Inter Milan refinances its spiralling debts – but pays a price

IFR 2418 - 29 Jan 2022 - 04 Feb 2022
7 min read
Gareth Gore, Ed Clark

Inter Milan looks set to avoid a looming crunch point over its spiralling debt problem after securing €415m of financing in the junk bond market in a deal that buys the Italian champions vital time as its Chinese owners consider what to do with the club amid mounting financial problems back home.

It means that Inter now has the funds to pay off €350m of bonds that come due for payment in December. But the club was forced to pay a heavy price to secure the financing, offering investors a substantially higher interest rate that will heap further pressure on its already poor finances.

The 108-year-old club has come under acute financial pressure over the past two seasons, at one point being unable to pay its players. Its billionaire owner Zhang Jindong turned to distressed debt outfit Oaktree Capital last May to secure a €275m line of credit to keep the club afloat.

Zhang, who made his name with a chain of shops selling electrical appliances, is facing problems in China. His Suning business empire has been haemorrhaging cash, prompting him to close down Jiangsu FC, another club he owns, just three months after the team won the Chinese league.

While the fate of Inter is unlikely to be so dramatic, not least now that it has secured new financing, the Italian side still faces huge uncertainty. Zhang has already discussed selling his majority stake in the club, with Saudi Public Investment Fund, the new owners of perennial English underachievers Newcastle United, one name previously linked to a deal.

The self-made billionaire bought a majority stake in Inter in mid-2016 from an Indonesian consortium, boasting that the tie-up would be mutually beneficial for the club and his burgeoning business empire, which has expanded from white goods to include finance and real estate.

Spiralling costs

His financial backing has brought results, with the club securing its first league title in 11 years last season. But its success on the pitch has come at a heavy price. Inter has racked up almost €440m in losses in the five seasons since the entrance of Zhang, and seen its debts spiral.

While the coronavirus pandemic has hit the club hard, forcing it to close its stadium to spectators for many months and robbing it of lucrative matchday income, it was already burning through money before Covid-19 hit.

But it appears that Zhang may no longer be willing – or able – to keep bankrolling the club’s losses. He has been holding talks about bringing in a new investor and last year was linked to talks with private equity firm BC Partners which later collapsed.

He has also brought Oaktree in as a lender. Its €275m loan comes with strict conditions that if breached could allow the distressed debt fund to take control of the club. Such a fate has already befallen arch-rivals AC Milan, which was taken over by Elliott Management after a similar deal.

The latest junk bond sale should buy Inter some time. The financing is secured against revenues from the club’s media rights and sponsorship income. Barcelona FC struck a similar private debt deal linked to its media rights last year after breaching covenants on a previous bond.

Issuing debt through a media rights subsidiary widens the appeal to investors, not least because the vehicle that issues it is shown to make stable profits. But the vehicle doesn’t include most costs associated with securing those rights such as paying the players or operating the stadium.

Investor pushback

Pushback from investors on pricing could indicate that the structure, used by a number of teams in recent years, is beginning to fall out of favour. Inter was forced to pay a coupon of 6.75% on the five-year bonds, compared with 4.875% the last time it did an almost identical deal four years ago. That translates as an additional €7.8m of interest costs every year compared to the previous offering.

"Some people find these deals acceptable because you are taking a view on the club's ability to stay in the Serie A and retain access to the premium media rights,” said one banker. “Because investors essentially get first dibs from the media rights, some investors will view it as a structure play.

"That is all well and good, but it doesn't completely detach itself from the reality that if a company, or rather a club, is living way beyond its means it is more likely to go into administration, and then clubs can drop out of divisions."

Like Barcelona, which has had to sell a number of its top players to improve its finances, Inter is now likely to face pressure to do the same. On the investor call, cost cuts were mentioned. The side has seen its wage bill more than double over the last five seasons.

According to Andrea Accinelli, the club’s finance chief, that is in part due to a frozen player market. “The staff costs are due to a transfer market that is really stagnant … due to poor liquidity,” he told investors during the marketing call ahead of the bond deal.

Worryingly for investors, the club has also committed to another big expense over the coming two years – a brand new stadium to replace San Siro, the ground that it has shared with AC Milan since 1947. During calls with investors, management said more debt could be taken on to fund that project.

Inter Milan is not unique. Across Europe, many of the biggest football clubs are operating in a financially unsustainable way, only kept alive by the deep pockets of their owners – or the willingness, until now, of investors and banks to keep rolling over debts.

The club was one of the founders behind the proposed European Super League, a JP Morgan-funded breakaway competition that promised hundreds of millions of euros of extra revenues to the continent’s top clubs. After a backlash from fans, the competition was abandoned. But some clubs haven't entirely given up on the idea.

Goldman Sachs was lead bank on the issue.