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Flamengo Signs Up CEOs to Save Brazil’s No. 1 Soccer Debtor

Painted on a whitewashed wall at its Rio de Janeiro home is Flamengo’s boast that it’s “the most loved club in the world.” The soccer team is counting on that affection to help rescue it from the taxman.

While the most popular in Brazil, it’s also the most indebted. Flamengo owes creditors 750 million reais ($351 million), two-thirds of which is in unpaid taxes, according to Eduardo Bandeira de Mello, the club’s president. Prominent fans including Carlos Langoni, a former head of the central bank, and top executives from Brazilian companies have joined the club’s board to fix its finances by cutting debt and are now raising money through sponsorships and membership fees.

“We knew the numbers were going to be bad but nobody knew exactly how bad they were going to be,” Bandeira de Mello, 60, an economist voted into the job in December, said in an interview last month.

For a country that will host the showpiece World Cup next year and the Olympics in 2016, the state of clubs like Flamengo is the flipside of the glitz. A self-proclaimed 40 million-strong fan-base, and rising television and marketing money during a boom that quadrupled the Brazilian economy over a decade, have failed to reverse years of financial mismanagement.

“In Brazilian football there’s no accountability,” said Amir Somoggi, a consultant to several top Brazilian teams. “Right now we’ve had 10 or 20 years of bad management. Maybe we need to wait 10 or 20 years for the situation to change.”

Maracana Stadium

The image abroad of Brazilian soccer centers around the canary yellow shirts of the national team made famous by Pele as well as Zico and Ronaldinho, who both had spells at Flamengo. At home, it’s the clubs that occupy more attention.

Founded in 1895 as a rowing club called Clube de Regatas do Flamengo, the team with red and black hooped shirts will return to play games in the revamped 78,000-seat Maracana stadium after this month’s Confederations Cup.

The iconic arena will host the 2014 World Cup final after being shut for three years while undergoing a $500 million refit. The stadium reopened for Brazil to draw 2-2 with England on June 2 after missing two deadlines.

“Flamengo is my passion, my life,” said Jonas Freitas Moura, 51, who wears the team’s shirt under his taxi-driver uniform and everyday plays audio recordings of the team’s most memorable goals in his cab. Somoggi likened the club’s appeal in Brazil, a country of almost 200 million people, to that enjoyed in Europe and worldwide by Manchester United, Real Madrid and Champions League winner Bayern Munich.

Trophy Drought

Emulating the success of those European clubs has been tougher. A team led by striker Zico, a bronze bust of whom adorns the club’s main entrance, dominated Brazilian soccer in the late 1970s and early 1980s, including winning three national championships between 1980 and 1983.

Since then, the trophies have been harder to come by while debt mounted. A Brazilian Cup win in 2006 was followed three years later by the first league title since 1992.

Flamengo is without a win after the opening four rounds of the Brazilian championship. Last night it lost 1-0 to Nautico, which had been last in the 20-team standings prior to the game.

The start cost Jorginho his job as manager. The coach, who joined earlier this year, was fired after the loss.

Clubs in Brazil have unpaid debts of about 3 billion reais, according to the Ministry of Sport in Brasilia. It said in an e-mailed statement on May 28 that it’s proposing a bill that would help clubs renegotiate their borrowings in return for restructuring the way teams are managed.

“It is not about forgiveness or amnesty,” the ministry said, adding that clubs failing to meet agreed terms could be hit with points deductions or relegation in future.

Debt Burden

Under an agreement with Brazil’s federal revenue office, almost 60 percent of Flamengo’s income will be used to pay off the tax debt for the next three years, before a more manageable schedule is established and the club “will be able to breathe again,” Bandeira de Mello said.

Such debt isn’t an affliction particular to Brazilian soccer. UEFA, the sport’s governing body in Europe, reacted to concerns by introducing regulations that seek to make clubs keep spending within their means. Clubs that fail to meet the rules face expulsion from the elite Champions League.

Losses of teams in the continent’s top championships totaled 1.68 billion euros ($2.2 billion) in 2011, UEFA said. Those in Spain’s top two divisions owed 752 million euros in unpaid tax as of Jan. 1, 2012, the Spanish tax agency said.

Flamengo’s new management has already struck three major sponsorship agreements since taking office and most of the money is going straight out again to repay creditors.

The first installment of a new, 35 million reais-per-season kit deal with Adidas AG (ADS) didn’t touch the club’s bank account, the president said.

Shirt Sponsors

Another board member, Luiz Eduardo Baptista, president of cable TV operator Sky Brasil, said the new board paid off 68 million reais of debt this year before state-owned bank Caixa Economica Federal signed a 25 million-reais shirt sponsorship agreement. French carmaker Peugeot SA (UG) is paying another 10 million reais a year to have its logo on the back of the shirt.

As well as Baptista, 50, and Langoni, 68, who ran the central bank from 1980 to 1983, the board includes other members of Rio’s business world, including Rodolfo Landim, 55, former CEO of billionaire Eike Batista’s flagship oil producer OGX Petroleo & Gas Participacoes SA.

“If we were not there, Flamengo would have to close the door because things were unbearable,” said Bandeira de Mello, an executive for 30 years with Brazil’s national development bank. “So why not give some of our reputation, our time, our credibility to Flamengo because is it’s our passion? We were tired of suffering.”

Fan Appeal

They are counting on the fervor the team creates among supporters to help fix the finances.

Flamengo started a membership system this year, asking for a monthly contribution ranging from 39 reais to 200 reais in return for priority access to tickets and discounts on merchandise. In the first month, 18,000 people signed up, according to Bandeira de Mello.

Last year, Flamengo ranked seventh among Brazil’s soccer clubs by sales, according to Somoggi. It generated 146 million reais less than the highest earner, Sao Paulo-based Corinthians, which made 358.5 million reais in 2012, he said.

Making matters worse was the debt that ballooned through a combination of unpaid taxes, loans and salaries to players including Ronaldinho. The relationship with the 2002 World Cup winner, one of soccer’s most-recognizable athletes, soured within a year of his January 2011 arrival when Flamengo was unable to meet the costs of keeping him.

Tax Issues

Yet the tax bill is Flamengo’s biggest liability and a source of embarrassment, Bandeira de Mello said. He said tax contributions deducted from salaries were redirected into the club’s accounts by successive managements to boost cash flow. “That’s robbery,” he said.

It’s unclear why Brazilian clubs were allowed to build up such a debt of unpaid taxes.

“It’s a mix of irresponsibility from the club side and a lack of political will of the authorities,” Baptista said. “In Brazil, politicians know football is important to win elections. But it’s ridiculous. It’s not so important that these teams shouldn’t pay their taxes.”

To contact the reporter on this story: Tariq Panja in Rio de Janeiro at tpanja@bloomberg.net

To contact the editor responsible for this story: Christopher Elser at celser@bloomberg.net

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