The Glazer family is to pay off £243.7 million Payment in Kind (PIK) debt, which is owed by Manchester United’s parent company Red Football Joint Venture (RFJV). The move, which will reportedly involved “money from outside the club”, will eliminate the PIK debt that carries a punitive interest rate of 16.25 per cent annually.
However, the repayment poses almost more questions than answers, with the family’s record on financial transparency shody to say the least. Here’s 10 that Rant wants answers to…
Why pay down the PIKs now?
The high interest rate on the notes made redemption necessary, with the debt rolling up to more than £600 million by maturity in 2017. Redemption removes RFJV’s risk of default on the PIKs and will – presumably – lessen the interest rate burden on the company. The Glazers previously refinanced United’s senior bank debt with a £500 million bond in January, which offered greater flexibility for the family to withdraw United’s cash reserves. But why wait so long to pay the PIKs down if, as blogger Andy Green suggests, no restrictions on redemption have been in place since 2008? Business sense, it does not make.
Where is the money coming from?
Although Bloomberg yesterday reported that the money for PIK repayment will not come from club sources no further details have emerged about how the family intends to afford the £243.7 million redemption costs. Today a Glazer family spokesperson told the BBC that the family has not sold any equity in the club to repay the debt, leaving refinancing by far the most likely option given the perilous state of the Americans’ US business empire.
If this involves refinancing, how much debt is now owed by RFJV?
Assuming that the Glazer family has sought additional funding from the credit markets, how much has been taken and against what assets is it secured? If the family has refinanced the 85 per cent of the PIK notes it did not already own, RFJV will be indebted to the tune of more than £200 million. Moreover, the PIK notes are secured against RFJV’s shares in United; presumably this will also be the case with any new financing the Glazers have taken out.
How will debt that be repaid?
If the PIK debt is refinanced how will any new credit facility and the associated interest be repaid? The PIK notes represented some of the most expensive finance in commercial credit but the Glazer family continued to roll up interest into the ongoing debt. As a minimum, any new creditor will seek repayment of annual interest, if not the capital sum, which may mature at a later date. Will the Glazer family repay this from their own pockets or use dividends from United to finance the facility?
Will the Glazer family still take dividends?
The terms of the January bond enable the Glazer family to remove £70 million immediately and a further 50 per cent of EBITDA after bond interest payments – around £25 million – each financial year. Although the family has reportedly been spooked by supporter unrest into changing its strategy the facility is still available. After all, somebody will have to repay the new credit facility.
How much money has the Glazer family personally made from this?
The Glazer family bought around 15 per cent of the PIK notes back in 2008 at a heavily discounted rate. Reports suggest the family paid around £12 million for the stake. This came not longer after it borrowed £10 million from United – a sum that is yet to be repaid. However, the Glazers stake, at today’s redemption rate, is worth about £36 million, leaving suggestions that the family has personally profited from the PIK redemption.
What of United’s assets?
Old Trafford could still be sold and and United’s training base at Carrington transfered to a Glazer holding company under the terms of the January bond. Sale- and lease-back arrangements could net the family more than £400 million but forever burden the club with punitive rental costs. Nothing in today’s PIK refinancing suggests an asset-lock is – or ever will be – in place.
What about the Bond debt?
The £500 million bond issued in January, which is costing the club £45 million per season in interest payments, matures in 2017. What will the Glazer family do:repay the debt or refinance yet again? As yet the family has shown no inclination to de-leverage the club, leaving a £500 million bill in six years time. The bond actually increased interest payable on the bulk of United’s debt but increased the flexibility the Glazer family has over United’s finances. But if the specific intention was to enable greater dividend streams to flow the family’s way, why did they not take them? It seems that supporter anger and poor season-ticket sales may have had an effect on the Glazer family’s strategy.
What about the Glazers’ other business interests?
Green previously demonstrated the dire state of the family’s property empire, which has not expanded in four years and seen a number of malls default on their mortgages. Analysis done by Green, the Guardian and BBC Panorama in February predicted that further foreclosures are likely within the Glazer property business portfolio, which made just $9 million pre-tax profits last year. The Glazer family has also sold personal property and other business interests as the recession bit hard into their fortune. Meanwhile, the Tampa Bay Bucaneer’s franchise has lost a third of its value according to Forbes magazine, with the Florida based club also heavily indebted and rapidly losing supporters.
Will United now spend in the transfer market?
Today’s quarterly Red Football Ltd accounts showed £151.7 million burning a hole in United’s bank account but will a previously parsimonious regime allow Sir Alex Ferguson to spend next summer? With up to four players due to retire and two others out of contract, the Old Trafford exit door could be busy. Shortly after Wayne Rooney signed a new contract in October a rash of media stories suggested Ferguson will have substantial funds to spend next summer. Indeed, the Glazer family once promised £25 million net spend per season. During their regime it is substantially less. Will they finally loosen the purse strings?
34 thoughts on “PIK debt: 10 unanswered questions”
Ten good questions. I wonder when we will get the answers.
If the upshot in the short term is that Sir Alex has money to spend on players, I’d like him to buy a top-class attacking midfielder in January (cup-tied or not). Just like last year – when they should have run away with the league, Cheatski seem unable to pull away from the pack, and a United side with a strengthened midfield would stand a very real chance of getting #19.
As you say, why now? 14% or 16% is an insane rate of interest, what were they waiting for?
I can only assume it’s taken them a while to raise the cash. According to the Telegraph they have been selling stuff off recently. They raised $100m from seling their stake in Zapata and their Palm Beach mansion. I guess they have found buyers for some other stuff in their business empire.
I doubt they have just refinanced. Who would lend to them when they have no serious revenue streams besides United and United’s revenues are already servicing the bond debt?
Chris – Zapata sale was over a year ago now, as was their house sale, most probably to finance their existing lifestyle. That money is not going to repay PIK debt – they could have done that ages ago and not cost millions in interest. They’ve refinanced.
Ed – the statement is very clear. The debt has been paid off. If RFJV had acquired new debts to replace the PIKs they would have to declare that. Presumably you are saying that the Glazers themselves have borrowed money to pay off the PIKs. But why would anyone lend £220m to the Glazers and have any confidence in getting it back? It’s really tough to get loans these days, much harder than when they took out those PIKs.
If I was the Glazers I know exactly what I would do – sell whatever I could to pay of those crazy PIK loans (which I understand could only be paid off once the bond was in place, early this year). No asset has a risk-free return rate of 16% so this is a no-brainer.
Chris – what statement Chris? RFJV made no statement today, if the company had acquired new debt they have no legal duty to declare it. The company doesn’t file its next accounts until January. I fear you are misinformed. I’m not at all saying the Glazers have (personally) borrowed money what I think is the most likely scenario is that RFJV has acquired new access to capital and refinanced, securing the new loan against its shares in Manchester United – just as the PIK debt was. That’s a realistic scenario and the most probable one. Hopefully the answers to my questions will come out in the wash sooner rather than later.
I agree with Rob. We can win this league. Lets buy a world class midfielder in January and leave Ancelotti with his head buried in the sand like an ostrich wondering how Chelsea let it slip away.
Re Point 10.
If the Glazers havent used the money in the bank (circa £150M) for the PIK, why is it sitting there?
OK some could be there for a rainy day and to partly cover the bond’s interest payments, but surely at least £50M of this must be cash available for transfers and has been for a while?
Triggs – there seems to have been a last minute change of strategy. Right up to last week the Glazers were asking PIK holders to waive redemption costs. So seems the plan all along was to take the dividends, then they score some refinancing in the US capital markets and bingo they can look like heroes because the media are too lazy to ask the right questions and just go with the misleading “they’ve paid off a third of the debt” BS.
Mind you, given the lumpiness of revenues across the year and that about £30m is already effectively earnmarked for debt swap costs (over six years so point is a bit moot) there’s no chance United is going to spend £150 in the window. But there should be something if the Glazers aren’t taking that dividend. I personally think they got spooked both by fan action but more by Liverpool’s price. Here’s a living example of what happens to the value of the asset if you don’t invest in it. It might cost them more in terms of exit strategy to not spend, than to spend.
I agree it does appear to have been a change in strategy, but personally I think it more to do with their own personal economic circumstances than anything to do with Liverpool/G&G/Rooney. They’ve never cared previously what the fans think.
However, I will admit that the latter does offer a far more interesting explanation. I’m just imagining Wayne during that telephone call with the Glazers, “what you’re gonna do right, is clear that fucking PIK debt and give Fergie £100M to spend in January – alright? Oh, and you’re gonna give me an extra £5M a year!
Btw – I’m not saying you were suggesting the Rooney saga had something to do with this, but some are
The Rooney situation might have spooked them. They couldn’t let Rooney go after losing Ronaldo and still claim that we were a top club alongside Madrid and Barca.
But if they want to sell the club soon for big money then they need to keep up our image as one of the worlds’s top clubs. And if they intend to stay for the long term it’s because they think they can expand the merchandising, internet and TV deals to make the club worth even more. That needs a few big name players and a few trophies.
Like any business people they try to cut costs as much as they can. I think the Rooney crisis marked the point where they realised the cutting had gone a bit too far and was in danger of torpedoing their plans. It then became impossible to take money out of the club to pay the PIKs because the money was clearly needed to invest in the team. So they had to find some other way of dealing with the PIKs (we don’t yet know exactly what).
UNITED REVEAL POST-FERGIE PLANS
Last Updated: Wed, 17 Nov 2010 12:29
United chief executive David Gill says United are building a young squad with Sir Alex Ferguson’s successor in mind.
Gill revealed that younger players have been targeted by the club to smooth over the transition to a new manager’s regime when, ultimately, Ferguson calls it a day.
Gill told US Radio Station Sirius XM that Ferguson was on a rolling contract for a year and at some stage he will retire, whenever that may be.
“What we’re doing with him, with the coaches and scouts, is getting a great squad with the right age profile so that a new manager coming in-yes, he will probably want to change one or two players, thats always the way, or two or three-but he won’t make wholesale changes.
“There will be a sensible transaction to the new manager. So that’s where we’re at. As I say, its not something we worry about. We worry about other things but we don’t worry about that.
“What happens on the pitch is crucial to all our off-the-field aspirations and we have to understand that. So someone coming in to take over Manchester United will have to have that pedigree, will have to have that logical success and achievement because it’s such a big club.
France manager Laurent Blanc and Real Madrid boss Jose Mourinho are the leading candidates to replace Ferguson.
I don’t think that’s true at all. The Glazers have never shown the slightest interest in PR concerning their ownership of United, so none of this has anything to do with image or appearances. The amount of money is too important for that.
They always said that they would refinance the debt on the club and then refinance the PIKs. They had to wait a while to do the first because the financial markets have been so crapped up the past few years, but then they did that this year, and now they’ve done the PIKs, just as they said.
There’s too much tea-reading that goes into this, thinking the Glazers give a crap about the stuff on the back pages of the English newspapers. They always had to refinance the debt, they had to do the club’s debt first and then the PIKs, and now they’ve done that as quickly as their own personal circumstances and the financial markets have allowed. There’s no big mystery here. They *might* be thinking of selling the club, the *might* be thinking lots of things, but refinancing the debt was always going to be done anyway, so it tells us nothing new about their plans.
It’s not about PR, its the economics. They were not always going to refinance the debt, strategy #1 was to pay down the debt using dividends. How do we know this 1) they refinanced the bank debt in Jan using a bond, which makes them pay a higher coupon on the ‘senior’ debt but gave the the flexibility to take dividends 2) last week the Glazer family asked PIK holders to wave additional redemption costs in order to redeem. This absolutely was not a long term plan to refinance, the refinancing is plan B.
So what has changed and why are you completely wrong?
1) credit markets have opened up a bit enabling the Glazers to refinance using RFJV’s shares in United as collateral,
2) United’s ticket sales are not good and the club is concerned about a further tailing off of sales,
3)PIK holders told Bloomberg (off record) last month that the fans’ protest had delayed redemption through dividends,
4) Liverpool’s price has set the market price for the club vis-a-vis the competition,
5) Liverpool’s slide from grace has shown how much revenues and therefore the asset price can fall if not protected.
This isn’t speculation, this is what’s known. You seem in denial about it judging by this and other comments.
Sorry, but that’s actually the definition of speculation, you’re taking a bunch of circumstantial evidence and drawing a conclusion. You might be right, but it’s a bit deluded to think that your analysis of the very thin available evidence is incontestably the truth and everybody else is in denial.
So I freely concede that you might well be right, but I personally lean towards being more conservative in my speculation, and I have provided my logic.
It is worth noting that your argument is very self-justifying, since like others you insisted for a long time that the Glazers would pay off the PIK with the club’s money. Now that that has been proven wrong, you claim instead that “oh I was right but I made them change their minds”. I’m not calling you a liar or anything, but I think you have a (completely justifiable) emotional involvement in the issue that may be clouding your judgment.
As for “what’s known” and what isn’t known, it’s worth pointing out that until very recently nobody even knew that the Glazers had bought a quarter of the PIK debt themselves two years ago. The reality is that we know very little. I don’t claim to know what’s going on, I can only speculate, but I don’t say anybody else is “in denial” because I recognise that not a single person here “knows” anything for a fact, we’re all just speculating.
Let me clarify that I think it would be great if the supporters’ protest did make the Glazers change their minds, but I’m a bit more cynical about them. I don’t get the impression that they care that much about the protests or PR in general, they simply don’t make any effort at PR at all. If they did change their plans, I think it’s more likely because Fergie and Gill have told them they need to invest more in the team to keep players and get new ones. Most likely of all though, they just refinanced the PIK debt like they always intended, but they had to refinance the club’s debt first.
Actually your argument doesn’t make much sense to me, because even if the Glazers did want to pay off their debt by taking money out of the club, it would still make sense to refinance the PIKs and pay down a debt with a much lower interest rate. Most likely paying off the PIK with dividends was the last resort, which is why the built up a cash pile in the club. They always hoped to refinance, and they managed to do so. It would just be weird to pay off a high interest loan instead of a low interest loan.
There’s no possible scenario anyone can come up with in which refinancing the PIK isn’t the smart thing to do, therefore the fact that they’ve just refinanced the PIK tells us nothing at all about their plans. They might flog the club, they might take dividends out, who knows.
Interesting reading on all the above comments.Glazers have been reigned in by the Green and Gold campaign and if this had not taken place we would all be worse off ( higher ticket prices etc )For the life of me so many 0000’s of Man Utd fans dont give a toss about all this finance and dont care that they are being screwed by the glazers, thats why they are so fuckin rich. The harsh reality is that United fans like all others in this country take the easy way out which is doing nothing. Just think if we all stayed away in unison for ONE SINGLE HOME, it would reverberate around the world and the world would know that Manchester United Football fans mean business. Well we can all dream……
Any truth to rumours that a potential new owner has paid off the PIK debt before buying the club out right?
What is really outrageous is that the Glazers do not communicate with the fans. There will always be bad blood between the Glazers and the fans until they are finally gone.
When they eventually fuck off, they won’t tell us they are going to do so, they’ll just do it. There will probably only be one official press release – “Cheers, you cunts. Thanks for the memories”
This is why there could be some truth to the rumours that they are about to do one
They are well aware that they are not wanted and when you’re not wanted, you definately don’t hang around.
These gangsters have got something going on behind the scenes and it will all come out in the light very soon.
Yep, I think you’re right
I’d be fucking gutted if it turns out they’ve paid off the PIK loan with another loan – absolutely gutted, because it means they’ll be hanging around for quite some time
Yes, and thats what everyone is worrying about because Man Utd was a debt free club before these gangsters arrived. There’s got to be a way to get them out. May have to hire one of those terrorist groups and go over there and take them out.
You misspelled money.
Bad news: The Telegraph have sources inside United and they reckon that an American company called Springfield Financial Companies have taken on the PIK debt at a slighly reduced interest rate
So does the PIK debt still exist? Are we just being charged slightly less to pay it off? ffs ffs fuck about
sidney – they probably have refinanced, although word is the Springfield link is nothing more than speculation.
Some gullible sections of the United support wanted to believe that the Glazers had United’s interests at heart. They don’t. They’ll protect next summer’s season ticket sales with a few new players but after that they’ve got to deleverage at some point or they’ll keep eating into the asset’s value. Then there’s the real pain of sucking money out of the club.
This brief article in the Guardian is a classic piece of United financial fear-mongering, which occurs almost on a daily basis these days:
After quoting Gill, the piece immediately implies that his statement is a load of rubbish with two extremely selective and context-free pieces of information. First, match day revenues were flat for the year. OK fine, but why mention only that and not also mention that the other two pillars of United’s revenue, commercial and media, are growing healthily. Why not also mention that United’s match day revenue is the highest in the world, despite still having cheaper tickets than the big London clubs. So yeah growth is flat in that one area, but it’s also already the highest in the world, and the Guardian would be the first to scream bloody murder if the club tried to increase that revenue by raising ticket prices some more.
The second piece of information they offer is that the wage bill grew 14.6%. OK fine, but they don’t also mention that revenues grew too or by how much, so it’s not like the wage bill sucks up an extra 14% of revenue, which is what they imply. Additionally, they don’t point out the highly relevant piece of information that United’s wage bill is quite comfortably the lowest in the PL as a proportion of revenue. The only two clubs which come close, but still pay more in wages proportionally, are Arsenal and Spurs. Yeah, exactly, the two teams that papers like the Guardian regularly wank over saying they are the best managed clubs in the world.
Obviously I don’t think we should just take everything Gill or especially the Glazers say at face value, journos should be skeptical and inquisitive. But this is the opposite of good journalism, it’s simply anti-United propaganda, and every single piece on the club’s finances is like that. The Glazers are paragons of honesty, openness and virtue compared to the journalists reporting on them.
People are letting themselves get too wound up by that kind of reporting.
Got to say that I’ve also noticed that the Guardian appear to have an axe to grind when it comes to United’s finances, i.e. its articles are not balanced.
But then why get a sports journalist to comment on the finances of a huge corporation anyway?
bman – fortunately for the media, lay fans, the world’s financial analysts, football experts, banks, credit experts, equity professionals we have you to explain it for us! Or not.
This isn’t “anti-United propaganda” at all – United is a highly geared business in a volatile industry. The club is also very good at generating cash but it is running just to stand still. Wages did rise 14.6% before Rooney’s new contract and the inevitable knock on effects but TV revenue and matchday revenue is flat, and will be so for the foreseeable future. Commercial income is rising fast but many people – me included – believe they’re close to peak exposure. Point being, as I said before, EBITDA rose just 4.8%. The coupon on the Glazers bond is 8% and who knows what rate they’ve refinanced the PIK debt at. They’re eating into their own equity and United’s ability to compete in the market. Cash is important here not revenue. Fact is, United’s free cash flow isn’t likely to increase much and there’s a £700m bill that the Glazers have no intention of paying down yet – and if they ever do – have only one source of income from which to pay it down.
You can rail at the media for misleading reporting if you like but I’m well qualified to say that you’re wrong.
Ha ha, good man ed, stick to your guns.
you seem to know a lot about LBOs and you nail a lot with the cashflow analysis which is broadly hangs together. there is one continual flaw in this.
why would they suck cash out of united? it doesn’t generate that much spare cash by your own admission. cash flow has to service debt is the first major of private equity and they have consistently ensured that cash flow does service debt as it falls due and payable without incurring an event of default – to the extent a covenant breach was immenent they negotiated an extension / grace period, which the banks gladly obliged. debt service is key.
the typical investment horizon for a deal like this is minimum 7 years and their plan is to be in it longer. they need to generate enough equity upside so that when they sell (which they will), they will make a return on their real equity investment.
stressing the cash makes no sense – no sense at all. why wld the glazers simply sink united and their own investment? seriously, you can’t believe that they would for the hell of it
the logic must therefore be that they will directly or indirectly mismanage the club so that failure is inevitable, which must be the centre peice of the anti-glazer movement. you don’t see chav, shitpool, arsenal or citeh fans objecting, so it must be the debt and can the glazers manage it – and to this end we use the lack of investment in players as the principal reason why glazer ownership has not been successful.
otherwise, we use Fergies lack of value argument – which is barely credible because it is at least arguable that there is a lack of value in the post-global crisis european football market – and there is at least some credible evidence that the targets we went after did not wish to come to united.
as for another point, i think but you know more so will defer to you, that glazer period of ownership is at least if not the most successful period of any owners “ownership” – if you count trophy count, player accolades etc.
the fact that there is a slow deterioration in clubs financial health is definitely their to argue and it can be seen with the stats you proove.
however the owners it wld seem are sufficiently incentivised to at least not fuck things up and they have it would seem being making efforts to boost debt service – refinancing, stretching covenants, boosting sponsorship cash generation, cashflow from ticket receipts and TV deals, shirt sales and merchandise, etc.
i think the glazers will slowly optimise the balance sheet to ensure cash flow generation and wait for the global upturn and demand for the united product. once the clube has a book value of say 1.4 bn plus – possible 1.6 bn, then they will sell and cash in. given an investment horizon of another 5 years, and potential upside in the united product, that is feasible.
importantly, cash needs to be present to service the squad and the players but it wld seem that it is Fergal and the market that is stopping this and not the Glazers. Rooney’s intervention means that Jan and Summer are the actual acid test of this – however, fans are not that stupid – or that rich, and the real proof is voting with their feet. if and when, fans start avoiding the united product, OT, the shirts and the united credit cards, i think the glazers are smart enough to ride the storm – whether it is cloaked by the Red Knights or something else.
So, it’s not the Glazers but Sir Alex who is soley to blame for the sh*te we’ve been watching last season and this? For some strange, unfathomable reason, he has decided to handicap himself with the largest collection of overrated stiffs we’ve seen at United for quite some time. To what end? If he can squeeze one more EPL title (the CL is beyond fantasy) out of this bunch, will it confirm him as the greatest manager of all time? Nonsense. The reason Sir Alex manages such a sh*t side is that he cannot afford a better one.
As for the Glazers being in charge during the most successful time in United’s history, I think you know how flawed that argument is. Even Rafa (the FSW) enjoyed success in his early days at Liverpool, but the success was not really his; he was, however, responsible for running his club into the ground, and that is exactly the direction in which United are currently headed.
Any idea if they have paid it off yet?
Anthony – we can assume that it has been paid yes. They have no legal obligation to announce it. We’ll see RFJV’s accounts in January so that will confirm the payment and we might get insight into how. Although the latter is not certain – it might just show a transfer from the American subsidiary, which might not show the ultimate source of funds (almost certainly a refinancing via a US financial institution or hedge fund)