The Glazer family must pay an eye watering 16.25 per cent on the Payment in Kind (PIK) debt it owes as part of the 2005 Manchester United acquisition, Bloomberg confirms today. The anticipated increase will add an extra £5 million annually to the debt that will climb to £270 million by 2011 and £310 million by 2012.
The notes, which are due in 2017, will continue to increase in value unless the family pays it off, culminating in a bill of more than £600 million if no payments are made. The Glazer family took out the notes in 2005 as part of the highly leveraged takeover, with two rounds of refinancing, including the January 2010 £504 million bond, failing to address the PIK debt.
Including the PIK notes – £202 million at last published figures – and bond, United’s total debt is effectively £706 million rising to around £770 next year and in excess of £810 million the year afterwards.
“PIKs can make sense at certain times but given the rate at which interest accumulates they can quickly wipe out equity,” said Jonathan Moore, a high-yield analyst at Evolution Securities, told Bloomberg.
“You’d expect owners to take them out as soon as they’re able to.”
Indeed, January’s bond removed the restrictive covenants placed by banks on the club’s former senior debt and offers United’s management greater flexibility in the way it uses the company’s cash reserves. The Glazers have an option under the terms of the bond to take £70 million out of the club to pay down other debt this year, and 50 per cent of United’s profits in dividends, management fees and loans on an ongoing basis.
The bond substantially increases United’s interest payments, leading most analysts, including underwriters JP Morgan, to conclude that partial PIK debt repayment will take place in the coming months. The family may already have removed the £70 million from United’s coffers but supporters may not find out until the club’s Q1 2010/11 results are published in the autumn.
Although United is not directly liable for the PIK debt – it is owned by a Glazer holding company called Red Football Joint Venture Ltd. – analysis by the blogger Andersred earlier this year demonstrated that the family has no other source from which to pay down the debt or face losing the club in 2017.
It is this very prospect, with Sir Alex Ferguson’s spending limited to a net £6.7 million per season under the Glazer regime, that so inflamed the United support this year, with more than 160,000 supporters joining the Manchester United Supporters Trust (MUST).
Ferguson has spent around £24 million bringing Chris Smalling, Javier Hernández and Bébé to the club this summer, with another £14 million recouped from the sales of Ben Foster, Zoran Tosic and Craig Cathcart.
However, with the Red Knights yet to make a bid for the club, and no other serious bidder yet on the table, United supporters may have to swallow limited net spending by the club in the coming seasons.
The Red Knights group, including Goldman Sachs Group Inc. Chief Economist Jim O’Neill, confirmed this week that it still intends to bid for the club, with reports of new “anchor bidders” from the Middle East injecting cash into the consortium.
Despite this, the group has said it will not bid for United until the Glazer family reduces its £1.5 billion asking price to “a sensible price” of less than £1 billion.