Buying Time The Scramble for Fresh Capital in Professional Football
Stephen Schnippe and Ilkay Gündogan
On June 1, 2016, Borussia Dortmund sold Ilkay Gündogan to Manchester City. The transfer fee that the German team was owed for the midfielder can be found in bold face on Page 2 of the "Transfer Agreement": 25.8 million euros.
But the money didn't land in Borussia's account all at once. The deal called for payment in two tranches, with the first 12.9 million euros due on July 7, 2016, and a second payment of the same size to be submitted one year later. In this era of exorbitant transfer fees, breaking them up into multiple payments has become standard -- but it was apparently a problem for BVB, as Borussia Dortmund is also known. In late summer 2016, the club needed the entire sum. And it needed the money as quickly as possible.
On Sept. 19, three-and-a-half months after Gündogan's transfer, BVB's in-house lawyer sent an email to Manchester City, a missive that essentially amounted to an electronic supplication. Borussia, the lawyer wrote, wanted to "strengthen our liquidity position," adding that the team was in discussions with a credit institute and was planning on signing over the second tranche of the Gündogan transfer fee as collateral for a short-term loan.
The article you are reading originally appeared in German in issue 47/2018 (November 17th, 2018) of DER SPIEGEL.
"It is quite normal and does not affect our, or change our, contractual relationship," the BVB lawyer continued. But to consummate the deal, he needed Manchester City's permission, which arrived the next day. "Seems OK to me," Manchester City's head of finance wrote in an internal mail.
Things moved quickly after that. By the end of September 2016, Borussia Dortmund had access to fresh cash from the Internationales Bankhaus Bodensee (IBB). The private bank located in Friedrichshafen on the shores of Lake Constance has become a specialist in helping out football clubs in need of cash -- like Borussia Dortmund.
Debt Financed
Teams in Europe's largest leagues have seen their revenues climb inexorably in the last two decades and there has never been as much money in the game as there is today. But in many cases, the booming business is debt financed. Costs too, after all, are rising quickly: including transfer fees and salaries for the players along with agent fees. Many club executives have found it necessary to rely on the same drug: They borrow against future earnings, such as revenues from long-term marketing, TV and sponsorship deals -- and outstanding payments owed due to the sale of players.
In addition to significant processing fees, the clubs must also pay interest rates on the short-term cash injections of up to 10 percent, an enormous financial burden in times when global interest rates are so low. Ever since the outbreak of the financial crisis 10 years ago, larger banks have significantly reduced their involvement in the football business. When it comes to short-term loans, their need for security is often at odds with the enormous time pressures facing teams when making important decisions.
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A new type of investor has jumped into the gap left behind by the classic moneylenders. On the one hand are the private banks that have discovered football as a business opportunity and are not afraid of the risks involved in lending money even to clubs lower down on the financial totem pole. They even send out agents who knock on clubs' doors not unlike vacuum cleaner salesmen, hoping to start a business relationship. On the other hand, an increasing number of investors are forcing their way into the football market, people who have collected billions of euros that are often parked in tax havens -- money that is looking around the world for promising investment opportunities.
Hidden Financial World
In material from the whistleblowing platform Football Leaks, there are numerous documents that provide a deep look into this hidden financial world and its deals in the football business. Particularly striking is the appetite for risk on both sides - on that of the financiers and the teams taking on debt. The result is hundreds of millions of euros flowing into football every year, money that is spent before it even lands in a club's bank account. It is the perfect situation for the development of an unsustainable bubble.
The private bank IBB in Friedrichshafen, which helped out Borussia Dortmund by advancing the team 12.9 million euros and using the Gündogan transfer as collateral, is often involved when teams badly need fresh liquidity. The bank, which was founded in 1995, belongs to the financial empire of the Swabian billionaire Reinhold Würth. The 83-year-old holds 94 percent of the bank's shares via the Würth Finanz-Beteiligungs-GmbH, headquartered in the tiny town of Künzelsau north of Stuttgart.
In a company presentation an IBB employee sent in 2014 to a team in France's Ligue 1, the bank proudly noted that in the previous 10 years, it had loaned around 250 million euros to 30 football clubs across Europe. At the time, it held open loans worth 44.4 million euros, with a bit more than half of that owed by German clubs.
The PR brochure presented Frithjof Kraemer as the contact person for "Business Clients Football," a man who has been instrumental in recent years in developing IBB's involvement in the football business. From 2007 to 2012, Kraemer was the CEO of Alemannia Aachen, a period which, to put it mildly, didn't go too well for the team. During his time there, Aachen plunged from Germany's top league to the third league -- and then went bankrupt.
The Cologne public prosecutor's office charged Kraemer with delayed bankruptcy filing, a crime in Germany, and with breach of trust. A trial at a regional court in Aachen ultimately ended in 2017 with a conviction on 39 counts of bankruptcy crime and an 18-month suspended sentence along with a fine of 50,000 euros. The sentence was so mild because the accused had confessed.
Even before the end of the trial, the German Football Association (DFB) declared Kraemer to be persona non grata. In November 2013, the DFB Sports Court slapped a two-year ban on Kraemer from holding any kind of function in German football, whether in the DFB itself, in a state chapter of the association or in a club belonging to the association.
His history was of no concern for IBB. More than anything, the Friedrichshafen-based private bank needed insider industry knowledge. And Kraemer had that.
Living Beyond Their Means
IBB has particularly tight ties with clubs like Hamburger SV that are notorious for living well beyond their means. In July 2016, for example, IBB wired 2 million euros to Hamburg in exchange for collateral that included a transfer fee the club was expecting from Leverkusen. The loan period was set at one year, with an interest rate of 6 percent. That loan followed a similar credit worth 2 million euros from April 2015.
That spring was a time when Hamburger SV's reliance on the bank became particularly apparent. During the licensing process ahead of the 2015-2016 season, DFB had applied strict conditions on the Hamburg team should it be relegated to the second league. And HSV found itself having to quickly come up with nearly 10 million euros. IBB was there to help. Again, it pledged significant amounts of cash to the team, this time almost 5 million euros.
IBB has loaned money to FC Porto, Lisbon's Benfica, Olympiakos Piraeus and Atlético Madrid. On occasion, the loans have even risen into the two-digit millions, such as a loan to FC Porto against a 12-million-euro transfer payment for the player Danilo Luiz da Silva, who had transferred to Real Madrid. A former employee of the Portuguese agent Jorge Mendes contacted clubs across the Iberian Peninsula on behalf of IBB. The German bank, he claimed in an email to the head of finance at FC Villareal, is "market leader in financing deals with clubs across Europe." Its trademark is "immediate liquidity."
But the Spanish club elected not to do business with IBB when the financial institute stated its terms for a 19 million-euro advance on the transfer fee for the player Eric Bertrand Bailly, who had transferred to Manchester United. "We have better offers available," the club representative replied to the IBB agent, "so we won't be going with you this time around."
Tough Competition
Just how tough the competition is in the finance industry is a lesson IBB also learned in its dealings with AS Monaco. Following the 2014 World Cup in Brazil, the team sold its Colombian star James Rodríguez for 75 million euros to Real Madrid. Only an initial tranche of 25 million was paid immediately, with additional payments due in July 2015 and July 2016.
After 2013, though, Monaco's Russian owner Dmitry Rybolovlev was no longer able to pump more money into the club because UEFA's new Financial Fairplay rules essentially banned such subsidies starting that year. As such, the team from Monaco was on the lookout for fresh cash. The prospect of being able to loan the principality's football team up to 50 million euros in return for hefty fees and interest payments attracted investors from far and wide, like wasps drawn to an open jar of jam.
The bankers from IBB also offered their services -- "despite the international financial institutions are currently avoiding to invest in football business," as a bank employee noted in somewhat shaky English to the vice president of AS Monaco.
An initial meeting was organized in Monaco between IBB and team representatives in late July 2014, just a few days after the Rodríguez transfer. This time, though, it was time for senior bank executives to step in. Stephen Schnippe, a member of the bank's board of directors, took over the negotiations himself. "We are really interested in this deal," Schnippe wrote to AS Monaco Vice President Vadim Vasilyev, adding that the bank wanted "to build up a long-lasting, successful cooperation" with the team. To be able to offer a sum of 50 million euros, he wrote, he would have to establish a "a syndicate behind IBB." What he meant by that was getting more private investors onboard. Schnippe turned to the London-based Swiss financier J. Stern & Co., which he described as "preverred (sic) funding partners."
The IBB board member flew to the Côte d'Azur on several occasions, but the conditions he was offering were apparently too high for the team from Monaco. Schnippe noted that Atlético Madrid had accepted interest rates of up to 9.25 percent for three short-term loans from IBB. Ultimately, an IBB competitor landed the deal. AS Monaco obtained a loan against the third tranche of the Rodríguez transfer fee from the Australian investment bank Macquarie Bank International. In June 2015, the Sydney-based credit institute loaned the club 22.28 million euros, with AS Monaco agreeing to pay back the sum of 23.55 million euros one year later.
The higher the transfer fees for players become, the more attractive the business of pre-financing such deals gets. Which means that along with the skyrocketing costs for buying new players, the amount of money being pumped into the football industry from outside automatically increases.
Financial Backers from Bermuda
Clubs like AS Monaco, which has recently been selling players to the tune of over 100 million euros almost every summer, have an almost magical attraction for potential financiers. In September 2015, the company XXIII Capital Limited, one of the most active in the industry, got in touch with the team. Behind the company are financial backers from Bermuda and the United States that have collected around $10 billion for investment purposes.
According to confidential company documents, the founders of XXIII Capital, two bankers from Australia and England, had already "provided credit facilities in excess of GBP 500m" to clubs like FC Liverpool, FC Arsenal, Tottenham Hotspur, FC Barcelona, Real Madrid and Berlin's Hertha BSC before striking out on their own in 2014.
One of the agents who contacts teams to drum up business is Henk Hoekstra, former head of finance for the Dutch first-league team SC Heerenveen. "We are not one of the typical runners around," he wrote to a Champions League participant in early September 2015, before making a slight boast. In just the previous month alone, he wrote, XXIII Capital had issued 125 million euros in loans to football clubs across Europe.
Hoekstra sent reports back to his superiors, telling them which clubs he had contacted in what leagues. "Germany is not easy to make appointments," he reported in spring 2015. He said he had leads at 1. FC Kaiserslautern, Karlsruher SC, Fortuna Düsseldorf and VfL Bochum, adding that he was also trying to get his foot in the door at RB Leipzig. "Sometimes I feel a detective to sort out the contacts," he wrote.
One German club that finally took the bait was -- surprise, surprise -- Hamburger SV. In late 2016, the club needed a short-term loan of 5 million euros, and a couple of weeks later, XXIII Capital made an offer: A credit with a period of one year, with interest and fees amounting to 7.5 percent. "We can inform you that our conditions and rates have been improved," Hoekstra wrote to the club's bean counters. The message came after a Hamburg SV employee rejected a first offer, writing: "To be honest: the dealbreaking point at our last contact was the amount of the interest rate."
XXIII Capital has been accredited with the Financial Conduct Authority, the British regulatory agency responsible for the financial market, since February 2016. Recently, England's Football Association (FA) once again tightened up the rules pertaining to financing deals. The Premier League wants to prevent capital from offshore tax havens -- some of it potentially laundered -- from continuing to flow into the market unhindered. Under the new rules, clubs must identify who is behind the shell companies, some of which make sums available in the hundreds of millions to the clubs.
Opaque and Impenetrable
Just how opaque some of the backers of large European clubs are can be seen from Football Leaks documents pertaining to financing deals conducted by Atlético Madrid. In summer 2011, the team sold its star striker Sergio Agüero to Manchester City for 36 million euros, with 12 million paid immediately and the rest first arriving in summer 2013.
Immediately after the transfer, Atlético CEO Miguel Ángel Gil Marín borrowed the outstanding 24 million from the sale from investors located in the British Virgin Islands. The fund was called Mousehole Limited.
The name itself seemed to hint that Mousehole Limited might be little more than a tax-free money depot, and sure enough, the company's lawyers in London were unwilling to reveal its ownership structure. The FA, however, insisted. Otherwise, Agüero would be unable to play for Manchester City.
Only following a legal back-and-forth were the Mousehole lawyers prepared to share the name of the owner with FA. He was one of the wealthiest businessmen in the United Kingdom, with much of that fortune having come from his betting-shop empire.
The financial backers from whom Atlético CEO Gil borrowed exactly 20 million euros in May 2017 were similarly impenetrable. The company Haneuro International 1 has its headquarters in Malta and the owners prefer to remain in the shadows. It was only founded half a year before the deal with the Spaniards.
The Madrid team has numerous business contacts of that nature. On the field, it is one of the most successful teams in Europe. Since 2010, the club has won the Europa League three times and has won the La Liga crown once and the league cup once. Atlético has also been in the Champions League final twice. In June 2017, its annual revenues stood at 258 million euros, thanks in part to lucrative sponsoring deals with Nike and the Chinese company Wanda, which owned a stake in the club.
Borrowing Everywhere
But the team is often short of the cash it needs on a day-to-day basis. So, Gil, who is also the club's majority owner, borrows money from everywhere to cover ongoing costs. At the close of the 2016-2017 season, Atlético's books showed short-term loans from financial institutes worth 213.7 million euros. In mid-2014, it had only 23.9 million euros in such debt.
One of Atlético's primary financiers was XXIII Capital. In August 2014, the team signed off on the key elements of a 23.5-million-euro loan that cost the team almost 3.5 million euros in fees and interest over the 26-month loan period. A month later, the company loaned the club 13.3 million euros.
The pace picked up around Christmas 2015. First, XXIII Capital offered the Madrid team 73.8 million, to be paid back over the course of 3.5 years. Then the London financial backers presented an offer for a loan of 100 million euros, including an interest rate of 7.75 percent and an "advisory fee" of 819,000 euros. In the document, it was noted that Atlético would use 82 million euros of the loan to pay tax debts.
A month later, an Atlético lawyer wrote that the club again needed money, this time 60 million euros, to be paid back between July 2017 and August 2019. The lawyer noted that the team had collected offers and that the interest rate plus fees stood at 8 percent. XXIII Capital, he wrote, was welcome to submit an offer as well.
And so it continued. CEO Gil was constantly on the hunt for fresh capital. In September 2017, he met in Atlético's stadium with representatives of the London-based company Greensill Capital to discuss a potential loan of 76 million euros. As collateral, Greensill wanted Atlético's outfitter Nike to sign over payments from its sponsoring contract, which had just been extended. But Nike refused to play along.
The club also had ties with IBB in Friedrichshafen. In late July 2017, the bank once again helped out and quickly sent over 12.25 million euros, to be paid back within two months. It was a lucrative deal: For the two-month loan, IBB earned almost 100,000 euros.
Atlético also remained close to another German banker: Stephan Schnippe, the former IBB board member. He left the bank in mid-2015 and joined an investment company in Munich called Score Capital AG. That company, too, specialized in providing needy football clubs with fresh cash.
'Please, Peter, Try To Help Me'
In January 2017, Schnippe set up a loan for Atlético Madrid for exactly 10 million euros. The money actually came from the German state of Thuringia -- from the Volks- und Raiffeisenbank Bad Salzungen Schmalkalden eG. In July 2017, Schnippe wrote an email to Atlético saying that the German credit institute "would like to expand their relationship with you."
Miguel Ángel Gil declined to comment on his club's numerous credit deals. But one question remains open -- one of interest not just to the small-time savers in Bad Salzungen and in Schmalkalden: How did a banking coop in small-town eastern Germany end up loaning 10 million euros to a highly leveraged club like Atlético Madrid?
As it happens, there is a surprising link between the Volks- und Raiffeisenbank Bad Salzungen Schmalkalden and Score Capital in Munich: Dieter Althaus, the former governor of Thuringia and present-day lobbyist, is on the supervisory boards of both companies. Did he perhaps have a hand in setting up the deal? Althaus denies it, as does Schnippe. Score Capital executives simply view the loan to Atlético as a good business deal. "The professional football asset class is verifiably very low risk."
The Football Leaks documents allow for a rather different interpretation. In June 2013, Atlético CEO Gil was apparently having difficulties paying back an installment to the Singapore billionaire Peter Lim, after having borrowed 16 million euros from one of Lim's companies in Hong Kong the year before. When the Far East investors appeared to be losing their patience, Gil sent a desperate text message to his creditor.
He confirmed their partnership, promised improvement and referenced his lifetime achievements. And he asked for a payment deferral: "Please, Peter, try to help me In any case, you'll have a friend always in Madrid. Thanks."
