Liverpool FC - 22/23 CF Statement and Debt Estimates
Initial LFC Financial Estimates: Part 3
Welcome to the final entry in this series estimating Liverpool’s 22/23 financials.
As a quick recap of content thus far:
Part 1 centered on the P&L statement and estimated that the club generated revenue of £578.7m, EBITDA of £89.3m, and pre-tax profit of £1.5m in 22/23, with each figure representing a modest decline compared to 21/22 results.
Part 2 focused on fixed asset investment and estimated a net spend of £144.0m across players (£95.0m) and infrastructure (£49.0m).
Building on estimates from the prior two entries, this post will estimate LFC’s 22/23 cash flow statement and debt metrics as of 31 May 2023. Given that Liverpool are cash-flow-sensitive and general debt-averse under FSG, these are crucial elements to consider when evaluating Liverpool’s overall financial performance.
Housekeeping Notes
This entry will provide full cash flow statement and debt estimates up front, followed by a discussion of the development of figures.
The standard disclaimer applies that these are estimates and therefore are (i) subject to revision as new information becomes available and (ii) developed based on judgments and assumptions, and therefore will vary from actual figures. The objective of this exercise, and subsequent updates, is to provide a directionally reasonable assessment in advance of published accounts in February / March 2024.
Cash Flow Statement and Debt Estimates
I have estimated the following with regards to cash flow for 22/23:
Operating cash inflow of £89.4m, a decline of £21.0m from 21/22.
Attribution: working capital movements down £11.3m; EBITDA down £7.1m; net cash interest payments up £2.6m.
Investing cash outflow of £127.8m, an increased outflow of £39.4m over 21/22.
Attribution: infrastructure payments up £25.6m; cash net spend related to player registrations up £13.8m.
Financing cash inflow of £38.4m, reflecting an estimated £78.4m swing from 21/22 when there was a £40.0m repayment on the revolving line of credit. The analysis assumes cash remains level YOY and no change to the owner loan balance.
Note that my cash flow presentation below departs from the standard format for operating cash flow as it provides revenue less cash expenses, rather than operating profit/(loss) with non-cash add-backs, to arrive at operating cash flow before working capital movements. Liverpool’s cash flow reconciliation is relatively simple, and I feel this format is more informative to readers.
For changes in debt from 31 May 2022 to 31 May 2023, I have estimated:
Net financial debt increased by £38.4m, as identified in financing cash flow estimates, from £145.0m to £183.3m (note that there is occasionally rounding impact for figures in this entry).
Net transfer debt increased by £16.2m, from £38.6m to £54.7m.
These figures result in an estimated increase in football net debt, the sum of net financial debt and net transfer debt, of £54.5m.
Cash Flow from Operations
Cash flow from operations (CFO) is a critical metric for Liverpool as it is the club’s primary source of funds for player and infrastructure investment.
Estimating CFO requires consideration of (i) EBITDA, which was estimated at £89.3m in Part 1 and did not include any non-cash operating gains/(losses), (ii) exceptional cash expenses, which were previously modeled at nil, (iii) working capital movements, (iv) net interest payments, and (v) tax payments.
As Liverpool’s net tax payments have been de minimis over the past decade (with none since 13/14) I have estimated the figure as nil in 22/23.
For working capital movements, Liverpool tend to see slightly positive cash flow uplift on average, with the net increase in operating creditors typically higher than the increase in operating debtors and inventories by ~ £4.8m to £6.0m on average over a five-to-ten-year look-back period.
Based on this historical profile I have estimated positive working capital movements of £5.0m for 22/23. While this is a relatively crude approach, I don’t think it is an unreasonable estimate when considering various factors that may impact working capital on net. These factors, which are non-exhaustive, include (i) the receipt of the €15.5m UCL stage payment for reaching the 2022 UCL final falling in the 22/23 financial period, (ii) likely increase in deferred revenue from ticket sales in consideration of stadium expansion and (ii) likely negative cash-flow-impact of high variable bonuses earned in 21/22 disbursed in the 22/23 period.
With respect to net interest payments, I have estimated an increase from £2.2m in 21/22 to £4.8m in 22/23, reflecting higher rates and projected higher incremental usage on the club’s revolving credit facility. Note that this figure is slightly different from the net interest expense of £5.9m in Part 1 as the P&L figure includes notional interest on transfer installments.
The estimates for working capital movements and net interest payments largely offset, resulting in a CFO estimate of £89.4m, which is in very close proximity to the EBITDA estimate of £89.3m in Part 1.
Note that the proximity of these two estimates fit what has been observed over the prior decade. While there was notable divergence in each covid-impacted year, when viewed in aggregate over the two years the relationship generally held.
Cash Flow from Investing - Capital Expenditure
Liverpool’s cash spend on infrastructure tends to closely track costs each year, reflecting low impact from trade financing for this investment segment.
Given this relationship, it is reasonable to assume that cash payments for infrastructure in 22/23 will be in line with costs incurred, which I estimated as £49.0m in Part 2 (ARE: £44.0m; general demands: £5.0m).
This estimated level of cash spend on CapEx results in a CFO less CapEx estimate of £40.4m, which would represent a 53.5% reduction from 21/22.
Cash Flow from Investing - Player Registrations
While net cash spend for CapEx generally approximates net cost, the relationship is very different for player registrations, where the impact of trade financing in the form of transfer installments causes notable divergence between cash net spend and net cost.
Generally speaking, cash net spend is the far more stable measure, with the standard deviation (a measure of variability) for net spend 3.1x greater than cash net spend from 2012-2022 and 4.0x greater when shortening the look-back to 2017-2022.
In consideration of this dynamic, I developed cash flow estimates using the following framework:
Transfer installments payable and receivable in 22/23 are per 21/22 club account data. While LFC don’t directly segment between current and non-current transfer installments, the segmentation is easily derived assuming 100% of trade payables and receivable > 1-year are transfer related, a relationship generally observed for peer clubs that provide such segmentation.
Up-front transfer payments and receipts for new transfer activity in 22/23 that are 30% of guaranteed transfer fees that were estimated in Part 2. The market has evolved such that one-quarter to one-third of the guaranteed fee is commonly due in the first installment, forming the basis for the assumption.
Liverpool paid £33.7m in agents fees from 01 February 2022 to 31 January 2023 per the FA report. I used that figure as a proxy for agents’ fees for the 01 June 2022 to 31 May 2023 period, used personal judgment for the split of agents’ fees between acquisitions/retention and sales, and included some modest additional transaction fees (e.g. sign-on fees) on the payments side.
Estimated add-ons met, which were developed in Part 2, were assumed to be paid/received during the 22/23 financial period.
The resulting cash net spend estimate for 22/23 is £77.8m, which is £16.2m less than the net spend estimate of £95.0m developed in Part 2. That difference represents the estimated YOY increase in net transfer debt, as will be illustrated in the transfer debt section of this entry.
With CFO less CapEx previously estimated at £40.4m, a cash net spend on player registrations of £78.8m would result in a net cash outflow of £38.4m before considering cash flow from financing.
Cash Flow from Financing
Since the completion of the Main Stand expansion project, for which Liverpool’s owners provided an intercompany loan of £110.0m (sourced from a loan taken out by FSG or a subsidiary of FSG in the US) to fund construction, the club has exclusively relied on its revolving credit facility for financing needs. Additionally, when cash flow has been deemed sufficiently healthy the club has made incremental payments on the Main Stand loan, paying down ~ £12m per year on average from early 2017 until covid impact in early 2020.
For cash flow from financing (CFF) in 22/23, I’m estimating that (i) financing needs continued to be sourced solely from the revolver and (ii) the club did not resume repayment on the Main Stand loan. For simplicity I have estimated that cash remained level YOY.
This framework results in an estimated borrowing of £38.4m on the revolver, equal in magnitude to the cash flow deficit from operations and investing in aggregate.
While I have assumed that no repayments were made on the Main Stand loan in 22/23, the club is intent on paying this balance down and it wouldn’t be a major surprise if they did resume, particularly if cash flow excluding financing was stronger than I have estimated.
Financial Debt
With cash flow from financing estimated to be sourced from incremental borrowing of £38.4m on the revolver, the balance on the line is estimated to increase from £87.1m to £125.5m and take gross financial debt from £158.5m to £196.9m. Both figures would be largely in line with gross debt as of 31 May 2021.
When viewing financial debt net of cash, which is generally a more useful assessment of financial borrowing than gross debt, the resulting estimates for 22/23 are net debt of £183.3m and net bank debt of £111.9m.
While both estimated figures would represent new highs under FSG and entail an increase in cash flow leverage ratios, the level of financial debt is estimated to remain healthy as of 31 May 2023.
Transfer Debt
In the discussion for cash flow for investing, I outlined net transfer debt coming due in 22/23 per club accounts and the assumption that 30% of guaranteed transfer fees for new activity were paid up-front.
The estimates for transfer payables and transfer receivables outlined below extend that framework to include the following assumptions:
Two-thirds of non-current transfer payables and receivables at 31 May 2022 shift to current as of 31 May 2023 (i.e. due in 23/24).
30% of guaranteed transfer fees for 22/23 activity (acquisitions and sales) are estimated to be due in 23/24 and 40% are estimated to be due in 24/25 or later, encompassing the 70% of guaranteed fees not estimated to be payable/receivable up front.
This framework results in an estimated increase in transfer payables (gross transfer debt) from £93.7m to £115.5m, with £58.5m of payables projected to be due in 23/24.
Applying the same framework to transfer receivables results in an estimated increase from £55.1m to £60.8m, with 30.8m projected to be received in 23/24.
Aggregating the payables and receivables estimates results in an estimated net transfer debt at 31 May 2023 of £54.7m, an increase of £16.2m over net transfer debt at 31 May 2022, tying to the difference between estimated net spend and cash net spend cited in the cash flow from player investment section of this entry.
While I haven’t yet estimated transfer debt for other ‘Big 6’ clubs as of 22/23 year-end, Liverpool’s net transfer debt will likely continue to be relatively modest compared to that of Manchester United, Arsenal, and Tottenham. Net transfer debt for Liverpool will also likely be well-below that of Chelsea after the Blues invested heavily in player recruitment in 22/23 and reportedly relied heavily on installment debt to facilitate activity under the new owners.
Football Net Debt
Football net debt is an industry-specific figure that sums net financial debt and net transfer debt to provide a more complete view of debt obligations of football clubs.
Aggregating the component figures for Liverpool results in an estimated football net debt of £238.1m as of 22/23 year-end. This estimate represents a £54.5m (29.7%) increase from the actual football net debt of £183.6m per LFC 21/22 accounts, driven by the estimated level of fixed asset investment being notably higher than estimated cash flow from operations.
With football net debt estimated to increase and EBITDA estimated to modestly decline in 22/23, the cash flow leverage ratio for net football debt is estimated to increase from 1.9x to 2.7x.
While this is a notable projected YOY increase, leverage of 2.7x is generally healthy and does not signal potential financial issues.
Conclusion
With completion of this entry, I have now provided estimates for the profit & loss statement, player investment, infrastructure investment, and the cash flow statement in 22/23, as well as estimated financial debt and transfer debt as of 31 May 2023. To recap the series at a very high level, I currently expect the following from published 22/23 club statements:
Revenue and key profitability measures to be slightly worse than in 21/22.
Fixed asset investment to be relatively high by historical LFC standards.
Investing cash outflows to exceed operating cash inflows, resulting in incremental borrowing on the club’s revolving line of credit as well as a modest increase in net transfer debt.
Debt to remain at a relatively conservative level despite the estimated YOY increase in football net debt.
As previously noted, as additional information is available, I will revise estimates as appropriate and periodically publish the updated figures. When revisions are posted it will be done through a single post (rather than a series) and with much lighter commentary.
Hopefully readers found value in this series and are find value in content to come, whether Liverpool-specific, centered on a different club, or discussing a broader football finance topic.