Manchester United’s bond issue is falling apart almost as quickly as it began, with institutional investors ditching the notes and forcing prices to fall. The bond issued by the club, which raised £504 million last week, fell to a low of 93.4 pence in the pound at one stage today as investors sold on fears of United’s financial standing.
The United bond has a coupon rate of around nine per cent, significantly above current inter-bank LIBOR but fears expressed by key City insiders have sent prices tumbling, with one prominent United-supporting investor calling the club “over leveraged.”
That Jim O’Neil, of Goldman Sachs, works for one of the principal under-writers is highly embarrassing for the Glazer regime.
“I value my long-term support for Manchester United better than anything else,” O’Neil told The Daily Telegraph, before criticising the level of debt at the club.
United is now leveraged 200 per cent over turnover and 500 per cent over underlying profits with the bond issue alone – a rate normally associated with “junk” bonds. Factor in the £200 million in Payment-In-Kind loans being paid down from United’s cash reserves and there is little room for maneuver in the business model, argues O’Neil.
So desperate is the situation that another United-supporting hedge fund trader, Paul Marshall of Marshall Wace, urged fans to combine forces and return the club to the Manchester United community and out of the Glazers’ grip. Marshall co-founded Marshall Wace LLP, one of Europe’s largest hedge fund groups, in 1997 and is widely regarded as one of the leading equity strategists.
“Debt has acted like a leech on the club, sucking money out of the football budget to feed the Glazers and their bankers,” Marshall wrote in The Daily Telegraph today.
“It has been estimated that between 2005-9 Red Football Joint Venture Limited has spent at least £260m servicing its debt. Manchester United Plc has debt service costs of over £40m per annum – money that could otherwise be available for players.”
This much the fans are now painfully aware. Marshall, though, is deeply worried for the long-term future of the club with, he says, 45 people now employed to manage the club’s finances alone. £35 million has been lost in derivative positions in the past year, notes Marshall, and an estimated £140 million more will be sucked out of the club in the next.
“Leaving aside the apparent incompetence behind these losses, such hedging is only necessary because of the scale of the debt,” he says.
“Manchester United’s future is deeply worrying. United will never realistically be able to pay off the debt. And with the imminent retirement of Sir Alex Ferguson, we are close to a tipping point where declining fortunes on the field could lead to a loss of revenue which could cause the debt burden to spiral out of control.”
The solution, says Marshall, is a fan-led takeover, leveraging – in the best possible way – more than 300 million supporters worldwide to build a sustainable community project. He cites the fan-owned principles of Europe’s largest and most successful clubs as a model for the future.
“Football clubs are communities. Manchester United’s community famously extends well beyond Manchester, although Manchester is at its heart and core,” he concludes.
“The best form of ownership for a football club, as Barcelona has proven, is its community, not a single tycoon. It is time Manchester United’s global community came together to create a structure of common debt-free ownership.”
Meanwhile, in the City investors already have cold feet over the bond issue, which “was bought by investors who aren’t specialists in valuing high-yield bond investments,” according to one leading analyst today.