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Gab Marcotti explains why the Europa League could prove to be Milan’s best hope of Champions League football in 2018.

Last week, Marca and The New York Times reported that Milan were staring down the barrel of financial fair play sanctions, if not worse. Here’s an attempt to make sense of a complicated situation.

Q: I thought Milan had a rich Chinese owner now? Like the guy at Inter Milan? Isn’t this part of the whole trend of wealthy Chinese buying up football assets with the blessing of the Chinese government?

A: Li Yonghong is certainly Chinese and he may be rich, but he was only able to buy the club after taking out a loan of around €303 million. And that was after considerable delays in getting the deal done. You may recall that he twice made nonrefundable down payments of €100m but then struggled to come up with the rest of the cash, which is why the whole affair dragged on for some six months after the sale was agreed. Ultimately, Milan were sold for €540m and Li took on the existing debt of around €200m, all of which valued the club at around €740m, or $860m. It’s the biggest sale yet of a football club (at £790m, United cost more, but they were publicly traded at the time).

Q: OK, so more than half the money to buy the club was borrowed; what’s the big deal? Didn’t the Glazer family borrow a whole load of cash to buy Manchester United in 2005?

A: Indeed they did, but United is a bit different. For a start, the club was — and still is — a cash cow, whereas Milan have racked up losses. But in some ways, it’s not so much about borrowing the money as to whether the guy who borrows it can pay it back. Many dislike the Glazers and there’s a fair argument for doing so, given the money they have taken out of the club, but nobody doubts their assets. That is why they were able to borrow the cash from mainstream institutions at a reasonable interest rate and with reasonable conditions. That’s not the case with Milan.

Q: How so?

A: The loan has to be repaid by October 2018, leaving Li just more than 10 months. Given the high interest charged and the fees to arrange it, it will likely cost a bundle. What’s more, the money was not borrowed from a mainstream bank, but from a hedge fund called Elliott Management that is run by a guy named Paul Singer. He has a reputation as someone who plays hardball and is very aggressive. Heck, when Argentina owed him money, he persuaded the Ghanaian government to seize an Argentine navy vessel. 

There really are only two scenarios where you’d want to borrow money from Elliott: One is if you’re 100 percent certain you’re going to be able to repay or refinance the loan; the other is if you’re desperate and nobody else will give you money. When the Milan deal was announced, many believed it was the former. A lot of big Chinese conglomerates were throwing around cash, the government was often indirectly involved and many thought Li was just another multi-billionaire. But now you have The New York Times writing that “virtually nobody” in China had heard of him.

Q: So what can Milan do about it?

A: If Li does have the money, he can simply repay Elliott. Theoretically, revenue could be grown by €303m between now and October and be used to pay it back but, in practice, that’s impossible. So Milan’s options are to look for investors or try and refinance the loan, ideally over a longer period, and the club hired an outfit called BGB Weston to do just that. But it’s going to be tough; it’s hard to see how Milan’s situation is any better today than when the Elliott loan was taken out. Somebody might give them the money, but the terms could be even worse than the current deal.

Q: Is that why UEFA could take action against Milan?

A: The club is subject to financial fair play regulations like every other team that wants to play in Europe. Given that Milan changed ownership, they’re eligible to apply for a “voluntary agreement.” That means they concede that they won’t meet FFP requirements in the first season (or seasons) — in part because of pre-existing liabilities, in part because they need to ramp up investment in the squad — but they submit a business plan that shows how they will meet them over time. If UEFA agree, Milan will need to hit certain targets over a certain time period — they would ask for four years — and by the end of it, they will be in compliance. Clubs like Roma and Inter have signed similar voluntary agreements, but the trouble for Milan is that if the Marca and New York Times stories are correct, UEFA won’t agree to it.

Despite the sale of Milan to Yonghong Li earlier this year, the future of the club remains uncertain.

Q: Why not?

A: Nothing is confirmed yet; UEFA hope to have a decision by Dec. 8 but are under no obligation to provide it by then. But if UEFA reject a voluntary agreement, it’s because they don’t deem the business plan to be realistic. Clubs have to project future revenues to make it work, and if they are overly optimistic, the answer will be “no.” Moreover, there’s an added wrinkle in Milan’s case.

Q: What’s that?

A: Qualifying for the Champions League is really important; a club like Milan could expect to make anywhere between €60-120m in prize money alone, while being in the competition offers exposure that translates to more sponsorship and commercial opportunities. All that goes a long way toward improving revenues that are critical to any voluntary agreement.

But Milan are seventh in Serie A, 11 points away from the Champions League places, so any voluntary agreement that takes qualification for the competition as a given will be harshly scrutinized. And if Milan don’t get their voluntary agreement, they’ll face sanctions that could include withholding prize money from this year’s Europa League, restrictions on transfers and possible exclusion from European competition. (Although that’s unlikely and given their league form, could be a moot point.)

Q: So will UEFA consider the doubts surrounding Li and the Elliott loan when deciding whether or not to sign the voluntary agreement?

A: You’d imagine so, and that’s why this needs to be resolved quickly. If Li can find a solution — be it paying off the loan or finding new investors or whatever — the situation will more solid. Plus, the club will be able to show how they will continue to invest, ideally without borrowing.

Q: What if Milan don’t get the voluntary agreement, can’t find new investors or creditors and default on the Elliott loan?

A: Elliot would take control of the club, and as they seek to recoup the money, it becomes anyone’s guess as to what happens next. Marco Fassone, Milan’s chief executive and the man who put the original Elliott deal together says that this would be the worst-case scenario.

But, in fact, the worst-case scenario would be what Elliott might do next. Like, for example, aggressively asset-stripping by selling players. Gigi Donnarumma has a buyout clause of €70m and someone will certainly take him. You could probably raise the rest through the sales of, say, Alessio Romagnoli, Leo Bonucci, Franck Kessie, Nikola Kalinic, Hakan Calhanoglu, Suso, Ricardo Rodriguez, Andre Silva, Davide Calabria and Manuel Locatelli.

If you did that, there would be very few players left and the club would be run into the ground. That’s the real nightmare scenario, but it’s also the extreme case, and I doubt Elliott would do that. Based on their past history in other industries, where they’ve seen value and opportunity, they’ve tried to restructure things, rather than rip them apart and sell whatever wasn’t nailed down. They could try to run the club themselves (although given this is not their core business, it’s unlikely) or, more likely, “flip it” to someone else.

Q: You’ve thoroughly depressed me! Is there a best-case scenario? And how likely is it?

A: You mean a best-case scenario other than Li finding the money? A serious investment group buying out Li and paying off Eliiott would be a boon. And I don’t think it’s a bad investment, because Milan remain a huge brand; one executive at another Serie A club told me he thinks the club is worth north of €1 billion. For all the negativity, Milan average 55,000 in attendance per game this season, which is almost a 40 percent increase over last year. They also have some really talented young players, the sort you can build around.

To me, that’s a better scenario than getting another bridge loan — even a long-term one — while you chase absurd targets like raising hundreds of millions in commercial revenue elsewhere or budgeting to reach the Champions League semifinals.

And even if Elliott do take over, my guess is that they’ll look to sell right away and lock in some profit. The price shouldn’t be extortionate, and with the right buyers, the club could be benefit in the long term, even if that would mean writing off another two seasons at a minimum, which is not ideal.

Gabriele Marcotti is a Senior Writer for ESPN FC. Follow him on Twitter @Marcotti.

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