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United’s bond issue: a primer

January 6, 2010 Tags: , Reads 50 comments

Manchester United’s owners are seeking to issue a £600 million bond in a bid to ease the club’s mounting debt burden, as Rant reported on Sunday. The bond, which in practice effectively swaps one kind of debt for another, will theoretically cut the overwhelming annual interest burden on the club – now at more than £70 million and rising.

But what does it really mean? Rant explains…

What does United owe?
When the Glazer family bought the club in 2005 they did so using two forms of debt in what City insiders call a leveraged buyout. Firstly, the family borrowed a touch over £130 million from various New York-based hedge funds. These so-called Payment-In-Kind (PIK) loans, which the family is ultimately responsible for meeting, roll-up interest annually. Secondly, the Glazers borrowed hundreds of millions more in principle cash debt from banks, including JP Morgan. In 2006 the family refinanced this debt placed it on the club’s books, securitised against the shares and club assets.

It is the PIK loans, which roll-up interest annually until the debt matures at a future date, that are causing greatest concern. In this case the interest charged is widely reported as an eye watering 14.35 per cent annually, with the maturation date in 2017. By then the initial £130 million loan will have reached £580 million.

The principal cash debt now stands at £519 million, according to the last published accounts, which are more than 18 months old. These loans are relatively inexpensive, attracting interest at between two and five per cent annually. Cheap money in times of extreme illiquidity in the commercial lending market.

Together – and with an assumption of interest added over the past 18 months – United owes more than £700 million.

What is a bond issue?
The Glazer family has asked US bank JP Morgan to explore a bond issue in which the club will effectively write IOU notes to potential investors who buy debt. On these IOUs the club promises to pay investors their money invested plus interest at a fixed date in the future. The success of the issue depends on how many investors buy United’s bonds: a factor of risk (default) versus potential rewards (interest payable). The risk to investors is diluted by spreading the debt among many parties.

Why refinance now?
The Glazer family has sought to refinance the PIK loans on many occasions over the past two years but the global recession has reduced to almost nothing the amount of money available on the commercial debt market. Unless the family can refinance it will be liable to pay the huge PIK loans in full on maturation. A firesale of the club – stripped of all its assets – is the inevitable outcome.

What are the advantages of the bond issue?
A successful bond issue will swap one kind of debt for another kind of debt but at a far cheaper interest rate. For the Glazer family this makes complete sense by removing the burden of the punishing PIK loans. The club’s books would actually be laden with more debt, although this point is moot: the Glazer’s debt, is effectively the club’s debt anyway.

What are the catches?
The principal bank lenders have a say in the running of the club under the terms of the £500 million cash loan but only if United does not meet certain financial targets. The club is meeting those targets but as preferential lenders JP Morgan and others expect the club to pay down some cash debt in addition to the PIK loans. This is why a full-scale £600 million bond issue is now mooted. This may have the effect of increasing interest payments on some parts of the club’s cash debt.

What do the fans’ groups say?
Manchester United’s Supporters’ Trust (MUST) questions why “any potential bond investor [would] be prepared to take on this risk if the return is going to be less than the current lenders receive and now in an environment where the risk is clearly much higher than the time at which these loans were first negotiated?”

“Is the financial situation for the Glazers as bad as recent speculation has suggested?” asks the group.

“Despite the extra income from TV and the huge ticket price rises they have been clawing back expenditure both at Manchester United as well as at the Tampa Bay Buccaneers where fan discontent is starting to mirror that at Old Trafford.”

“Whether they do manage to shift the debt onto other lenders the situation for United fans and our club will be little changed – weighed down by the millstone of the Glazers debt and with the supporters having to foot the bill through ever increasing ticket prices and reduced expenditure on players,” the group said in a statement.

“The Glazers have taken us from being a club that were the richest in the sporting world to now the most indebted. In the four years before the Glazers’ takeover Manchester United invested over £80 million in the form of players like Rooney and Ronaldo. In the four years since the Glazer takeover the turnover has doubled but, despite protestations to the contrary, independently published figures suggest the net transfer spend is now negative.”

“This is surely the time for the Glazers to exit and make way for a new investor interested in working with the supporters to build a stronger football club and business together,” it concludes.

What about transfer spending?
Simple arithmetic says that to pay down cash debt and account for rolled-up interest on the PIK loans United cannot spend more than £20 million per season. Even that figure is optimistic. Money from the sale of Cristiano Ronaldo remains unspent. The question is whether the Glazer family pays down debt more quickly than in the past or reinvests in the squad.

Will a white knight save United?
This is highly unlikely. While United is heavily indebted the club is as the leading sports franchise by the influential US-based Forbes magazine, ahead of Dallas Cowboys and Washington Redskins. With a market value reaching more than £1.3 billion, any investor in the club will need seriously deeps pockets. In comparison Roman Abramovic has invested a total of around £400 million in Chelsea, including buying the club, paying off debt and bringing in new players. Meanwhile, Sheik Mansour’s investment in Manchester City totals just £304 million.

So what does the future hold?
United must refinance or the club’s indebtedness will continue to climb sharply in the coming years. While the club can meet cash debts through revenues, the looming maturation of PIK loans is wiping out almost 100 per cent of the club’s annual profits. Despite making a pre-tax profit of £88 million, debt repayments, transfer spending and rolled-up interest meant United’s holding company – Red Football Joint Venture Limited – increased its indebtedness by £33 million in the last published accounts.

The catch: there is little incentive for current investors to swap cash debt for a bond and the financial market is still deeply frozen to commercial borrowers.

The club has doubled turnover in the past four years through strong growth in TV, commercial and match-day revenues. It may need to do so again in the next four years simply to stand still. The alternative is a frozen transfer budget and inevitable player sales.

Glazers aim to swap debt for debt

January 3, 2010 Tags: , Shorts 3 comments

The Glazer family is looking to issue a £600 million bond to ease the club’s debt burden, according to reports. There is more than £550 million in debt on the club’s books, while the family is responsible for a further £175 million ‘Payment in Kind’ hedge fund loan that accrues more than 14 per cent interest annually.

“It is understood that the Glazer family, the American leisure tycoons who bought the club in 2005, have asked two investment banks to look at ways of easing the debt burden,” reports The Times.

“JP Morgan, the US bank that engineered the Glazers’ £790m takeover, and Deutsche Bank, have been working on options to improve the club’s financial situation amid concerns that its debts could soon have serious repercussions.”

The bond, effectively an ‘IOU’ against which City investors loan money in exchange for a predetermined interest rate, would ease the club’s overwhelming interest burden that stands at £70 million annually.

Bond investors could raise £500 – 600 million in a successful issue, according to City analysts, with United liable to pay down the original principal plus interest by the ‘maturity’ date. In the current financial climate the Glazer family has been unable to refinance the club’s debts through normal commercial banking.

£1 billion United buyout – really?

December 13, 2009 Tags: , Reads 8 comments

Thai-based investors will bid £1 billion for Manchester United according to reports in the News of the World today. The unnamed consortium, composed of unknown “billionaires”, will make the record-breaking bid with the Glazer family struggling to pay down personal and club debt, according to the newspaper.

“The group of six billionaires have spent three months on a deal they hope is too good for Malcolm Glazer to reject,” claims the Rupert Murdoch owned newspaper.

“Two consortium members are keen United fans who have twice visited Old Trafford this year to watch Sir Alex Ferguson and his players in Premier League action. Based in Bangkok, the consortium wants to buy out the Glazer family and put an end to the financial balancing act which has engulfed the world’s biggest football club.”

The unattributed source quoted by the red-top goes on to claim that the proposed investment made by the consortium would “far outstrip” that of Roman Abramovich in Chelsea in what would amount to the biggest football deal in history.

The Glazer family secured Manchester United Plc in a leveraged deal more than four years ago. But the terms of the deal have loaded the club with £600 million in debt secured on the club that accrues around £60 million in interest payments annually. Additionally, the family took out a ‘Payment in Kind’ (PIK) loan that attracts a punitive 14.75 per cent interest annually on a debt that has now reached more than £175 million.

On the revenues side of the business, United first attracted doomed US insurance group AIG and then risk management corporation AON as principal shirt sponsors. A range of other firms have taken up tiered sponsorships in travel, drinks and financial services and the new BSkyB-led television deal ensures more media cash than ever before is reaching the club’s coffers.

But ticket prices have increased sharply, locking out many fans and potentially alienating a whole generation of fans. The club has also struggled to sell-out Champions League and Carling Cup matches and a number of corporate tickets remain on the table.

Yet supporters of the Glazer family’s time at United can point to the three Premier League titles and European Cup win during their ownership. But as Rant reported earlier this month success on the pitch has come at the cost of just £ 6 million net spent per season on the team. Moreover, the family has struggled to refinance the PIK loans with the equity market frozen during the global economic downturn.

In that scenario United may well be ripe for a takeover but hardly the most attractive financial proposition. Although the £1 billion headline sounds like a substantial increase on the 2005 purchase price, the figure necessarily includes both the value of the club and debt, which stands at well over £700 million, and a profit margin that the Glazer family would undoubtedly demand. The mooted Thai consortium will need very deep pockets indeed.

Moreover, it’s questionable whether £1 billion represents good value for money in the current market. The reported ‘offer’ equates to a 400 per cent multiple on United’s annual turnover for a start. In the fickle world of football success, that’s a substantial premium.

Any new investor would also be faced with a football reality in which Real Madrid, Chelsea and Manchester City are free to spend without limits. Sir Alex Ferguson has bemoaned the lack of value in the transfer market – it is unlikely to correct itself in the near future.

Glazers struggling to refinance debt

December 5, 2009 Tags: , Reads 3 comments

Manchester United’s owners, Malcolm Glazer and sons, are struggling to refinance part of the club’s huge debt, according to a report in The Times today. The family, who bought the club in a leveraged deal during summer 2005, has twice failed to refinance £175m so-called Payment in Kind (PIK) loans over the past two years.

The principal area of concern for the family, according to the report, is not the £518.7 million of loans leveraged against the club but the PIK finance that the family secured as part of the buyout four and a half years ago. Unless the family is able to secure refinancing they will be responsible for a £580 million repayment on the debt, which attracts a punitive annual interest rate of 14.25 per cent, when it matures in 2017.

United’s recent austerity in the transfer market is often attributed to the club’s debt, with a net transfer spending averaging just £6.48 million per season since the Glazers’ takeover. The club spent a net £8.1 million on transfers in the year ending June 2006, followed by £1.2 million in 2007 and £44.9 million in 2008 before making a profit of £38.7 million in 2009 after the sale of Cristiano Ronaldo, according to figures published by The Telegraph.

The figures are in stark contrast to the net £25 million per season promised when the Glazer family bought the club.

Since June, United have spent a net £16.9 million on Antonio Valencia and Gabiel Obertan while Frazier Campbell left the club for Sunderland. But the club failed to take up the €10 million option on Adem Ljajić this week, while £25.5 million was left unspent on Carlos Tevez in the summer. The club also backed down from a bid for Karim Benzema in summer, with Sir Alex Ferguson claiming that there is “no value” in the transfer market.

“Whatever the reason for the Ljajić deal falling through, the fact is, with the revenues flowing into the club, Manchester United should be competing with Real Madrid and Barcelona for players of the calibre of Lionel Messi and Kaka. But instead, we have to carry the deadweight of the Glazers’ ownership on our backs,” said Duncan Drasdo, chief executive of the Manchester United Supporters’ Trust.

“The true picture will not be clear until after the January transfer window, but with the £80 million Ronaldo transfer fee, plus the supposed £25-30 million annual transfer kitty, a spend of £100 million would effectively be break-even.

“Supporters will rightly be asking where the money has gone when they’ve been forced to pay more and more through the huge ticket-price rises in recent years.”

Mike Phelan denied that the Ljajić deal collapsed due to financial reasons, although the player’s club – Partizan Belgrade – claimed that United is in a “financial crisis” on Friday.

United must meet certain spending and revenue targets under the terms of the principal loan, secured against the Glazer family’s club shares. Although revenue has steadily grown under the American’s ownership – a record-breaking shirt sponsorship deal with AON kicks in next season – many fans are locked out of Old Trafford because of season ticket price rises over the past four seasons.

MUST: Glazers set to leave

October 10, 2009 Tags: , , Reads 2 comments

The Manchester United Supporters Trust (MUST) says that the Glazer family will inevitably exit as owners of the club, possibly in as soon as five years. Responding to Martin Edwards’ comments, where the former United managing director expressed his concern over the club’s £700 million debt, MUST ceo Duncan Drasdo says the Glazer family will sell up.

Edwards, interviewed for Andy Mitten’s new book Glory, Glory! Man United in the 1990s, says that Manchester United has lost control of its own destiny due to the huge level of corporate debt, which is now almost 200% of turnover.

“It concerns me that the club are in so much debt,” said Edwards, who sold the last of his remaining United shares before the 2005 takeover.

“The club are not in control; that family are in control of the debt. I can understand where the fans are coming from with their concerns.

“The crunch time will come when they [the Glazers] exit. Will they saddle the club with the debt or just sell the club on for a profit because that’s all they are interested in? How will they leave the club?

“I’m not going to make any accusations because up to now they have behaved fairly well, supporting the manager, and they haven’t disrupted the running of the club or the personnel. Time will tell.”

Edwards, who inherited control of the club from his father Louis in 1980,tried to sell United three times during his reign. First, to disgraced media tycoon Robert Maxwell in 1984, then in 1989 to Michael Knighton for a prospective £20 million. Knighton appeared on the pitch at Old Trafford, playing ‘keepie uppy’, before pulling out of a deal he couldn’t afford.

In 1991 Edwards led the board’s flotation of the club on the stock market, raising funds for Stretford End development but placing the future independence of the club in jeopardy.

Then in 1998 Edwards, now managing director of Manchester United PLC, recommended that shareholders sell to Rupert Murdoch’s BSkyB, who tabled a £623 million bid for the club.

“I thought Sky would have taken Manchester United to a level where nobody could have got near us,” explained Edwards.

“That’s why I recommended their offer in 1998. When they approached us, we had gone 30 years without winning the European Cup. I felt that they could have pushed us on to the next level.”

In April 1999 Stephen Byers, the Trade and Industry Secretary, halted the takeover after the Monopolies and Mergers Commission (MMC) ruled it anti-competitive, saying it would have an adverse effect on the wider football industry. Fans’ groups, including Shareholders United, lobbied hard for the government to block the deal but the precedent was set: United was available for purchase.

MUST, the supporters’ organisation that succeeded Shareholders United after the Glazer takeover in 2005, now campaigns for fanss’ interests including investment in the team, reasonably priced tickets and a positive relationship between the club and board. MUST has also been outspoken about the damaging level of the club’s debt.

“We share Martin Edwards’ concerns about the future,” said MUST chief executive Duncan Drasdo this week.

“That is precisely the reason why we have begun building a huge online network of Manchester United supporters and ‘Reds In Business‘.

“I think it is unlikely that the Glazer family will still be the owners of Manchester United in five years’ time so supporters need to prepare now if they want to have a say in the future ownership of the club.”

The group – in its various guises – made similar calls in the past. First at flotation and then in the lead up to the 2005 Glazer takeover. Fans listened but where the financial muscle will come from, to have a say in what will be a multi-billion pound deal is a moot point.

Four years and £667 million later

July 3, 2009 Tags: Reads 11 comments

It’s just over four years since the Glazer family took over Manchester United in the most heavily leveraged football buy-out in history. Despite fans’ anger, threats of violence, and a myriad of destroyed season tickets, Malcolm Glazer landed the club and handed it over to his sons Avram, Joel and Bryan to run. In doing so he placed hundreds of millions of debt straight on to the club’s books, at almost no risk to his own personal fortune. United moved from the world’s most profitable sports team, to the most indebted in one easy step. Four years, three Premier League titles and one European Cup later and the anger has subsided but the debt legacy is just as stark.

While common in the world of business, leveraged buy outs are almost non-existent in football. The process, whereby money is borrowed against the asset that is to be bought, means that the acquired company effectively pays for itself through its own profits. And that’s exactly what happened to United – with the vast bulk of the purchase price effectively mortgaged against Old Trafford, Carrington, the players and future season ticket revenue. The Glazers then took out a £152 million payment-in-kind (PIK) loan, on which the club is playing an eye-watering 14.25% interest rate, to cover the rest. In total the debt burden is now more than £667  million.

On the pitch few fans can complain. Investment has been made in new players since 2005 – Dimitar Berbatov, Nani, Anderson, Nemanja Vidic, Patrice Evra and others. United meanwhile has continued to rack up trophies – three Premier League titles, a European Cup, World Club and the Carling Cup, twice.

The big question is – when does the debt start to bite? Because it will bite. According to the most recently published accounts United serviced £69 million of debt interest last year. Almost exactly the same amount as the club’s profits before tax. Perhaps most pertinently, however,  none of the total debt burden was paid off. United does have to pay off the debt, whether its by increasing revenues, selling assets or lowering costs.

For the fans the takeover has meant huge increases in match-day ticket prices. With TV income largely known – save for the millions available from a long Champions League run – ticket prices and commercial revenues are the two principal areas where the United board has looked to generate revenue. Tturnover has increased hugely under the Glazer regime, but critics can argue that the club is sprinting just to stand still.

But does trouble lie ahead? With Cristiano Ronaldo sold for £80 million, and the money earmarked for Carlos Tevez not spent, Sir Alex Ferguson was expected to have a transfer kitty of more than £100 million this summer. But the move to bring Michael Owen into the club on a free transfer and pay-as-you-play terms, could be seen as a sign that the chequbook has been put firmly back into the safe for the summer. More worrying still, the United board has being trying to strike a hard bargain in a sellers market – and failing. First with Carlos Tevez’ team over the fee to secure the player’s rights, and then with Olympique Lyonnis over the transfer of Karim Benzema. Each time the club has effectively given up the ghost and been outbid.

Time will tell whether the Glazer family allows the board to spend this summer. And whether they’ll ever pay off that debt. One thing is for sure, love them or hate them, they appear to be here to stay.

20,000 new seats but will they be any cheaper?

May 7, 2009 Tags: , Reads No comments

Old Trafford is set to expand once again to over 95,000 seats from the current capacity of 76,212, according to recent media reports. While these rumours are not new, nor a timescale given to the project, or planning permission granted by Trafford Borough Council, they are given some credence by a recent interview by M.E.N with United’s group property manager George Johnstone.

While the news is hardly unexpected – the club have been looking at options for expanding the single tier South Stand for some time now – it is welcome for the thousands of fans who are locked out of many of United’s home matches. But the development poses some real questions:  is the move designed solely to increase turnover at debt-ridden United, or will any of the new seats be offered at affordable prices?

Since Old Trafford was converted to an all-seater stadium in 1992, at a capacity of just 44,000, there has been continual expansion in size and facilities. Firstly, the club added more than 11,000 new seats by building the giant three-tiered North Stand in 1995. Further seating was then added with second-tiers built on the East and West Stands. The North East and North West Quadrant second-tiers were completed in 2006 to restore something of a bowl to the stadium for the first time since 1992.

The new project will is likely comprise of two phases and has two potential outcomes. Firstly, completing the second-tiers of the South East and South West Quadrants, for an additional 8,000 seats. This has always been a matter of time and money as the expansion would use very little extra land.

Secondly, building a three-tier replication of the North Stand on the South side of the stadium that will add an additional 11,000 seats for a new Old Trafford capacity of 95,212. However, the South Stand expansion is a much more complex project because of the Manchester to Liverpool railway line and Manchester United FC Halt station that lies behind the stand. Any project will be affected by the presence of the track, with either a two or three tier new stand certain to overhang or possibly be built over the railway. This will necessitate the club buying up to 50 houses on Railway Road and create a far more difficult planning process.

A less expensive two tier addition to the South Stand is also believed to be under consideration by the board and would not be built over the railway tracks. This would create a final Old Trafford capacity of about 91,212, similar to Real Madrid’s Santiago Bernabeu but well short of Barcelona’s soon-to-be expanded Camp Nou at 106,000.

When United last conducted a feasability study on the project the costs came out at more than £100 million and are unlikely to have fallen in the meantime. With club debt at more than £700 million and rising there must be serious doubts about how the club could fund the project without rolling the costs into the club’s ongoing bank and PIK debt.

The debt also quashes the mooted possibily of a reduction in ticket prices. After all more seats equals more revenue, and financing a stadium expansion together with debt repayment will require a lot of extra revnue. One of the reasons why United were one of the only top clubs in the country to raise ticket prices for next season, in the depths of the worst recesion since the 1930s.