Dundee United financials

Dundee United are going through some tough times at the moment. United are currently at the last position of the Scottish Premiership, trailing Kilmarnock by five points and looking very likely candidates for relegation. The season has been a difficult one since the beginning. Last season´s 5th place seems like a distant memory now, as the club has struggled from day one. Jackie McNamara was ousted in the fall, as United were second to last in the League. Since then, things have only gotten worse, and United have slipped to bottom place, and it seems like they have dug themselves a hole too deep to get out of.

 McNamara was succeeded by  Mixu Paatelainen, a former player at Dundee United, whose last coaching job as the head coach of Finnish national team ended on a sour note last June. After being appointed, Paatelainen spoke enthusiastically of the club, telling BBC: "It feels wonderful. Obviously this club is special to me - it was my first club abroad as a player. Fond memories.” As tough as the challenge seemed at the time, Paatelainen relished it frome the start: ”I must also say that, before that, I had my eyes elsewhere. But once this vacancy came about, I felt that would be a great challenge and wonderful to go back there, now in a management capacity, so I'm looking forward to it.”. Since then, the tone has been rather different, as the stressful situation has evidently had it´s effect on the whole team, including Paatelainen. He has been critising his players vocally. At the time of his appointmemt he spoke about the former management with respect, but by December the outspoken Finn was in a different mood, blasting McNamara by saying: ”We want to install tactics into this side that were never there, never existed. When we started about six weeks ago, I thought our game was in a really, really poor state”. Recently, Paatelainen was called to Scottish Football Association´s disciplinary hearing after allegedly ”shouting and gesticulating" at local rival Dundee´s fans during derby game. It seems like Dundee United really have hit rock bottom this season, and Paatelainen´s furious efforts have not been enough to change the course. 

Managers are usually the ones to take the blame when a team is doing below expectations. McNamara had to leave his job. Paatelainen has been the target of criticism as well. But while the performances have certainly been dissapointing, the reasons for United´s poor success and likely relegation go much further back than anything that has taken place this season. And it goes way beyond managers and tactics. The seeds of this harvest were sown years ago, off the pitch.

Going back to 2013, Dundee United was a club deeply in debt. Bank loans and overdraft combined were £ 4,4 million. In addition to this, the club had £ 0,5 million of related party loans, to Catherine Thompson. This loan was not an issue until 2013, as it was interest free, it was unsecured and had no contractually set repayment terms. The last part was changed in 2013, and the notes of the annual report stated: Subsequent to the year end the terms of the loan were modified to provide for the loan to be repayed in monthly instalments of £ 4 000, commencing at the end of November 2013. This is when the club changed it´s approach comcerning the related party loans, commencing their repayment. A bit unusual move, since it is not that common for owner´s loans to have fixed repayment schedule. Firstly, because not many clubs generate enough cash flow to amortise debts in a steady fashion and secondly, doing so is rarely in the best interests of the club. Still, there was nothing wrong with this move, but it was a sign of things to come.

More pressing issue for the club was the bank debt. By the end of 2013 this consisted of £ 3,6 million bank loan and £ 0,8 million overdraft facility. The terms of the bank loans repayments were hardly beneficial for the club. As the notes of the annual report from 2013 stated: Minimum annual repayments of £ 250 000 are required to be made in each of the 3 years then ending with additional debt reduction being required from proceeds of player registrations or improved financial performance.” This is what put the club in a stranglehold; effectively it was forced to sell players in order to amortise the debt. On top of this, related interest payments were a burden for the club´s financials. The bank loan had an interest rate of 3,2 % and the overdraft facility 3 % over Bank of England bank rate (0,5 %). In total, the club was paying over £ 200 000/ year in interest payments. The bank loan was also secured by a bond and floating charge over the assets of the company. The club´s equity and liabilities are presented  below:

 

Looking at the figures above, it is no wonder that the club felt that reducing debt would be the smart way to go about. In November 2013, Catherine Thompson ceased to be the controlling shareholder, as 52 % of the issued share capital was transferred to her son, Steven Thompson. After this, things started progressing, as Thompson worked on relieving the club of it´s debt. 

At the beginning of 2014, Dundee United took a major step towards relieving itself of bank debt. In February, the club  reached an agreement with the Bank of Scotland. According to the annual report of 2014, Negotiated terms included the payment of £ 1,45 million on the entering of the agreement with further contingent payments to a a maximum of £ 2,65  million being payable through to 31 August 2015, dependent on future transfer proceeds received through to that date. The borrowings due to the bank at the date of entering the agreement were £  4,7 million. Subsequent to the balance sheet date, on 15 August 2014, a further settlement agreement was reached with the bank with full and final amount of £ 1,4 million paid to exit the banking obligations.An exceptional gain of £ 1,4 million has been recognised in the profit and loss account as a result of the settlement.

So that is how United got rid of the bank debt. Some of it was still left in the 2014´s balance sheet, but by 2015 all of it was gone. Chairman Steven Thompson spoke enthusiastically to STV at the time of the arrangement: ”It is a big deal for the club. It puts us in a strong position when it comes to keeping players in transfer windows. We won’t need to sell at any price and I just think we are in control of our own destiny now.” Thompson also told the Express; “I said from the outset that I wanted to leave this club debt-free. That was my ambition. It looks like it could be happening a lot quicker than even I thought.”

The arrangement was made possible by loan notes provided by a group of investors. The total amount of the loan notes was £ 2,1 million. Curiously enough, who these investors were was not stated in the accounts. The lenders have been referred to as ”a group of fans”, or ”mystery investors”, but their identity remains unclear. Either way, it seemed like a good deal at the time. Debt level declined, and it seemed like the club was in a much healthier position owing money to a group of supporters than to the bank. As Thompson noted to STV; ”Yes we have to repay the investors and it is all agreed and all confidential. But it is very different dealing with a Dundee United fan in many respects than it is dealing with the banks these days.”

As it turns out, it isn´t really that different at all. If the bank loans would have been converted to equity or at least to loans with flexible payment schedules and without interests, that would have been a significant change for the better. But these loan notes were something else. The annual report of 2014 stated very clearly what the name of the game was: The agreement to exit the banking arrangements was partly financed through the issuance of £ 2,1 million of insecured loan notes on 6 February 2014. The loan notes bear interest at 6 % and are repayable in four increasing annual instalments, commencing on the second anniversary of their issuance, with a payment of £ 369 250. Keeping in mind the fact that the bank loan and bank overdraft had interest rates of 3,2 % and 3 % over bank rate makes the loan notes seem like anything but charity.  

But at least this arrangement provided the club with two years without loan amortisations, as stated in the accounts, right? Wrong. Because now the club started paying back the related party loans. In FY2015, the club repayed £ 248 020 of director´s loans, to Justine Mitchell and Steven Thompson. These loans were repaid in full.  Loan to Catherine Thompson was to be payed in monthly instalments of £ 4 000. The full cash flow statement is presented below:

 

Looking at the arrangement, two things come to mind. Firstly, since the club never actually ceased to repay it´s loans but merely switched from amortising bank loans to paying back director loans, what Thompson meant when he said the club was now in a better position regarding sales of it´s players is unclear. Secondly, since the loan notes are bearing 6 % interest, why start the repayments from interest free director loans? Surely this kind of arrangement wasn´t in the best interest of the club. In fact, it almost seems like the payment schedule of the loan notes was designed to give the club sufficient window to take care of the director´s loans. While there is nothing wrong with repaying these loans, it does make one question the commitment of the owners.

In order to repay these loans, the club has been forced to sell its assets, the players. Looking at the cash flow statement above, the club´s net capex (capital expenditure) has been negative, at £ 6,5 million, meaning the club has sold way more assets than it has acquired. The club´s proceeds from player sales have been £ 7,7 million in the last four years. Most notable departures over the years have been Andrew Robertson (to Hull City) and Ryan Gauld (to Sporting) in 2014-15. While it is normal for a club like Dundee to raise young players and sell them with a profit, these kind of sales are bound to reflect on results. In the accounts of 2015 Steven Thompson said about the sales: ”at an operating level the club continues to spend more than it generates in income. Operating loss for the period was £ 798 816. Such losses can only be sustained by succesful player trading, and there is no guarantee of such impressive gains in the future”.  While it is true that the club has been making operating losses, they are not that big, as can be seen below.

Furthermore, it should be noted that operating income also includes depreciations and amortisations of the clubs assets, which are not cash flow –items, but merely ”accounting items”. Therefore, a better measure for the club´s profitability is EBITDA (earnings before interest, taxes, depreciations and amortisations). This figure gives a better picture of what comes in and what goes out at operating level. While it is true that the club made a loss last season, it was only £ 0,3 million. In total, the club has operated at roughly break-even level four the past four years. Obviously Dundee United´s biggest problems are therefore not at the operating level. This is evident looking at the club´s wages/turnover –ratio:

 

The wage bill was 73,3 % of the turnover in 2012, which a bit high, but nothing out of the ordinary for a football club. Since then it has been even lower, at ~67 % in 2015. No matter how you look at it, it is not reckless by any means. Obviously there is always room for more efficient policies, but at some point that will show in performances on pitch. A negative EBITDA obviously needs to be covered by either player trading or new loans, but the slight operating losses the club has made are no reason for any fire sales.

Another curious thing about the loan notes that were used to get rid of the bank debt, is that while the accounts in 2014 stated that the repayments would commence on the second anniversary of their issuance (which would have been February 2016), the club didn´t wait for that long, after all. In the notes of 2015´s accounts, it is stated that ”Subsequent to 30 June 2015, the company reached agreement with loan note holders to repay £ 860 000 of these notes early. The repayment was made on 4  August 2015, with £ 1,25 million of loan notes remaining in issue.”  That is a huge amount, which would have been impossible to finance from operating cash flow. Keeping that in mind, it is interesting that the club decided to sell the forward Nadir Ciftci to Celtic on July 9th, 2015 with a reported transfer sum of £ 1,57 million (source: Transfermakt). Ciftci scored 14 goals for United in 2014-15 season, and would most likely have been a valuable asset this season as well. While it may be just a coincidence that he was sold less than a month before a loan repayment that wasn´t originally supposed to take place, it certainly seems a bit odd. Again, one has to wonder if all this was really in the best interests of the club. Sales have continued this season, as Ryan McGowan (to HN Jianye, £ 293 000) and John Souttar (Hearts, £ 150 000) have left. All arrivals have been loans or free transfers (source: Transfermarkt). 

As is stands, relegation is looking very probable for Dundee United. Steven Thompson has stated that financial consequences of relegation would be grave. As he told BBC in January: "We've got an infrastructure at this club, it's for a Premiership club. If you're not in the Premiership, you have to cut your cloth accordingly and it'd be tough, there's no doubt it'd be tough.” That much is obvious, turnover would decline substantially, successful player trading would also be much more difficult, making it very hard for the club to amortise it´s debts. Making an effort to bounce back to Premiership would be a difficult task, indeed. Which is exactly why it seems so sad that the club has put themselves in this kind of position. They way the club has been run recently, it was always only a matter of time until relegation became a distinct possibility. Mathematically it is still possible to survive, even if escaping relegation now would be a historical feat. It would be sad to see such a traditional club being relegated, but if it does happen, United only have themselves to blame.

 As a Finn, it is also sad to see Mixu Paatelainen facing such a desperate task. Mixu´s period with the Finnish national team was less than succesful (to put it mildly), and it would have been nice to see him reviving his managerial career. But Mixu, you should have done your homework better.