The Close Call: Avoiding PSR breach

AFC Bournemouth narrowly avoided breaching the Premier League’s Profitability and Sustainability Rules (PSR) thanks to a controversial decision regarding a £71.4 million shareholder loan write-off. The Premier League approved the write-off, allowing it to be counted toward PSR calculations.

This decision raises questions about the consistency and fairness of financial regulations within the league, especially considering recent points deductions levied against Everton and Nottingham Forest for PSR breaches.

The Transaction: Demin’s Exit and Foley’s Arrival

The £71.4 million write-off occurred in December 2022, coinciding with Maxim Demin’s sale of the club to American businessman Bill Foley’s Black Knight Football Club group. The details of the transaction are crucial to understanding the Premier League’s decision.

• Sale Date: December 12, 2022
• Seller: A.FC.B. Enterprises Ltd (helmed by Maxim Demin)
• buyer: Turquoise Bidco Ltd (renamed Black Knight Football Club UK ltd, headed by Bill Foley)
• Sale Price: £98.5 million cash, with a further £19.4 million potentially due in the future.

At the time of the sale, Bournemouth owed Demin’s company £161.2 million.the debt was extinguished in two ways: Foley’s group provided an £89.8 million shareholder loan to repay A.FC.B. Enterprises, and the remaining £71.4 million was writen off.

This write-off was recorded as extraordinary other operating income in Bournemouth’s 2022-23 accounts,significantly impacting their financial results.

PSR Implications: From Loss to Profit

The loan write-off dramatically shifted Bournemouth’s financial position. It transformed a substantial loss into a club-record profit of £44.5 million for the 2022-23 season. Without it, they would have reported a £26.9 million pre-tax loss, adding to the £55.5 million loss from the previous season when they were promoted back to the Premier League.

The crucial question is: would Bournemouth have struggled with PSR otherwise? The answer is a resounding yes.

It wouldn’t have just been a struggle — Bournemouth would have breached their PSR loss limit in at least one of the past two seasons without being able to include this transaction in their calculation.

Specifically,without the £71.4 million, their pre-tax loss across the three-year PSR cycle to the end of last season would have been £148.6 million, far exceeding the £83 million limit. This would have required Bournemouth to find £65.6 million in allowable expenditure, a challenging task given their limited spending on areas like youth advancement and community programs.

Premier League’s Rationale: An Arm’s Length Transaction?

The Premier League’s decision to allow the write-off hinges on the argument that it represented an arm’s length transaction as part of the club sale, passing the league’s fair market value assessment protocol.This distinction is critical.

The league deemed the transaction separate from a scenario where an existing shareholder simply writes off a loan, which would typically be excluded from PSR calculations. The key factor appears to be that Demin wrote off the loan *after* selling the club, making it, in effect, third-party income for PSR purposes.

This timing distinction has raised eyebrows across the top flight, especially considering Bournemouth had previously been required to book implied interest on their interest-free shareholder loans, costing the club around £20 million from 2014 to 2022.

Precedent and Potential Impact

While the Premier League maintains this isn’t the first time a club has benefited from a change in ownership in this way,the news has been met with skepticism. The allowance of the loan write-off enabled bournemouth to spend significantly in the transfer market, exceeding £130 million on new players for two years running, and increasing their wage bill by 36% in 2023-24.

This raises concerns about whether Bournemouth gained an unfair sporting advantage, especially considering their net transfer spend was the fifth-highest in English football over those two years.as one source noted:

Across the 2022-23 and 2023-24 seasons, Bournemouth spent £271.1m on new players and recouped just £5.1m in player sales, a net spend of £266m. That was the fifth-highest net transfer spend in English football over those two years.

The situation also comes at a sensitive time, with increased scrutiny on financial regulations and the impending arrival of an self-reliant football regulator in the UK.

Future Implications: A Loophole for Others?

The Bournemouth case raises the question: could other clubs exploit this loophole? While the specific circumstances are unique to a change of ownership, the possibility remains.

Consider the hypothetical scenario of Tony Bloom selling his stake in Brighton. If a buyer paid Bloom £500 million and he wrote off the £299.7 million debt owed to him by the club, Brighton’s bottom line could benefit significantly.

However, such a transaction would have significant tax implications for the seller, making it a less attractive option in many cases.

The Bigger Picture: Sporting Advantage vs. financial Sustainability

The underlying aim of PSR is to prevent clubs from gaining an unfair sporting advantage through breaching financial rules. The Premier League successfully argued this point in their legal battle with Everton, claiming their overspending had helped them on the pitch.

While Bournemouth broke no rules, their ability to invest heavily in new players due to the loan write-off raises questions about the spirit of the regulations.without the write-off, they would have breached PSR and faced potential sanctions.

The Premier League’s approval of the transaction highlights the complexities and potential inconsistencies within the current financial framework, leaving many to wonder if the system truly promotes fair competition and long-term sustainability.