Analysis: Burnley’s leveraged buyout would significantly impact club cash flows in the event of relegation

The release of Burnley’s 2021 accounts last week shed new light on the club’s takeover by ALK Capital in December 2020. Reported as a leveraged buyout at the time, the club’s latest financial statements confirmed as much.

As part of ALK’s takeover of the club via investment vehicle Calder Vale Holdings Limited, the latter was revealed as owing the football club €115 million.

That sum comprised €42 million cash taken from Burnley’s bank account and a €73 million external loan that was loaded onto the club’s books at an annual interest rate of 8 per cent plus LIBOR. Reports suggest the lowest interest rate applicable is in the region of 9.5 per cent.

That was merely the position as at the end of July 2021, with payments known to have been made in instalments and the full cost of the takeover previously reported as high as €190 million.

Between July and April 2022, a further €11 million was ‘advanced to a fellow group company’ from the football club; whether that was to aid in the payment of further instalments is not known.

Leveraged buyouts are not new in English football, with the Glazer Family’s takeover of Manchester United in 2005 the most obvious and regularly cited example. Yet ALK’s takeover of Burnley did mark a shift.

Where United’s ability to service its debts has never really been in doubt, Burnley are a club forever at risk of relegation; repaying the debts now borne by the club looks heavily reliant on Premier League survival.

Indeed, such a situation is reflected in further detail disclosed last week in the financial report for 2020/21.

Within the accounts it was noted: ‘In the event of the club’s relegation from the Premier League, the repayment schedule for the capital element of the loan is brought forward, with a significant proportion falling due for repayment shortly after the end of the football season in which the relegation even takes place.’

Knowing the club’s income would drop significantly upon relegation, external lender MSD UK Holdings would seek swifter repayment.

5.4 per cent of Burnley’s income

Following the release of Burnley’s accounts, Off The Pitch has undertaken analysis to assess the impact the takeover, and specifically the debt incurred by it, could have on Burnley’s future finances.

If the club continue to survive in the Premier League, the loan will incur estimated annual interest of €6.9 million each year until December 2025, when repayment is due. Based on the club’s 2021 revenue of €130 million, a full year’s interest on the loan would have consumed 5.4 per cent of Burnley’s income.

2021 was a year impacted by Covid, with Burnley’s gate receipts plummeting. Yet even a repeat of Burnley’s highest ever turnover - €157 million, when they finished seventh in 2018 – would peg those interest costs at 4.4 per cent of income.

In total, if Burnley survive relegation between now and the loan repayment date, the loan is expected to incur interest costs of almost €35 million in total.

Furthermore, that figure does not include interest costs incurred by the new ownership on a factored loan with Macquarie Bank following the sale of Chris Wood to Newcastle United in January. The Clarets advanced €14 million they are due from Newcastle by February 2023, with rates on such loans from Macquarie generally believed to be around 8 per cent.

Our modelling makes a number of assumptions, particularly in relation to loan repayments that might fall due in the event of relegation. Burnley’s accounts shed no great detail on this element of the €73 million loan, but the use of the term ‘significant proportion’ suggests any brought forward repayment is likely to have a sizeable impact on the club’s cash flow.

To that end, we have modelled scenarios whereby the club is required to pay back between 25 per cent and 50 per cent of the loan upon relegation. In the former instance, a continued stay outside the Premier League would see the loan fully paid off in 2025.

In the latter, it would be paid off in 2023, and have a huge short-term impact on club cash flows and, accordingly, Burnley’s ability to compete for promotion

If Burnley were to be relegated this season, we project their income could fall to around €75 million in 2023. If parachute payments were then scrapped and a merit-based distribution model introduced to the EFL – a distinct possibility Off The Pitch covered last week – we project club income could fall to under €50 million by 2024, dependent on Burnley’s on-field performance.

Were that to transpire, the need to repay the MSD loan more swiftly would have a significant impact on the club’s cash flow.

We project that, were the club to have to repay 25 per cent of the loan this summer (a scenario, which, we stress, is entirely hypothetical), and every year thereafter until full repayment in 2025, combined repayment and interest costs would take up an average of 34.9 per cent of Burnley’s income across the four years.

Were the EFL to move to that merit-based model, the effects would be accelerated. Without parachute payments, Burnley’s income would fall even further from its Premier League levels, and we project that servicing the debt would take up 43 per cent of the club’s turnover in 2024 even if the club managed successive top-six finishes in the Championship.

Of course, Burnley could well bounce back at the first attempt. In doing so they would avoid the need for further accelerated repayments. Accordingly, we project debt repayment costs would range from 5 to 8 per cent of club income in 2023 under this scenario, with parachute payments unlikely to scrapped by then.

Yet the need to repay some of the loan early this summer – even just a 25 per cent repayment would exceed €18 million – could hamper their chances of bouncing straight back and enjoying parachute payments in the manner Fulham and Bournemouth have this season.

Our analysis is laden with assumptions, so cannot be assumed to be wholly accurate. We have, for example, assumed Burnley’s new owners will be able to enjoy only modest uplifts to the club’s income if Premier League status is retained across the loan term.

If they were to exceed our projections, the costs of servicing the loan while in the top tier could fall below the 4 to 5 per cent of annual revenues that we have projected, a level the new owners would doubtless argue is perfectly manageable.

Yet what our analysis does show is the dangers of relegation to The Clarets.

ALK Capital have long stressed that their takeover has not imperilled the club, and that the resources to pay off the loan used to fund it are not in doubt. But it is clear that a prolonged stay outside of the Premier League would have a large impact on Burnley’s cash resources – a far cry from the debt-free club ALK inherited in late 2020.