated mortgage documents the loans give the Malaysian investors the right to place the club into administration if the club defaults on its loans.

Similarly Everton have found succour at a BVI bosom through their arrangement with the Vibrac Corporation. For several years the club has been entering into an annual “deed of assignment” with an offshore vehicle whose backers are entirely hidden from scrutiny. Each year the club has been borrowing millions of pounds secured against the TV money from the Premier League’s central pot. This has helped Everton, one of the League’s most financially stretched clubs, manage their cash flow from season to season.

There is nothing at all untoward about the arrangements. Everton and Cardiff both had working-capital requirements that banks were not prepared to meet, forcing them to go west to find it. Lenders such as Tan, Chan and U-Juin have been able to park their money in places they know more about than does the average banker.

But the arrangements do come at a price. Whereas many clubs have for several years found their bank financing at premiums of around 1.5% or 2% above LIBOR (that is to say generally between 2% and 3%), the offshore arrangements tend to be substantially more expensive. Cardiff’s Malaysian loans are payable at an interest rate of 7% while Everton’s Vibrac loan for the 2011-12 season incurred an interest rate of 8.9%.

Going west to seek money from a Caribbean-tax-haven lender is all very well. But it certainly looks like that is medicine easier given than taken.

Journalist and broadcaster Matt Scott wrote the Digger column for The Guardian newspaper for five years and is now a columnist for Insideworldfootball. Contact him at moc.l1701959647labto1701959647ofdlr1701959647owedi1701959647sni@t1701959647tocs.1701959647ttam1701959647.