Chelsea’s historic January transfer window came to an end in the early hours of Wednesday morning as they confirmed a British record deal for Argentine World Cup winner Enzo Fernandez.
And after an unprecedented winter window in which they signed seven senior players for over £280m, there is one question dominating the sport.
How are Chelsea able to tackle such spending while complying with UEFA’s Financial Fair Play (FFP) rules?
The answer is, as you might expect, complicated.
The Athletic explains below.
How do Chelsea plan to make it work?
Chelsea supporters have been given a crash course in amortization over the last month as Todd Boehly and Clearlake have pushed the boundaries of what is possible with player contract lengths.
By signing Mykhailo Mudryk to a deal that runs until June 2031, for example, they are enabling his €70m (£62m) transfer fee to be spread over eight years on the books instead of a more conventional four or five , thereby reducing his annual cost on the accounts.
Fernandez, Badiashile, Madueke and summer signing Wesley Fofana have similarly long contracts. This amortization ploy – which could end up backfiring if the players on these super-sized contracts don’t live up to expectations on the pitch – is one of the conditions Boehly and Clearlake have exploited to maximize their ability to front-load spending levels that most elite clubs would stretch over three or four summer windows, but not the only one.
Another arises from the other half of how football clubs report transfers in their accounts. Transfer fees for purchased players may be amortized over the length of the contract, but transfer fees for sold players are booked immediately in one lump sum (minus their remaining amortized cost on the books).
These different accounting practices can make it surprisingly easy for clubs to significantly offset or even completely balance multiple high-profile signings with as few as one reasonably large sale in their annual results – especially if the player or players being sold are already fully amortized or academic. graduates, who represent pure profit in the books.
Does this work?
A key example from recent Chelsea history: For the financial year ending June 2022, despite signing Romelu Lukaku in a disastrous £97.5m deal from Inter Milan, the club actually made a huge profit on player sales – estimated by the respected football financial analyst Swiss Ramble to be £160m – due to the departures of Tammy Abraham to Roma, Kurt Zouma to West Ham, Fikayo Tomori to AC Milan and Marc Guehi to Crystal Palace, among others.
Chelsea’s overall financial results for 2021-22 are not yet public. The club has until 31 March to submit the accounts to Companies House. But in recent years, large profits from player sales have been enough to lift the club into the black, despite matchday and commercial revenues consistently lagging behind their Premier League rivals – most recently in 2019-20, when a profit of 143 million pounds from the player. The sale contributed to a total pre-tax profit of £36m.
What is Chelsea’s current playing status?
Swiss Ramble estimates Chelsea’s pre-tax profit for 2021-22 will be £19m. Between those two years in the black is a massive loss of £156m in 2020-2021, partly a result of the huge spending spree in the summer of 2020 that brought Kai Havertz, Timo Werner, Ben Chilwell, Hakim Ziyech and Edouard Mendy to Stamford Bridge.
FFP has traditionally only allowed clubs to lose up to €30m (£26.3m) over a three-year monitoring period, although a number of accommodations were made in recognition of the impact of COVID on club revenues.
Back in September, UEFA listed Chelsea as one of 18 clubs that were “technically able to meet the break-even requirement thanks to the application of the COVID-19 emergency measures and/or because they benefited from historical positive break-even results, ” and added. that further financial information had been requested and the clubs in question “will be closely monitored in the coming period”.
UEFA also reminded Chelsea that the special COVID accommodations no longer apply, but FFP is changing in ways that make Boehly and Clearlake’s current spending more viable. From 2023-24, the allowable loss limit will be doubled from €30m to €60m, which will include the 2022-23 season as the third year of the monitoring period. Clubs deemed to be in good financial health will also receive an additional €30m in allowable losses over a three-year monitoring period, meaning Chelsea could be allowed to lose as much as €90m over three years – triple the old limit.
Before deadline day, when Chelsea finally agreed a British record contract for Fernandez, Swiss Ramble estimated a €96m loss for Chelsea over the three years to 2022-23, just above the €90m allowable loss limit. He also estimated the club’s team cost at 92 percent of revenue and profit from player sales; UEFA has decided that all clubs must reduce this proportion to 90 per cent for 2023-24, then 80 per cent in 2024-25 and 70 per cent in 2025-26.
Should Chelsea have any concerns?
Recent history suggests that Chelsea have relatively little to fear even from being found in breach of FFP. UEFA’s latest round of penalties, announced in September, included a list of fines – only a small percentage of which were to be paid immediately, with the rest subject to future compliance.
You could argue that’s the equivalent of a speeding ticket for an ambitious club determined to spend big.
Boehly has publicly insisted on several occasions that Chelsea have FFP in mind, but it is clear that he and Clearlake are pushing as close to the limits as possible to try and build a squad capable of consistently competing for the biggest domestic and European the trophies, perhaps aware that economic and regulatory conditions in the coming years may not be so favorable for this scale of investment.
Is this level of spending likely to continue?
UEFA has already moved to close the amortization gap for future transfer windows; even if a player is signed on a seven- or eight-year contract from the summer onwards, their transfer fee will be spread over no more than five years in any FFP calculation.
The increasingly tight cost control rule for the squad will also put pressure on Chelsea and their rivals to be more disciplined when handing out lucrative wages to players and coaches.
Then there is also £60m in annual commercial income that Chelsea will lose from next season, as a result of the end of a £40m-a-year deal with main shirt sponsor Three and the early termination of a £20m-a-year deal with Sleeve sponsor Whalefin. None of them have been replaced yet, the football sponsorship market is less than inviting right now and the clock is ticking before the process of producing next season’s kit must begin.
Most important of all, Chelsea currently face the very real prospect of playing the 2023-24 season without Champions League football, and perhaps without European participation of any kind. It certainly wasn’t in the original Boehly-Clearlake business plan, and would have a significant impact on the club’s transfer ambitions over the next two windows.
This is where it is important to note the very defined profile of the player that Chelsea have targeted in this January window: players aged 23 or under who have, to varying degrees, flashes of elite ability and can either blossom into key components of the the next big team at Stamford Bridge or increase the resale value in the coming years.
If enough of them prove to be positive assets on or off the pitch, nine-figure transfers won’t be necessary in future windows.
In any case, no one should expect this level of transfer spending to continue indefinitely. Boehly is not an oligarch and Clearlake Capital is not a sovereign wealth fund. The money invested is taken from private equity, and with it comes an expectation of a possible positive return – either in the form of annual profits or, more likely, a significant increase in Chelsea’s value that can be realized if the club is sold on. .
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