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Bavarian Financial Works: FC Barcelona’s debt ruins Karl-Heinz Rummenigge’s breakfast

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We take a look at FB Bayern and FC Barcelona’s approach to debt.

Bayern Munich’s chairman Karl-Heinz Rumm Photo credit should read FABRICE COFFRINI/AFP via Getty Images

In a recent interview Bayern Munich stalwart Karl-Heinz Rummenigge was asked about FC Barcelona’s widely reported debt crisis. His response was frank and straightforward, “I read about Barcelona’s debts while having breakfast and I almost choked.”

Rummenigge went on to say that he could not sleep at night if his beloved organization carried that amount of debt and that Bayern would continue to act as “model children” while they pursued their dual goals of sporting success and economic stability.

Time and again people are asking how does Barcelona continue to pursue players and even operate with the massive amounts of debt, both short and long term, that the club carries? Let’s take a look at just where the FC Barcelona debt is right now, what it means, and how it compares to Bayern’s financials and other top level teams that have debt issues.

Barcelona’s current situation

While headlines like to scream that FC Barcelona is in crisis by carrying over a billion euros in debt at the moment, the number, while large means nothing without context. For the sake of this article let’s just use the figure of €1.2 billion for Barca’s current debt. The value of the entire club is estimated at about €4 billion euros, meaning their debt is about 30% of their total value. For context, Bayern’s debt tends to run under 5% of the club’s revenues, which are obviously much smaller than Bayern’s total value. If Bayern’s revenue runs around €700 million per year, they might carry around €35 million in debt in a bad year. So, for an apples-to-apples comparison, with Bayern having a value around €3 billion, Bayern’s debt might be around 1% of their value.

But how does that compare to other clubs? While the absolute figure seems historically high, it relative terms their levels of debt are not unheard of. If Barca’s debt is €1.173 billion and their net debt is €488 million, Real Madrid’s debt chimes in at an also eye-watering €901 million and €355 million — not at Barca’s level, but not that far off.

But the raw numbers don’t tell even half of the story. As any homeowner knows the two key components to debt (after the principal amount) are the interest rate and how long you have to pay it off. If you have a €500,000 mortgage on your house and need to pay if off in five years, that can be impossible. But if you have twenty or thirty years it’s not such a big deal. For Barca there is bad news on that front, about 77% of the debt is apparently due in the short term. While this is not defined, it probably means within the next two or three years, with some reporting saying almost €300 million of the debt coming due this spring at some point.

To meet those shorter term obligations Barca has options. They can try to convert it to long term debt (the rest of their debt beyond the 77% is reported to be on a 30-year term), they can raise some capital and retire the short term debt, or they can kick it down the road via more short term loans. They will probably due a mix of all three and they reportedly have €500 million recently borrowed from Goldman Sachs to keep operations going.

There is good news for Barca on the interest rate front. Interest rates are at a historic low, the money coming from Goldman Sachs is reported to be in the 3-4% range. If Barca can stabilize or stop their debt growth, it would only cost them €30-€40 million a year to carry a debt of a billion euros. Not chump change, but not an existential threat either.

To give further perspective Manchester United’s debt after the takeover rose to over £700 million (Yes, pounds — I’ll save you the work—that would be just over a billion euros in today’s money). However that debt was financed in various tranches with interest rates ranging from about 8% up to 16%. Far more corrosive than Barca’s current plight.

The roots of the problem

Barca’s debt crunch arises from two key factors. The first is the current pandemic shut down and the second is their financial mismanagement.

The pandemic has hit FC Barcelona hard. Besides the obvious loss of game day revenue on a 99,000 seat stadium, their museum generates over €50 million in revenue a year, their soccer schools over €15 million, and their multiple retail outlets millions more. All of that has simply dried up during the pandemic.

Without delving into their transfer history, their wage bill is also bloated. Many football financial experts suggest around 60% of revenues going to wages is a high but healthy level. La Liga, which has a salary cap, sets a maximum of 70% by league rules. Barca has danced on the edge of the salary cap, often sliding up close to 70% but with the sudden drop in revenue it looks like they will be well above that level for the current season. It remains to be seen what, if any, discipline the league will hand out for this violation. Despite having shaved a reported €80 million a year off of their salary bill they are still projected to exceed the salary cap.

FBL-ESP-ARG-BARCELONA-MESSI Photo by MANU FERNANDEZ,LLUIS GENE/AFP via Getty Images

The repair work is underway

FC Barcelona is already taking steps to bring in investors to help retire large amounts of the short term debt, but it remains to be seen just how this will impact the club. Since Barcelona is a fan-owned club, they have to be somewhat creative, almost sneaky, in how bring in investors. It appears that the club is going to sever off some of its holdings including real estate, the academy and various digital rights into a separate company and sell a minority stake in that stand-alone body to various investment groups.

The wage problem is on the verge of solving itself. Messi’s €100 million plus a year contract is on the verge of coming to an end. This legendary player’s salary is reported to account for 40% or more of the entire club’s wage bill. Unless Messi is willing to take a massive wage cut, they are better off letting him walk away this summer rather than further mortgage their future to one player.

Lastly, due to the pandemic, a large number of sports investment groups have formed controlling billions of dollars in capital. They are watching the big soccer leagues in Europe for signs of financial weakness and are willing to step in to “help” teams in their times of trouble. This means that there is plenty of money out there that Barcelona can borrow, but the downside is that their interest rates will not likely be at the 3% level.

But according to data from finance blogger Kieron O’Connor (aka Swiss Ramble) on team losses last year, the investment funds won’t have a shortage of targets:

1. Benfica +€42m profit

2. Ajax +€20m profit

3. Real Madrid €0

4. Celtic €0

5. Atletico Madrid -€2m loss

6. Lazio -€16m loss

7. Napoli -€19m loss

8. Rangers -€20m loss

9. Manchester United -€26m loss

10. Olympique Lyonnais -€37m loss

11. Borussia Dortmund -€44m loss

12. Southampton -€71m loss

13. Tottenham Hotspur -€72m loss

14. Juventus -€90m loss

15. Barcelona -€97m loss

16. Inter Milan -€100m loss

17. Everton -€158m loss

18. AC Milan -€195m loss

19. Roma -€204m loss

(with thanks to Planet Football for compiling the data)

Final Thoughts

Legendary football clubs like Bayern Munich and Barcelona are literally money making machines. Since the year 2000, Barcelona has increased their income six-fold, vastly outstripping inflation. The difference in financial outcomes arises simply from the soundness of the their economic plans.

Barca suffered a financial crunch in 2010 and now face another one. Bayern has chosen steady conservative growth over that period, while not sacrificing on the field success. Barcelona’s management has been short sighted, ego driven and astonishingly inefficient. The results speak for themselves.

Bayern continues its on field success even in the face of the pandemic, while Barcelona looks on the verge of a significant step back. Getting their financial house in order seems nearly certain to reduce the sporting competitiveness over the next few years. A wholesale change in philosophy is needed for the Blaugrana to return to consistent glory.