Despite us being reliably informed by SAFC fans all last season that the Championship was “easy”, there’s an outside chance, the merest remotest of possibilities, that Sunderland won’t get promoted back to the Premier at the first time of asking.

Without regurgitating the old Tommy Docherty gag, it seems that Sunderland’s manager(s) are determined to get their club out of the 2nd flight this season. But not in the way their dwindling fan base had expected.

And why are they plummeting faster than Donald Trump’s ratings? The answer is simple. It’s their finances. Or to be more accurate the lack of them.

I wrote an article in the summer explaining how Sunderland had hurtled into their current financial car crash.  Obviously it gave me no pleasure to do so but I’m reliably informed that there’s an unquenchable thirst amongst our undoubtedly bitter support for every minutiae of Sunderland’s implosion. Apparently you just can’t get enough of it. So by popular demand, here’s the next epic instalment in the disaster movie which is Sunderland’s finances. Car Crash II.

So how did the first instalment end? With the prophetic words that “if they do not return [to the Premier] immediately, the financial consequences will keep on getting worse and worse”.

And this is what we’re going to look at. Whilst in the first instalment, we analysed how SAFC had arrived at their current predicament through years of spending money they didn’t have, we will examine what the future holds for Sunderland now that an extended holiday from the Premier looks likely.

We’ll take an in-depth look at their debt and how it’s likely to become an ever heavier millstone around their necks. We’ll ask whether this debt risks administration or whether their sugar daddy, Short, will continue to subsidise them. And finally, we’ll analyse how the Championship, or cherish perish the thought, Division One, will impact on their income and what that will mean in terms of how the club operates.

So let’s put to one side the laughter, the ridicule, the comedy at their predicament and take a moment to focus on their finances. And first up for scrutiny is their debt.

The latest published figures (30th June 2016) show gross debt of £139m. This figure is about 18 months out of date but I think it unlikely to have materially changed since then. Let’s put that in context. The gross debt was the 4th highest in the Premier League in 2016 (surpassed only by Man Utd, Arsenal and Liverpool) and the highest in the Championship.

The first thing to note here is the structure of their debt which comprises two loans. One from Ellis Short for £69m via his company Drumaville Ltd. But crucially, a second loan for £70m from external financiers, Security Bank Corporation (SBC). It’s this second loan which is key.

The loan from SBC attracts a whopping rate of interest (7.5% plus LIBOR). Not quite Wonga or ‘Big Jimmy from Byker’ rates but not far off. Lenders base their interest rate on what they perceive to be the risk of making that loan (i.e. the risk of defaults on repayments). It’s clear what SBC made of Sunderland’s financial status. And remember, this rate was agreed in 27/8/2014 when Sunderland were in the top flight. They were receiving huge TV money at that time meaning the debt was fairly easily serviceable. That all changed when they dropped out of the Premier League.

The loan from SBC is repayable on the 27th August 2019. This is a red letter day for Sunderland. How exactly do they repay that loan? They have three options.

  1. They repay the loan from existing funds generated by the club. It’s clear that this is unlikely. They could sell every player on their books, the Stadium and the training ground but it still probably wouldn’t come to £70m.
  2. Short repays the loan with a further loan from his personal wealth (via Drumaville). Short has already done this for a slice of the SBC loan (£15m was due in 15/16). All the debt would then be owed to Short. I don’t think he will go down this route either for reasons I will discuss later.
  3. Sunderland refinance the loan.

Option 3, whilst being the most likely, will cripple the club for years to come. In 15/16, SAFC’s interest payments were £6.9m. This was the 4th highest in the Premier only surpassed by Arsenal, Man Utd and Tottenham. If SBC or another lender is prepared to loan them £70m in 2019, they will charge an eye watering rate of interest due to the perceived risk. The interest could be north of £10m a year.

As revenue reduces due to the parachute payments falling away, those interest payments will become an increasingly high burden for the club. It’s possible that interest payments will take up the best part of half of their income in the future.

But it gets worse. The debt figures I’ve highlighted above didn’t include the money they owed on transfer fees. At 30/6/16, the net position (including money owed to SAFC by other clubs on transfers) was £26m (£35m – £9m). Sunderland will be paying the price for their catastrophic transfer dealings for years to come. And they don’t come any more catastrophic than Ricky Alvarez.

A note to the 15/16 accounts states that SAFC’s legal team considered it unlikely that they’d lose the court case against

Sampdoria so they made no provision for the estimated £9.6m they’d have to pay out. Their legal team is obviously as bad as their football team. They did lose. Lump another £9.6m onto the £26m transfer fees owed and £139m loans.

So it’s clear that Sunderland owe just slightly less than a small third world country. But is there a risk of them going into administration? My view is that as long as Short is there, administration is unlikely. Let me explain why.

Sunderland’s external creditors, namely SBC, can call in the administrators if they consider that SAFC will default on their loan. As explained earlier, the risk of this will increase the longer they remain outside the top flight.

But it just wouldn’t make sense for Short to allow this to happen. For a football club in administration, the “football creditors rule” requires football-related debts such as wages owed to players and staff, and transfer fees owed to other clubs to be paid first.

Short has made a huge personal investment in the club. Administration would mean that he’s unlikely to get anything back. So I think he’ll provide just enough funds from his own pocket to keep SAFC operating as a going concern. But “just enough funds” means exactly that. It means keeping the lights on.

Short has exactly the same problem as Mike Ashley had in 2009. He wants to sell the club but the debt will put off any prospective buyers who will inherit a whopping liability. To make the club more attractive to buy, the debt has to be reduced. To reduce the debt, losses need to be turned into profits. That’s what Ashley did. And that’s what Short will have to do if he wants to offload the club.

But be in no doubt, Short’s mindset has changed. He is no longer willing to fund the transfer splurges that SAFC fans have become used to over the last ten years. Not only is he unwilling, I reckon he may also be unable. His wealth is relatively modest in terms of football league owners and is largely tied up in non-liquid assets. I suspect he simply doesn’t have the spare cash to invest in the sums demanded by their supporters. Hence the club obtaining the £85m loan from SBC in 2014.

SAFC fans are about to wake up to the reality of what clubs like Newcastle have endured for years – attempting to live within their means.

And their “means” are rapidly diminishing. The biggest hit of course is TV income. If Sunderland do not return to the Premier League, be it in the Championship or Division One, their TV income drops away to virtually nothing by 2020/21 as parachute payments end in 2019/20.

 

Premier League C’ship Div 1 Div 1 Div 1
£m 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21
ESTIMATED
TV money 71.6 100.0 2.3 1.3 1.3 1.3
Parachute payments 55.0 45.0 20.0
Total 71.6 100.0 57.3 46.3 21.3 1.3

 

What about gate money? This won’t impact SAFC too much whichever division they’re in. In 15/16, their gate money was only £10.6m, one of the lowest in the Premier League. Average attendances have dropped from 41k last season to about 27k this term, a drop of 34%. I expect average attendances to drop further to around the 20k mark next season, regardless of which division Sunderland are plying their trade. Gate money will likely bottom out at about £5m.

In 15/16, Sunderland made a fairly impressive £26.1 million from commercial income. This will also take a serious hit. Let’s illustrate with an example.  Sunderland’s shirt sponsorship deal was worth £6m a season with Dafabet and was the 10th most lucrative in the Premier. Shirt sponsorship outside the Premier is worth a fraction of this. As new deals are negotiated and relegation clauses are implemented, commercial income will dwindle.

During the 15/16 season, Leeds United made the most in the Championship through commercial income, earning £16.7 million. I expect Sunderland’s commercial income to drop below that as their “brand” becomes increasingly toxic to be associated with for sponsors. A half empty stadium, a hopeless team, players getting locked up for paedophilia, supporters defecating on their seats. Would you want your product associated with that?

So with income collapsing, how will Sunderland operate if they are to live within their means? By cutting to the bone. This isn’t as easy as it sounds. We’ve already seen how servicing the debt will become more and more difficult for Sunderland. But that’s a drop in the ocean compared to their players’ wages.

Sunderland’s wages in 15/16 were £71.6m. Whilst several high earners have moved on since then, there’s still a number who will see out their eye wateringly lucrative contracts in the coming years. Jack Rodwell is a prime example. He’s got 18 months to run on a contract worth purportedly £60k a week. If SAFC are relegated, his salary will likely be more than the entire wage bill of some of the clubs they will face. And then you’ve got Lee Cattermole. And John O’Shea.  And Darron Gibson. Etc.

So as contracts run out, Sunderland will be forced to replace their high earners with Championship and Division One journeymen. From Jermain Defoe to James Vaughan. From Jordan Pickford to Jason Ruiter.

And what about transfer spending? From 06/07 to 13/14, SAFC had the sixth highest net transfer spend in England bankrolled by their owners. This sort of spending raised expectations amongst their fan-base that this was the norm. It’s clear to anybody rational that those days are over. Judging by social media, “anybody rational” does not include their own support.

Coleman has already attempted to manage expectations. “The January transfer window, we will have to generate some cash ourselves. We have got what we’ve got. I haven’t been promised any huge transfer kitty where we can just go and splash cash.”

The likes of Kone, N’Dong, Borini and Lens will leave for transfer fees hugely reduced from what they could have expected 18 months ago, such is SAFC’s bargaining position over transfers. Clubs are aware of their finances and will circle like vultures. Remember, in a similar position in 2009, Newcastle would have accepted £1.5m for Andy Carroll.

And whilst the sale of the likes of Pickford may provide a short term plug to the gap in the finances caused by the loss in TV income, the number of saleable assets are rapidly diminishing (as demonstrated by their league position). And, as in the summer, these remaining sales will largely go towards the day to day running costs of the club rather than financing incoming transfers. Coleman will have to make do with free transfers, bargain basement and loan deals. If a club is prepared to buy Grabban from Bournemouth, he’ll leave too.

So whilst things may appear bad at the moment for Sunderland, you can rest assured that they’re about to get a whole lot worse.

But as highlighted earlier, it appears everyone at the club is still in denial at the financial position outlined in this article and deluding themselves into thinking that they are a “big” Premier League club.

In a statement to the press following their failed bid to take over the club in June, fans consortium group Fulwell73, announced “our club is the biggest in the North East, should be one of the biggest in the country and the Premier League is therefore the only place it belongs.” (for added comedy, they also reckoned their fans were reputed to be the “best in the world” but that’s another matter!)

Even owner Ellis Short has got in on the act. In a rare interview in November, he stated that Sunderland should be competing at the top of the Premier League “in a good season, maybe sixth or fifth”.

It’s a fantasy world of entitlement created simply on spending cash they didn’t have over the last ten years. Their supporters lapped it up at the time but it was never reality, it was never sustainable. It was a delusion which was always going to be exposed. How brutally will become clear over the coming years.

Sit back, open the popcorn and enjoy. Car Crash II coming to a cinema near you.

TOM McMENEMY