Debt swap is 'window dressing'

Nick Clark
Thursday 07 January 2010 01:00
Chelsea owner Roman Abramovich recently converted a loan into shares
Chelsea owner Roman Abramovich recently converted a loan into shares

Recent moves by Chelsea and Manchester City's owners to wipe out debt by converting loans into equity work "by moving money from their left pocket to the right", say financiers.

It emerged this week that Manchester City's Sheikh Mansour had converted £304.9m of the club's loans into equity, a week after Roman Abramovich had done the same with £340m of interest-free loans to his club, Chelsea.

The accounting operation, which one banker called "balance sheet window dressing," was in reaction to Uefa president Michel Platini's calls for financial fair play in football. He has threatened those that load themselves with unsustainable levels of debt with exclusion from European competitions.

Stephen Schechter, who founded investment bank Schecter & Co, and has worked with football clubs including Manchester City and Leeds, said the loans had been left over from the time the clubs were bought. "They were convenient at the time but it doesn't serve any purpose now," he said. "They can't get any tax deduction on the interest because the clubs weren't paying it."

Essentially the owners, who hold all of the club's equity, have also lent it money. A debt for equity swap will beef up the balance sheet, what Mr Schechter called: "putting money from your left pocket to your right pocket". It doesn't change the clubs' potential valuation nor does it change the way they are run. He added: "The bonds didn't pay interest and had no maturity. Why go through the illusion?"

He added that it wasn't like the loans at clubs like Liverpool, whose debt is held by banks and features repayment schedules and interest.

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