'Clubs are not benefactors': Why you could face a total loss with fan bonds

  • Many professional soccer clubs are experiencing financial difficulties due to the Corona pandemic and the lack of spectator revenue.
  • Werder Bremen recently confirmed that it is keeping open the possibility for a fan bond as a “very last option.”
  • Some examples of such papers from the past show how dangerous this type of investment is for investors. One consumer advocate warns of a total loss.
  • Visit the Business section of Insider for more stories.

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In addition to TV money, spectator revenue is another important source of income for soccer clubs. However, the Corona measures have ensured that professional soccer does have the privilege of continuing to play – and thus receive TV money. However, no spectators are allowed in the stadiums, which hold tens of thousands of spectators.

This loss of revenue is difficult for clubs to compensate for – the weaker the financial situation already was before Corona, the more the clubs are affected now. Werder Bremen, as reported by Bild, made a record minus of 23.7 million euros in the past 2019/2020 season. Revenue fell from 157.1 million euros in the previous season to 116.7 million. Equity in the 2018/2019 season was still 7.6 million euros, now there is a minus of almost 16 million euros.

Officially, the club will announce its balance sheet at the general meeting, which has not yet been able to take place due to the Corona pandemic. The figures ensure that Werder Bremen must keep all options open. In the first step, Werder Bremen had already taken out a loan of 20 million euros for the first time in its history, which is secured by a guarantee from the state of Bremen.

Werder Bremen: Fan bond “the very last option”.

Managing director Klaus Filbry confirmed beyond that recently opposite the portal deichstube.de that also the expenditure of loans would be an alternative, both to medium-size enterprises and to fans. However: A fan bond in particular is “the very last option, which we actually do not want to pull and also very probably will not pull,” Filbry said.

Other clubs have already taken this step in the past. There are a few examples that show just how risky these investments can be for investors, or fans. FC Schalke 04 is currently facing major sporting and financial problems in the summer. The club is currently in last place in the Bundesliga and has to repay a fan bond in July that has been running since 2016.

To explain: Bonds are subject to a predetermined, fixed interest rate. For example, FC Schalke 04 offers 4.25 percent interest in the aforementioned bond. This means that if an investor has bought this bond, he will receive 4.25 percent on his invested money every year until July of this year and will get his money back at the end of the term.

Consumer protectionists: “Associations are not benefactors”.

Such a guaranteed interest rate is comparatively high in the current environment as savings accounts or call money accounts no longer offer any return at all. But one must ask oneself, why associations pay these for investors comparatively high interest. “You have to realize that associations are not benefactors,” says Thomas Beutler of the Saarland Consumer Center in an interview with Business Insider. “If there was a cheaper way for them to get money, they would choose this one. Anyone who issues a fan bond would have to pay higher interest at the bank or would no longer be able to get a loan from an institution at all,” he summarizes.

It is therefore clear that fan bonds are primarily issued by clubs that are in financial difficulties. Schalke 04 is such a club. The club is already burdened by debts of around 200 million euros, and relegation to the second Bundesliga would mean severe cuts in TV funding. Financial analyst Peter-Thilo Hasler recently told Bild: “Even if Schalke stays in the 1st Bundesliga, it will be difficult to survive relegation to the 2nd league because of the threat of illiquidity. In the 2nd league, the club is threatened with insolvency.” However, the club denied this to the paper.

But the financial situation is tense and now the club has to repay the fan bond. It is about 16 million euros that fans have lent to the club. Bonds are also traded on the stock exchange and the Schalke bond currently promises a return of around 20 percent. This means that investors see the possibility that the club will not be able to pay back the money. Otherwise, the yield would not rise to such a high value.

Investors face a total loss

This brings us to the risk for investors who buy such bonds. Clubs know how to grab their fans with emotional appeal, and if the club needs help, many fans are willing to stand by it. “Using fan bonds as a financial investment out of emotionality can become a danger,” warns consumer protectionist Beutler. “Anyone who invests money must be aware of the risks they are taking. If the association gets into financial difficulties, investors even face a total loss,” he says.

As a bondholder, you have no voting rights or even deposit protection. In the event of insolvency, bondholders are left empty-handed. As a bond buyer, you are therefore dependent on the sporting success of the club. Especially in the case of clubs that rely on the issue of fan bonds, this success is difficult to forecast over a period of several years.

When Schalke had issued the bond, the club finished the season in fifth place. In the years before that, Schalke had finished 6th and 3rd – meaning it regularly played in international competitions. It was hardly foreseeable at the time that the club would most likely be relegated six years later.

Alemannia Aachen unable to repay bond after insolvency

So no matter how emotionally the clubs appeal to their fans, they shouldn’t let it grip them. “It’s all about numbers in a very sober way: How high is the interest I receive for my investment? How is the risk-reward ratio derived from that? Emotionality clouds the view of the investment when it comes to these questions,” says consumer advocate Thomas Beutler.

Schalke is not the only example. Back in 2008, Alemannia Aachen, then a second-division club, collected 4.2 million euros mainly from its fans with a bond offering six percent interest per year. In the following years, the club slipped down to the third league and filed for insolvency. The investors’ money was gone. Today, AAchen plays in the regional league.

Arminia Bielefeld issued a bond in 2011 but was only able to repay it in 2016 because some fans had waived interest and repayment of their capital. “If you want to support your club as a fan, see a fan bond more as a donation and not as a financial investment, and are prepared to lose the capital invested in case of doubt, you can bet on such investments,” says Thomas Beutler from the Saarland consumer advice center. “Who would like to make promising investments, should always make investment decisions free of emotion”, he advises.

The following applies: Broad diversification and long-term investment in the stock market – for example, by means of an ETF savings plan – helps to reduce the risk of loss.

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