Look away now if you still believe that the Glazer family has plans for Manchester United that are anything but malevolent and would rather not know the truth! In an occasional series investment analyst Andy Green – andersred.blogspot.com – publishes further information on the family’s US property business, First Allied Corporation.
The report makes uncomfortable reading for United supporters still harbouring hopes of a late investment in the transfer market this summer, with the Glazers’ US strip-mall businesses failing an alarming rate as predicted by Green earlier this year.
In May Green identified 34 of 64 Glazer-owned shopping malls that were at serious risk of defaulting on their mortgages, with the entire portfolio highly indebted. In fact First Allied is failing so fast that several shopping malls have failed to pay their mortgages in the past quarter alone.
“Mortgages of five of these centres have become “delinquent”, that is to say the centres have started to miss mortgage payments,” explained Green yesterday.
“These five centres, originally valued at over $38m with over $7m of equity, have become delinquent in the last four months.”
Additionally, says, Green, “five new centres, which had previously been covering their mortgages, have now joined the “at risk” list after seeing falls in occupancy.”
Worse still, while occupancy rates remain low across the group some malls reported as fully let by the Glazer family have also fallen into delinquency because they have come out of interest-only periods on their mortgages.
Green estimates that many more of the family’s malls will fail even with full occupancy because the group is so highly leveraged.
“First Allied’s problems are not just a product of a weak US economy struggling to come out of recession, they are in large part due to aggressive financing structures put in place before the credit bubble burst,” explains Green.
“For 15 shopping centres, the terms of the mortgages on them make insolvency virtually inevitable.”
In fact the entire property business is now in such a poor state that it made just $9 million before taxes and other costs in the past year. The true group position is worse, with Green’s estimate deliberately ignoring the centres with negative cash flow. Each centre is non-recourse, meaning it can fail without impacting the group position.
Insignificant in a portfolio of 64 centres? Probably not, with the family’s NFL franchise Tampa Bay Buccaneers also heavily in debt, United is and will remain the family’s only cash-cow.
Indeed, given the lack of free cash-flow in its empire and the family’s extreme indebtedness, the Glazers have little choice but to remove hundreds of millions in dividends from the club’s coffers under the terms of the £504 million bond issued last January. This will pay down the so-called Payment-in-Kind (PIK debt), while Sir Alex Ferguson remains short of transfer funds and seeking “value” in the market.
There is, to paraphrase the Scot, no doubt that, although inexplicably some supporters still doubt this is the family’s intention.
The picture is of course similar to that unveiled by Green, the Guardian’s Daniel Taylor and BBC Panorama last May, with the Glazers’ property position deteriorating in the past quarter. It explains almost entirely the family’s motivation for issuing a bond that actually increased United’s interest payments, why Sir Alex Ferguson is suddenly seeking “value” and the reasoning behind both the Bucs and United’s “investment in youth” – read cheap – strategies.
While the Bucs came off disastrous 3-13 losing season on one of the lowest wage budgets in the NFL, United had ‘only’ the Carling Cup to show for a largely disappointing campaign in a mediocre quality Premier League after selling Cristiano Ronaldo last summer.
The response to relative failure?
Tampa Bay has invested in a range of younger free-agent players during the off-season, while the fans have walked away in droves. The franchise sold less than 40,000 season tickets and the club must now black-out TV coverage as games have not sold out for the first time in decades.
Meanwhile, following a remarkably similar strategy United has spent around £10 million net this summer on three youngsters this summer as the club also failed to sell all available season tickets for the first time in recent memory.
The strategy has failed at the Bucs since the franchises’ 2002 Super Bowl win, while the future is still unknown for United. There are, however, few examples in professional sports where a club bucks – no pun intended – the market and reaches greater heights on a negative investment strategy.
Indeed, in context the 1996 double winning side, including a youthful Paul Scholes, Ryan Giggs, Gary Neville, Nicky Butt and David Beckham, is an historical aberration.
With the Glazers’ finances unlikely to improve in the medium term, Ferguson must now repeat the trick.