How bad is the financial crisis at Aston Villa?

The deepening financial crisis engulfing Aston Villa after the dispiriting loss to Fulham in the promotion playoffs exploded into full view Tuesday as reports began to surface that the club, deep in debt and now without the Premier League broadcasting money cushion to fall back on, had missed a GBP 2M tax payment and suspended chief executive Keith Wyness.

According to two club sources who spoke with the Financial Times, Villa owner Tony Xia made the move to oust Wyness after becoming enraged by Wyness’ advice that the club needed to quickly meet its tax obligations—or risk being “wound up” (that is, taken into administration and then sold off to pay down debt, which is a fancier way of saying “bankruptcy” but is basically the same thing). Mr. Xia, the owner and operator of the Chinese holding company Recon Group, is reported to be struggling to make the capital available to Villa because of regulatory constraints in his home country.

In the aftermath of this breaking news, ex-Villa player and current football journalist Stan Collymore reported that Villa’s finances were in even worse shape than reported in Sky or the Financial Times. “I know the bottom line financially at Villa (just confirmed),” he said in a series of tweets on Wednesday afternoon, “Quite frankly, it’s horrific, and this could turn out to be worse than Leeds or Portsmouth at its worst.”

Mr. Collymore also cryptically reports that Mr. Xia believes that “one club employee actively pushed for administration so that person could then be a part of a consortium to buy the club again, this ensuring continued role at Villa.” This type of corporate trickery is rather uncommon, at least in the United States, because any board member or employee with enough organizational power to “push for administration” while the club is fundamentally healthy (albeit in a liquidity crunch) would arguably be violating their fiduciary duty to the club and committing fraud. I’ll leave it there, as I am not familiar enough with English law or the exact situation here to know for sure what is going on.

However, the facts that Mr. Collymore is reporting are sobering: Aston Villa is operating at a loss of GBP 5 million per month, have a GBP 2 million tax payment due to HMRC and have almost no way to raise the capital necessary to pay HMRC because they have already leveraged every major asset and (perhaps most importantly) Mr. Xia cannot get the funds from China.

Here Mr. Collymore is asserting a few facts that seem complicated to me, simply because they go against traditional business practices: first, and most obviously, Mr. Collymore’s source reports that banks will not allow Villa to take out a loan using their recently-renovated training ground Bodymoor Heath as collateral. This strikes me as strange, as physical assets like BMH are often used as collateral on loans—in fact, physical property is one of the best assets a bank can take as collateral (real US financial crisis talk: this is why the market for residential mortgage-backed securities was so hot during the 2000s, because the securities represented interests in real property). It seems to me that in a pinch most lenders would vastly prefer to lend against physical property to help a legacy client like Villa meet its tax obligations—assuming, of course, that Villa are a going concern and simply suffering from a liquidity crunch (Villa has already take out loans against its so-called “parachute” payment that the Premier League pays to recently relegated teams to try to take some of the financial sting out of relegation).

Second, in general, and assuming HMRC acts anything like other treasury departments I’ve studied and interacted with, a single missed tax payment would never send a club into administration. In general, corporations with millions in assets and complex finances have a very close relationship with their country’s treasury, as both entities navigate the complex web of finances that allow corporations to function. Missed payments aren’t great—but they happen fairly regularly. So a single missed payment could easily be worked around with HMRC—again, assuming that Villa are a going concern.

This brings us to the biggest bombshell Mr. Collymore had in his report: that Mr. Xia “can’t get money from China.” This will be the crux of any issue Villa has moving forward, in my opinion. If Mr. Xia cannot inject capital into the club through any mechanism, then the finances as Mr. Collymore described them are incredibly dire. In fact, if Mr. Collymore’s reporting does prove true, HMRC could determine that Villa cannot meet its obligations and is thus no longer a going concern—in this case, HMRC could order Villa into administration in order to force the club to sell off its assets to pay its debts. This scenario could see Villa fail and cease to exist (or fall into the footballing void like Leeds).

However, none of the reporting we’ve seen so far has backed up Mr. Collymore’s source’s intimation that Mr. Xia cannot get money from his holding company. If anything, the sources in FT seem to suggest that Mr. Xia can get the money, just not right away because of the capital constraints in China. This interpretation is backed up by subsequent reporting that Villa made a down-payment of GBP 500,000 today on their outstanding tax bill, and will make follow-up payments in the coming weeks. If HMRC had any reason to believe those future payments would not be made they would be forcing the club into administration.

None of this, to be clear, has touched on the Financial Fair Play aspects of this situation and I won’t go into that here. But suffice to say that the English Football League could make Villa’s life significantly harder in the coming months should they go down the FFP enforcement road.

However, as things stand right now, Villa seem to be in a tremendously precarious situation financially—but things are perhaps not as dire as Mr. Collymore suggests. Ideally not, in any case.