Business With Blain Extra: Chelsea's crafty contracts
Time will tell if UEFA's crackdown will work after Chelsea's splurge.
When UEFA announced the expected replacement for their Financial Fair Play (FFP) Regulations in the early part of 2022 industry observers wondered how their new rule – the Financial Sustainability Regulation (FSR) – would impact the operation and financing of elite football clubs.
Fast-forward around a year and Chelsea were not only splashing the cash on new players under the direction of new owners, but were seemingly getting around the regulations.
Both Mykhailo Mudryk and Enzo Fernandez were acquired for eye-watering fees. Mudryk cost an initial £62m, and that figure could eventually rise to £89m; World Cup winner Fernandez cost £106.8m, a British record. But what also caught the attention of onlookers was that both were signed on eight-and-a-half-year contracts.
Fans and regulators alike had questioned how Chelsea could spend such large sums. Indeed, over the previous two transfer windows, Chelsea have spent over £600m under the ownership of Todd Boehly.
How could they do this and satisfy the financial regulations?
Part of the answer lies with accounting practices and while we won’t get into the technicalities here, a simple explanation is that transfer fees don’t show in a company’s accounts in total, but are instead amortised over the period of a player’s contract.
The longer the contract the smaller the hit in the accounts, and consequently the lower the FFP/FSR impact.
To use the Mudryk and Fernandez transfers as an example, putting these players on a typical five-year contract would mean an FSR liability of £170m/5, which is £34m per year.
Extending both their contracts to eight-and-a-half years provides an FSR liability of £170m/8.5, which is only £20m per year; a reduction that is well worth having.
To put the impact of such a saving (£14m) into perspective, it would allow a purchase as high as £119m, if that player were also to be given an eight-and-a-half-year deal.
By extending the terms of the players’ contracts, Chelsea were able to reduce their liability under the regulations and consequently spend more on transfer fees with the same FSR liability that shorter contracts would attract.
UEFA reacted quickly and closed this apparent loophole, their Executive Committee announced an adjustment to their regulations, to be effective from July 1st, 2023, that meant from then onwards, and for UEFA Competitions only, the amortisation of transfer fees could only spread over a maximum of five years.
The new rule has not been backdated and so Chelsea’s prior activity can continue to get the benefit of those long contract periods.
At the same time, UEFA also announced amendments around the regulations for player swap deals as elite clubs continue to seek ways around the rules, stretching and bending them as far as possible, and sometimes too far, as the Juventus scandal highlighted. The Bianconeri’s alleged false accounting and market manipulation resulted in the entire Board resigning, with Juventus docked points.
The devil is always in the detail and Chelsea, of course, have already moved a plethora of players on this summer, with more likely to follow.
CHELSEA OUTGOINGS
Kai Havertz to Arsenal (£65m)
Mason Mount to Manchester United (£55m)
Mateo Kovacic to Manchester City (£25m)
Christian Pulisic to Milan (£20m)
Kalidou Koulibaly to Al Hilal (£17m)
Edouard Mendy to Al Ahli (£16m)
Ruben Loftus-Cheek to Milan (£15m)
N’Golo Kante to Al Ittihad (Free)
Dujon Sterling to Rangers (Free)
Cesar Azpilicueta to Atletico Madrid (Free)
Tiemoue Bakayoko (Released)
So far, the Blues have recouped around £213m in fees and will be saving plenty on wages, so it does not appear Boehly is willing to play with fire again. That being said, the combined purchases of Nicolas Jackson and Christopher Nkunku equate to a reported £84m, while Chelsea have also put down £4m to sign Ishe Samuels-Smith from Everton’s academy.
This has all been possible due to Chelsea’s creativity from an accounting perspective as they seek to bounce back from their dismal performance last season.
Chelsea’s actions stimulated a reaction from UEFA, but not yet from the Premier League, and time will tell if the Blues’ actions have just been too risky or are a stroke of modest genius.
By JohnB
Well explained.