Leicester City have written off £194million of debt owed to parent company King Power International and converted it into equity.
Is it a grandiose display by the owners in the face of recent criticism from some fans?
Or is it an indication that the owners are making the club more attractive to potential investors or buyers?
According to Kieran Maguire, football finance expert and author of The Price of Football, it is probably just the club’s owners trying to tidy up their balance sheet.
“It is more of a cosmetic housekeeping exercise,” he tells The Athletic. “The football club would never have been in the position to repay King Power the loans, so it is formally acknowledging the nature of the relationship between the two. It has no impact on the value of the club.”
The club said in a statement that the loans have been given to the club over the last four years to “fund the construction of the club’s world-class new training ground at Seagrave and to continue to support the club’s investments into its squad and women’s football during the COVID-19 pandemic.
“Their conversion into equity serves to strengthen the club’s balance sheet, reduce its interest costs, and provide further evidence of King Power’s commitment to supporting the club’s long-term sustainability.”
According to Maguire, it is certainly not an indication that Aiyawatt Srivaddhanaprabha, chairman of the club and CEO of King Power, is looking to sell to serious investors.
“If I was tasked with selling the club, to be able to project it to potential buyers as having no debt, it looks nicer,” he says. “It is the type of thing you might consider if that was your objective, but to a serious investor it wouldn’t make any difference.
“I sometimes see sale brochures of individual clubs, which I can’t name, and it looks glossy, it looks more persuasive, and might attract some people who might not have been otherwise interested, but a hardcore investor would not be bothered.”
Leicester signing Harry Souttar (right) could be seen as a sign of the owner backing the manager (Photo: Gareth Copley via Getty Images)
It isn’t a new move by King Power. In 2013, they converted £103million of loans handed to the club following their £39m takeover from Milan Mandaric in 2010 into equity. That initial investment paved the way for promotion to the Premier League and the incredible success the club has enjoyed since.
But they never intended the loans to be repaid — it is the same now.
“It is a bit like me giving one of my kids a few grand for a deposit for their first house,” says Maguire. “I am never expecting to get that back, even though it is a loan.
“It is the owners effectively becoming the bank of mum and dad, and formalising the position.”
But the fact that they don’t expect the loan to be repaid doesn’t mean the owners may not get their money back someday if they sold the shares, especially as the value of Premier League clubs continue to rise.
“I think they would get their money back,” Maguire says. “The asking price for Leeds United is around £500million and Newcastle went for £300million, which looks a bargain now. There is increased value in Premier League clubs, so they could recover that money from the sale of the shares, certainly.”
Regarding the reduced interest costs, there has been talk of the impact of the conversion when it comes to financial rules. The club’s ambition — until their struggles this season — was to compete regularly in European football, which means obeying UEFA’s financial fair play (FFP) rules. However, this latest move won’t make a significant difference.
“The interest payments were never cash payments,” Maguire explains. “They just got added to the value of the debt. Charging interest on a debt that was never going to be paid is a bit farcical.
“From an FFP perspective, if you are no longer going to be charging interest then that is one less expense in your FFP calculations. So there is a benefit.”
But a small one. What will make a much more significant impact on the club’s finances — and their ability to earn more and therefore spend more — will be the expansion of the East Stand at King Power Stadium, and the retail, leisure and office facilities that are planned for outside the ground.
However, after a month when the owners demonstrated their commitment to manager Brendan Rodgers with new recruits, the debt conversion is certainly another sign of the owners’ active stewardship of the club’s future.
(Top photo: Leicester City’s chairman Aiyawatt Srivaddhanaprabha; by Adrian Dennis/AFP via Getty Images)
