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?