Thread by @SwedishRumble

(1/40) #CFC’s strategy signing long contacts to lessen the #FFP impact is much covered. In this 🧵, it is explained how #Boehly’s FFP strategy has enabled #CFC to spend £68.5m more than rival clubs in compliance with FFP – and it has nothing to do with the length of contracts.💣

(2/40) In 2022, the new FFP rules -- #FinancialSustainabilityRegulation / #FSR – entered into force. FSR is described as FFP, but with teeth. So how can #ChelseaFC spend 490m? As a shrewd PE investor, #Boehly will have simulated different strategies, and...

(3/40) …the path chosen by #Bohely is of course the one deemed the most beneficial for #CFC. As shown in the following, it will however impose austerity on CFC for coming years.

(4/40) Tweets (5/40) to (24/40) establishes a forecast for CFC’s compliance under the new FFP rules. Tweets (25/40) covers what this performance will mean in practice, which actually is the most interesting part.

(5/40) @SwissRamble and @KieranMaguire have made excellent analysis on the conditions for Chelsea to obtain a license for the 23/24 season (under the old FFP rules). To understand Chelsea’s strategy, we must however look an additional year ahead.

(6/40) The following forecasts are based on the assumption that Chelsea finish outside top 4. I mark the quality of my forecast on a scale from 1-10 depending on available information. This gets a 4, since the 21/22 Annual Accounts are not out, but we have the above forecasts.

(7/40) The main rules in Chelsea must comply with in the new FSR are the #FootballEarningsRule (hereinafter “FER”) and the #SquadCostRule (“SCR”). Let’s first look at the FER.

(8/40) The performance under the FER is calculated as follows: Relevant Earnings – Relevant Expenses + Relevant Investments = Football Earnings. Football Earnings cannot be less than minus £70m for CFC.

(9/40) UEFA’s licensing system is backward-looking. Hence, Chelsea’s spending in the summer of 23’, impacts its license in 24’. The FER monitor period in 24’ covers the 22/23 season and the 23/24 season.

(10/40) Hence, FSR will never “stop” someone from doing something, but if you done wrong, you will be punished for it down the road.

(11/40) To ensure compliance in 24´, Chelsea must in the summer of 23’ determine its outcome from 22/23 and prepare a budget for 23/24 based on a forecast for its financials that season. Since we do not have any 22/23 data, we must forecast both 22/23 and 23/24 seasons.

(12/40) The basis for our forecast will constitute on the below information on Chelsea provided by (a) @SwissRamble’s 2023 forecast (swissramble.substack.com/p/will-chelsea…), (b) Deloitte’s data from its Football Money League (in EUR):

(13/40) and (c) OffThePitch’s PL forecast for 21/22 (in Sterling):

(14/40) To these, a great number of adjustments must be made to get forecasts for the 22/23 and 23/24 year-end reports. So, what have happened on the income side for Chelsea? Naturally 22/23 has CL revenue – while 23/24 won’t.

(15/40) In addition, costs related to the new signings must of course be included. However, the big variable for CFC’s figures is the Club’s player sales, an area in which CFC do better than everyone else.

(16/40) When a player is sold, it impacts CFCs Earnings in three ways. (1) A profit or loss is made on the transfer fee, calculated by deducting Remaining Book Value (RBV) from the transfer fee received, (2) the club rid itself of the yearly amortization of each player, …

(17/40) and (3) the club will no longer pay the player’s wage. When Werner was sold for 20m, his RBV was 3/5*53m=31.8m, his amortization costs was 53/5=10.6 and his wage 14.4m, giving an impact on earnings of 20m-31.8+10.6+14.4= plus 13.2m y1.

(18/40) The forecast is made on the assumption that the deadwood/FA – Kante, Azpilicueta, Aubameyang, Pulisic, RLC, Jorginho, Ziyech and Silva – are removed form CFC’s squad and were applicable are sold for reasonable fees.

(19/40) On the cost side, the new signings are of course included as per Spotrac data.

(20/40) As a result, we get the following forecast under the #FootballEarningsRule for #CFC, meaning that the Club would be £150m – below – the acceptable deviance:

(21/40) Given the conditions for this forecast, it certainly contains a significant margin of error, but in no scenario could CFC’s deviance be within the €70m acceptable limit when reviewed in the summer of 2024.

(22/40) Over to the #SquadCostRule, under which a licensee’s squad cost ratio for the licence season must be no greater than the defined limit of 70%. What is the SCR? It is calculated as Amortization+Wages (Squad costs) / (Football Earnings + avg. profit from transfers/3 years).

(23/40) The SCR is however implemented in three steps, 31 December 2023 the defined limit is 90%, in 2024 its 80% and in 2025 its 70%.

(24/40) A key feature is that the Squad Cost Rule, complicating things, is that the Denominator is calculated as a 3-year average.

(25/40) With the above assumptions and adjustments, we get the following result under the #SquadCostRule, were CFC is found to breach the rules with a Squad Cost Excess of 48.7m and 91.9m:

(26/40) So is the analysis done now? After @SwissRamble and @KieranMaguire ‘s analysis, we knew #CFC would be in trouble going forward without CL income. No, this is only the factual side of equation, to …

(27/40) evaluate the practical side, it is what will happen next that matters. So what will happen to #CFC? We have concluded that CFC surely will breach the 90% threshold for the Squad Cost Rule when evaluated after 31 December 2023. …

(28/40) And that Chelsea surely will breach the new Football Earnings Rule when reviewed the first time in the summer of 2024. @SwissRamble finds that #CFC will pass the test in the summer of 2023 under the old rules.

(29/40) The margin for CFC’s compliance under the old FFP rules is just 6m, doesn’t include the latest transfers and depends on how far CFC goes in the CL.

(30/40) A breach is coming – but the timing for it, whether it is in the summer of 23’ or 24,’ is up in the air. We will get back to the importance of this.

(31/40) The breaches of the SCR, will result in a fine established in accordance with the below. How big is the breach? The fine for the first should be around 6-10m and – if nothing more is done – uptowards 45m for the second breach.

(32/40) But the real impact comes from the breach of the stability requirements – whether under the old FFP in the summer of 23’ or the FER under the new rules in the summer of 24’ – that will have a big impact.

(33/40) A smaller fine will be issued, but in connection with this, the relevant UEFA body will compel CFC to enter into a standardized Settlement Agreement with it. Relevant provisions of a Settlement Agreement are summarized below.

(36/40) In brief, with the level of breach as a starting point, Intermediate Financial Targets (IFT) are established which leads the club to compliance. The IFT are monitored on a 6 months basis. The sanctions for these violations shall be progressive…

(37/40) …and are so strict to start with, that it is impossible to see any club being competitive if in breach of them several years in a row.

(38/40) To achieve that, the following IFTs are required, meaning that CFC must improve its earnings with 33.5m per season three years in a row. This results in that CFC’s total deviance under the FER can be €160.5m.

(39/40) Meanwhile, the “Good Citizen FC” can only deviate from the FER with 92m over the same period, i.e. it can spend 68.5m less than CFC. I have not included CFC’s fines for the breaches, but its doubtful if they will amount to anything close to 70m.

(40/40) Does this explain while CFC is hoarding players this January window, making it seem like they almost are trying to breach the FFP with as much as possible? Simple answer, yes.

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