Inter: Financial Improvement, but who covers €342 Million?

The financial situation at Inter has seen significant improvement. This is undeniable. The consolidated loss has decreased from a historic high of €246 million in 2020/21 to €140 million in 2021/22 and further down to €85 million in 2022/23. Inter management have demonstrated their ability to handle finances effectively, even though the Champions League exposure was not fully leveraged. However, an unsolved mystery remains, and it is bound to influence everything else: the Zhang family’s future, as their mega-loan from Oaktree is coming due. One crucial detail to keep in mind: there are still €342 million in uncovered losses from the pandemic.

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Champions League Impact and Reduced Expenses

In 2022/23, the revenue-cost dynamics have significantly rebalanced, considering that the previous year saw notable gains from the lucrative sales of Romelu Lukaku and Achraf Hakimi. Capital gains from player sales dropped from €105 to €29 million (with €15 million for Casadei and €9 million for Pinamonti), yet the deficit reduced from €140 to €85 million. Why? The full utilization of the Meazza stadium, after pandemic restrictions were lifted, and the Champions League final boosted revenues. Stadium revenues increased from €38 to €79 million, and TV rights from €156 to €197 million, with €100 million from UEFA. Consequently, operating revenue excluding player trading amounted to €386 million, compared to €331 million in 2021/22. However, it was not enough to prevent being overtaken by their city rivals: last year, AC Milan's revenues were €398 million, second only to Juventus (€437 million) in Serie A.

Inter took a hit due to their main sponsor Zytara/DigitalBits not holding up their end of the deal, missing out on €30 million in fixed and bonus payments (plus an additional €1.6 million from 2021/22): a legal suit has been filed against Zytara Labs at the Milan Tribunal. The negative impact was partially mitigated thanks to 12 new partnerships (Konami, Adesso, Hisense, Leo Vegas, Attal, Recrowd, Snaitech, Heinz, Telepass, Frecciarossa, Ria Italia, Technogym) and a new e-commerce platform, directly managed and operational since July 2022, generating an additional €6 million in revenue. Thus, after all considerations, the reduction in commercial revenue was contained, going from €86 to €74 million. The disappointment lies in signing a contract for the most prized advertising space (front of the jersey) without proper guarantees and with an unknown counterpart operating in an unregulated and highly volatile market: the same mistake made by Roma.

On the cost side, Inter initiated a massive review of operating expenses in the last fiscal year, yielding initial results: salaries reduced from €248 to €227 million, player amortizations from €101 to €90 million, for a total decrease of €32 million. Since the summer of 2022, transfer strategies have aligned with ownership's directives: investments of €23 million and sales of €40 million in 2022/23, with a reduction of the historical cost of players’ rights by €30 million (Thuram's acquisition was registered in the previous fiscal year, technically free but with €8 million in additional fees for commissions). In the current season, containment efforts have continued vigorously. The 2022/23 financial report also benefited from the reduction of €41 million in impairments accounted for in 2021/22, related to Eriksen and Chinese commercial credits. Interests, however, reduced by about €10 million, although they still remain at a significant level (€39 million). Furthermore, at the beginning of 2022, the debt was refinanced with a €415 million bond maturing in 2027. Consequently, net financial debt, including shareholder loans and liquidity, stood at €437 million as of June 30, 2023. This is where Suning comes into play.

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Zhang Grappling with Oaktree

During the last fiscal year, the Zhang family provided new tranches of financing with an 11% interest rate, totaling €51 million. This is part of the provisions from the Oaktree loan. Simultaneously, they converted €10 million into capital and, in September, another €76 million. It's important to note that these are not new funds but rather credits that the shareholder relinquished. At present, net financial debt has decreased to around €360 million. The conversion of those €86 million into equity became necessary to cover the losses of 2022/23. As of June 30, 2023, the net worth of the parent company alone was negative by €110 million. However, previous assemblies had resolved to defer the significant losses of the 2020/21 and 2021/22 fiscal years, leveraging the decree issued by the government during the Covid period (later extended), allowing companies to delay dealing with their liabilities and defer their recovery for up to five years. For Inter, this means having to cover €342 million in past losses between 2026 and 2027. What does all this mean? In recent years, the Nerazzurri have burned through a lot of cash, unable to rely on the strong financial support of ownership, which, grappling with a financial crisis, was not able to carry out comprehensive recapitalizations, resorting to Oaktree loans and selling of valuable assets. Unsurprisingly, sales continued in the summer: €17.5 million for Brozovic to Al Nassr and €50.2 million for Onana to Manchester United. "These transfer operations," as stated in the financial report, "will allow the group to receive financial resources to meet its commitments and obligations in the foreseeable future." At the same time, the Zhang family has only very gradually tapped into Oaktree's cash. We are talking about €275 million, which, including interest, will amount to over €350 million when the time comes to repay them in May 2024. So far, €148 million have been utilized, of which €126 million as shareholder financing and €22 million to settle a debt owed by Suning for the sponsorship contract.

During this season, a portion of the remaining amount may still flow into Inter's coffers. However, sooner or later, Zhang will face the problem of how to repay those €350 million. A decision to be made between 2023 and 2024. Excluding reimbursement due to a lack of liquidity, the shareholder aims for refinancing; if unsuccessful, there would be no alternative to a sale, as Oaktree has the Nerazzurri shares as collateral. Regarding the Chinese troubles, the financial documents provide an update on China Construction Bank's legal action. The bank, claiming a credit against President Steven Zhang, has initiated a rescission action against Inter's assembly decision not to grant emoluments to him: a strategy to uncover an active stake on which to later request a seizure. "Based on the information currently available, the company believes it has valid reasons to seek the rejection of the counterparty's requests," reads the report.

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Nike and Paramount Figures

Within the details of the financial report, there are some revealing figures. We are talking about the new sponsorships, effective from 2023/24, which were expected to benefit from the extended exposure of the Inter brand in international markets, thanks to the Champions League final. In Nike's case, it involves the renewal of the kit partnership for the period 2024/31. The new agreement stipulates an annual fixed fee of €21.25 million, with reductions of 25% in the year Inter do not participate in the Champions League, and 50% in case of absence from all European competitions.

The contract also includes a variable portion and two "one-off" bonuses related to the new stadium, each worth €500,000, which will be earned upon authorization for construction and the first game played. The fixed €21 million undoubtedly represents an upgrade from the previous contract's €12-15 million, even though initial rumors from Inter spoke of €30 million. The same discrepancy applies to Paramount, which, after the €1.5 million granted for the last matches of the previous season, has signed on as the main sponsor for this season, "for a total amount of €11 million, in addition to various considerations." Much less than the rumored €15-20 million and, in absolute terms, not in line with the standing of a top club that reached the Champions League final.

This article is a special contribution of Marco Iaria from La Gazzetta dello Sport to Football Benchmark.