Thread by @SwissRamble

#FCBarcelona have signed the young forward Ferran Torres from #MCFC for a hefty €55m transfer fee (plus €10m add-ons). Given the club’s well documented financial difficulties, this deal will have left many fans scratching their head. This thread will explain how it is possible.

President Joan Laporta was characteristically bullish after the signing: “We're still players in the market. Everyone had better get ready, because we're back, and with the desire to do good things. We've got our status back. The resurgence of #FCBarcelona is a reality.”

This seemed a little optimistic, not to mention very surprising, as #FCBarcelona had been pleading poverty not so long ago. For those in the cheap seats,  it’s worth taking a few moments to remind ourselves of the magnitude of their financial problems.

#FCBarcelona reported a shocking €481m post-tax loss for the 2020/21 season (€555m before tax), which is not only by far the worst in Spain, but also in Europe. In fact, it’s the highest ever loss posted by a football club. In contrast, Real Madrid delivered a €1m profit.

#FCBarcelona total debt (including bank loans, transfer fees, wages, tax authorities, trade creditors and other creditors) has more than tripled in the last 5 years to stand at €1.2 bln, the second highest in Europe, only behind #THFC (who funded a state-of-the-art new stadium).

#FCBarcelona debt has been used to fund the purchase of new players with nearly a billion spent on transfers in the 3 years up to 2020. Their €960m was by far the highest in Europe, well ahead of Juventus €801m, #CFC €758m & #MCFC €678m. They have since applied the brakes.

That was then, this is now, and the first question is whether #FCBarcelona actually have enough cash to pay for Torres’ transfer? The answer to that is clearly yes, though it has again been funded by debt – in two different ways.

The cash comes from a Goldman Sachs loan to #FCBarcelona. The good news is that debt has been restructured with a 10-year €595m loan at 1.98% replacing old short-term debt. Before the refinancing, this was a real issue, as €731m of the debt needed to be repaid within 12 months.

That’s great, but the price to pay for #FCBarcelona debt growth is interest shooting up from just €1m in 2018 to €41m in 2021. The €26m they paid in the prior season was already the highest in Europe. In fairness, payments should fall with the new financing arrangements.

The other way that #FCBarcelona have used credit is by paying the transfer fee in stages (as done by all football clubs). They are reportedly paying the fee in four instalments with the first due this summer. Assuming these are equal, they will only have to pay €13.75m in 2021.

The other, far more difficult challenge for #FCBarcelona to purchase Torres was the salary cap imposed by La Liga’s Economic Cost Control, specifying how much each club is allowed to spend on first team players, reserves, academy, coaches, physios, etc.

Each season La Liga calculates a club’s salary cap as revenue less non-sporting expenses and debt repayments. In contrast to UEFA’s Financial Fair Play rules which look at previous years, La Liga’s regulations are applied in advance, i.e. before the spending takes place.

If a club is over its salary cap, it can only use 25% of any savings made (or transfer gains) on bringing in new players, with the other 75% used to reduce existing liabilities. If the player accounts for more than 5% of squad cost, then amount available to invest rises to 50%.

La Liga president Javier Tebas explained, “If #FCBarcelona sell a player for €100m, they can only spend €25m. If they want to bring in a player who costs them €25m a season in salary, they must earn €100m, either by transfer or salary reduction."

#FCBarcelona’s challenge is illustrated by their salary cap being severely reduced by €573m from €671m 2 years ago to just €98m in 2021/22. This is only 7th highest in Spain, miles below Real Madrid’s €739m, and behind the likes of Villarreal, Real Sociedad & Athletic Bilbao.

#FCBarcelona sporting director Mateu Alemany admitted, “The reality is that when we signed Ferran, we knew that we didn’t have any margin with the salary limit. We made an exception with Ferran, because it was worth it. We accept that and we’re working on various avenues.”

Of course, #FCBarcelona wage bill is still miles over the salary cap with the last reported figure of €432m in 2020/21, albeit down from €443m the prior year (which was the highest in Europe) and particularly the €501m peak in 2019. Includes all staff costs, not just players.

This helps explain this summer’s departures, when #FCBarcelona had to let Lionel Messi leave for free, while also loaning Antoine Griezmann to Atletico Madrid and Miralem Pjanic to Besiktas, as they needed to further reduce the wage bill.

In addition, some of the #FCBarcelona old guard accepted significant salary cuts to help the club register last summer’s signings, namely Gerard Piqué, Sergio Busquets & Jordi Alba, Furthermore, Dani Alves returned to help the cause for La Liga minimum wage (just €155k a year).

Philippe Coutinho has recently joined #AVFC on loan with Villa reportedly paying his entire salary (after the player agreed a 35% reduction). If it is true that he had become #FCBarcelona’s best paid player, it is possible the club could use 50% of his savings on new signings.

Following Sergio Aguero’s unfortunate retirement for medical reasons, the club can utilise his salary savings. Another example of actions #FCBarcelona have taken is to stop selecting Austrian Yusuf Demir, as one more appearance would have triggered an obligatory €10m purchase.

Another tactic the club is pursuing is extending player contracts. Indeed, #FCBarcelona confirmed that the recent extension of Samuel Umtiti’s contract to June 2026 permitted the club to “increase its ‘financial fair play’ quota and thus register Ferran Torres with La Liga.”

#FCBarcelona head coach Xavi has said much the same re Dembélé, “If Ousmane renews, it will allow us to make one or two signings”. This could work either if he lowers his pay or even if he simply spreads his salary over more years (as was the case with Umtiti).

Such contract extensions also help by reducing player amortisation, e.g. Umtiti down from €3m a year to €1m. This is important, as this expense is included in La Liga’s calculation. #FCBarcelona €174m was highest in Europe in 2020, though it already fell to €155m in 2021.

One reason why #FCBarcelona posted such a large loss in 2021 was generating only €4m profit from player sales, which they will look to address, as this activity produces a “double whammy” in terms of meeting the salary cap: the gain from the sale plus savings on the wage bill.

#FCBarcelona already have some major players out on loan with options to buy: Griezmann €40m (obligatory purchase, but only by 2023), Coutinho €40m and Trincao (at #WWFC) €30m. The latter two deals are not certain to happen, but they would certainly help the club’s finances.

In reality, #FCBarcelona have a long list of possible, even desirable, departures, e.g. Umtiti, Dembélé, Sergi Roberto, Neto, Sergio Dest, Martin Braithwaite, Clement Lenglet and Riqui Puig. If they want to raise big money, they might even consider letting Frenkie de Jong leave.

However, Alemany, who seems to be the #FCBarcelona voice of reason, cautioned, “When we make space in the ‘fair play’ with departures, we will have to see if it is enough to make more signings.”

As is often the case, people tend to overlook any additional costs, such as the new signings in the summer, contract improvements for academy graduates joining the first team squad (Pedri, Fati, Gavi, Nico, etc) and management changes (Xavi replacing Koeman including pay-offs).

More encouragingly, it is worth noting that #FCBarcelona €481m loss was significantly impacted by €271m once-off costs following the Due Diligence report, i.e. €161m player impairment, €26m other impairment & €84m provisions (law suits, tax cases), which will not be repeated

Similarly, #FCBarcelona loss included a net €92m impact for COVID. The revenue reduction was €219m, mainly stadium €181m and commercial €56m, while expenses were cut €127m (deferred wages €60m, savings from not opening stadium and stores €64m).

In other words, #FCBarcelona underlying loss, i.e. excluding the €271m once-off charges and €92m COVID impact, is “only” €119m, as opposed to the reported €481m. To be clear, this is still an awful figure, but nowhere near as eye-wateringly bad as the headline number.

Clearly #FCBarcelona have been massively impacted by COVID over the last couple of years. Even though they still had the highest revenue in the world in 2020 (per the Deloitte Money League), this has fallen by more than a third from €990m in 2019 to €631m in 2021.

Before the pandemic struck, #FCBarcelona claimed that they were on track to be the first football club in the world to generate more than €1 billion annual revenue. If they can replicate this performance after COVID diminishes, their salary cap will correspondingly increase.

In particular, as all home games were played behind closed doors in 2020/21, #FCBarcelona competitions revenue was only €8m, while season tickets & memberships cards incme was down to €16m. These revenue streams had been as high as €114m and €61m respectively two years ago.

Similarly, #FCBarcelona marketing and advertising revenue has dropped from €363m in 2019 to €270m in 2021. This should also rebound in a “normal” season. In fact, Laporta will be looking to grow sponsorships to create some more space in  the salary cap.

On the other hand, #FCBarcelona will see a reduction in their UEFA TV income following this season’s exit from the Champions League at the group stage. In 2019 they received €118m for reaching the semi-final, but my model suggests that their current earnings are only €67m.

If #FCBarcelona revenue does increase to pre-pandemic levels, then the salary cap should also climb. Two years ago this was the highest in Spain at €671m, even more than Real Madrid’s €641m, so it is not all doom and gloom, albeit an immensely difficult balancing act right now.

There is yet another hurdle for #FCBarcelona to clear, as members have recently approved the ‘Espai Barca’ project to remodel the Camp Nou stadium and develop the surrounding areas, which will require an additional €1.5 bln loan from Goldman Sachs on top of existing debt.

One possibility for #FCBarcelona to ease their financial problems is for them to sign-up to La Liga’s €2.7 bln deal with CVC Capital partners. Laporta has not completely ruled this out, but the club is not keen on giving up 10% of its TV revenue over the 50-year agreement.

As you will have seen, the calculations to meet the salary cap in La Liga are rather complicated, so only the suits in #FCBarcelona will know exactly what is required to balance the books, though it will require some fancy footwork for sure.

#FCBarcelona would clearly love to return to their traditional business model, where they spend big to deliver success on the pitch, thus generating more revenue to spend, but instead they currently have to focus on a series of “quick fixes” to meet financial fair play targets.

Despite this piecemeal approach, Laporta continues to think big, responding, “Everything’s possible”, when asked whether Erling Haaland could join #FCBarcelona. The smart money says he will end up elsewhere, but stranger things have happened in the crazy world of football.