Caught Offside, an Inter-Oaktree Loan Case Study

Welcome to the 138th Pari Passu Newsletter, 

This week, we are publishing a day early ahead of July 4th. Since the Americans are already in a good mood ahead of the holiday, today we have something for our European readers! If you enjoy this piece, forward the email to a friend who loves soccer.

In this article, we are diving into the world of sport with an in-depth case study on the unique nature of distress within European soccer clubs, focusing on Inter Milan. Oaktree’s 2024 takeover of Inter Milan stands apart for its scale, visibility, and timing. The €275mm loan extended to the soccer club in 2021 was never intended to result in a hostile loan-to-own takeover, but after failed refinancing efforts and plummeting equity value, Oaktree enforced on its collateral and assumed full control in May 2024.

This edition examines the Oaktree–Inter Milan transaction through a credit lens. We begin with an overview of the structural fragilities in the European soccer business model, discussing its volatile revenues, high wage costs, and the absence of protective league structures. We then walk through Inter Milan’s financial decline from 2016 to 2021, followed by an analysis of Oaktree’s rescue loan to Inter Milan and the factors relevant to its eventual takeover of the club in 2024. Finally, as an additional bonus, we will provide our insights on the viral Manchester United covenants that have seemingly punished the club for winning.

The European Soccer Club Business Model

The business model of a European soccer club is deceptively complex. At first glance, it appears that the income streams closely resemble those of NFL or NBA franchises, generating revenue from ticket sales, TV broadcasts, merchandise, and other sources. However, upon closer examination, European soccer operates within a radically different financial and competitive ecosystem, where market forces are less regulated, revenue streams are generally more volatile, and the stakes of poor performance are dramatically higher. 

Revenue

There are three primary revenue streams for a European club that we need to look at closely: (1) matchday income, (2) broadcasting rights, and (3) commercial activities.

1) Matchday income encompasses the revenue generated from ticket sales, stadium hospitality, concessions (food, beverage, and convenience items), and on-site merchandise sales. This is the most straightforward source of revenue for a professional sports club, that being the income generated from customers attending the physical event. After stagnating during the COVID-19 pandemic, matchday revenue surged to record heights in the 2023/24 season, reaching €2.1bn ($2.4bn) across the world’s top 20 revenue-generating clubs, accounting for 18% of total revenue amongst them. We will refer to this group of teams as the“Money League” clubs [1].

2) Broadcasting revenue is the second major pillar, accounting for over 38% of total revenue [1]. Here, we begin to see a significant divergence from American norms. In leagues like the NFL, broadcasting rights are centrally negotiated, and income is evenly distributed. Therefore, even small-market teams like the Green Bay Packers receive the same $400mm in media-related income as the Dallas Cowboys [3]. In Europe, television money is not as equitably distributed, as a significant amount of league-wide broadcasting revenue will be awarded on the basis of sporting success as prize money. Generally, across the Big Five domestic leagues (England, Germany, Spain, Italy, and France), teams that finish higher in the table and/or qualify for European competition receive a disproportionate share of the broadcasting revenue in prize money. For example, in the English Premier League (one of the more equitable domestic leagues in Europe), there are massive merit-based prizes, where finishing in the top three of the league is worth an extra £55mm+ in broadcasting revenue through prize money [2].  

3) Commercial revenue encompasses monetising assets, such as brands and stadiums, through sponsorships, merchandising, and licensing. At €4.9bn ($5.6bn), commercial activities remain the largest revenue source for the Money League clubs, accounting for 44% of total revenue [1]. Sponsorships, particularly kit sponsorships, play a key role. For example, in 2023, Manchester United renewed its shirt sponsorship deal, worth almost $1.2bn over ten years, with Adidas [4]. The club also signed a new shirt sponsorship deal with Snapdragon, a brand of mobile technology firm Qualcomm, which is currently paying $76.2mm a year [5]. Compare this with American franchises, where the NBA introduced small jersey patch sponsorships in 2017/18, netting teams $10.6mm a year on average, and the NFL, where kit sponsorships are still prohibited; this is a significant source of income [6]. 

Another key difference revolves around asset control. In the US, franchises like the Dallas Cowboys or the Golden State Warriors also generate revenue by utilising their proprietary venues (the stadiums) as commercial real estate assets. For example, concerts, naming rights, and retail operations help ensure year-round revenue for the sports teams. In contrast, only 18% of European clubs own facilities as property or have them on long-term leases [7]. Most arenas are owned by public authorities, like Inter Milan’s home ground, the San Siro Stadium, which is owned by the Municipality of Milan. This can not only hamper the creation of stable year-round revenues but can also lead to conflicts of interest over the modernisation, expansion, and responsibility for the venue. 

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