The Glazer family is to pay off the £243.7 million Payment in Kind (PIK) debt held by Red Football Joint Venture (RFJV) Ltd with “their own money” according to media reports today. The PIK notes, part of a 2006 refinancing round, incur 16.25% annual interest and will be repaid on 22 November according to a documents filed yesterday.
The move to repay the PIK debt, held by Manchester United’s parent company, was widely expected, with the eye-watering interest compounding rapidly. That the Glazer family has apparently not used club cash to do so is more surprising, with many analysts expecting the Americans to do so.
However, the move leaves several questions unanswered, particularly the source of finance used to repay the PIK debt and the timing of the move.
Indeed, documents released today by blogger Andy Green show that no restrictions on repayment of the PIK debt have existed since 2008. The Glazer family has been able, as widely suspected, to repay the PIK debt at their own discretion for the past two years. That the family has not done so has cost millions, leading to the assumption that the Americans simply could not afford to do so. Until now.
Bloomberg reported last night that the family has not removed up to £95 million in dividends from the club to pay down the PIK debt, confirmed by United in a statement today. The move had been widely expected as part of the bond refinancing last January, which released £70 million as a one-time dividend and up to 50 per cent of EBITDA on an ongoing basis.
The dichotomy of the Glazers not paying down PIK debt until now leads to a series of as yet unanswered questions about the family’s finances. Namely how can the Americans, whose US property business is in serious financial trouble, afford £243.7 million at this time?
The Glazer family moved to buy back around 15 per cent of the PIK debt in 2008 at a heavily discounted rate. The family’s stake, bought at a cost of £12.6 million is now worth £36.6 million, according to Green’s analysis today.
Yet the family has still found more than £200 million in new money, with the source highly likely a new round of refinancing by RFJV, secured on the company’s assets: MUFC. The new finance, should it now be in place, will presumably run at a substantially lower interest rate than the 16.25 per cent now charged by the small group of PIK holders. Any refinancing will leave United or its parent company with total ongoing debt of around £720 million.
Alternatively, the family may have sold a stake in United to finance the debt repayment. Although this is a potential scenario, the Glazers have previously shown no inclination to sell part or all the club despite widespread supporter unrest and interest in a purchase by the so-called Red Knights consortium. A new investor is the best possible scenario for Sir Alex Ferguson, leaving the club less financially hamstrung, although still highly geared with £520 million corporate debt, but in reasonable shape to invest in the transfer market next summer.
Possible, although less likely still, is that the Glazer family has sold other assets in the US. The family owns the Tampa Bay Buccaneers NFL franchise, although a sale of the Florida club would presumably have taken months and been widely covered in the media. The Glazers may also have sold part of their strip-mall business, although Green’s analysis earlier this year demonstrated the severely distressed state of their property empire.
The Manchester United Supporters Trust (MUST) called for greater clarity from the family today, amid more confusion about the state of the club’s finances. The Glazer family has kept financial issues largely secret during its five-year tenure at Old Trafford, with the January bond revealing more details than ever before.
“Now is the time for the Glazers to finally come clean and tell the truth about what is going on at Manchester United and what their plans are,” read a MUST statement today.
“What have they got to hide? No more secrecy. No more spin. Just tell the fans the truth.”
This seems unlikely though, with few further details released by the club as it announced its 2010/11 Q1 results today. Indeed, the club issued a terse 19-word statement confirming that “there has been no dividend of club cash”. The statement was very much in keeping with the club’s long-held view that supporters are owed no financial transparency.
The results, which follow a 2009/10 end of year loss of more than £83 million, show year on year quarterly revenue growth of 9.7 per cent to £63.3 million and £22.7 million paid out in interest over the quarter. The accounts showed a cash surplus of just over £150 million, although the highly cyclical nature of United’s reserves means that figure will deplete through the season.
The quarterly accounts also demonstrate the cost pressures on the club, with player salaries – pre Wayne Rooney’s new contract – up 14.8 per cent year on year. Other costs increased 4.8 per cent, with all costs up 11.7 per cent. Indeed, cost pressures have restricted EBITDA growth to just 4.8 year on year, placing doubt on the Glazer family’s claims that United is a ‘growth business’.
However, doubts still exist about the club’s ability to compete in the transfer market over the long-term, although Ferguson is widely expected to embark on the largest rebuilding programme at the club for years next summer. Whether the Scot will invest heavily in established internationals or continue to buy promising youngsters with a ‘resale value’ is as yet undetermined. The latter is effectively club policy.
Not in doubt, however, is the Glazer family’s record both on investment, price rises and attitude to fans.
The Americans promised a net spend of £25 million per season on takeover in 2005. To date net spend hovers just under £2 million per season, while aggregate ticket prices are around 50 per cent higher than in 2005, and the family continues to ignore supporter calls for greater transparency.
The latest move is unlikely to wash with United fans though. After all, no PIK debt repayment will compensate for chronic under-investment in the transfer market allied with ticket price rises – effectively a poorer quality product for a higher price.