Manchester United’s owners are seeking to issue a £600 million bond in a bid to ease the club’s mounting debt burden, as Rant reported on Sunday. The bond, which in practice effectively swaps one kind of debt for another, will theoretically cut the overwhelming annual interest burden on the club – now at more than £70 million and rising.
But what does it really mean? Rant explains…
What does United owe?
When the Glazer family bought the club in 2005 they did so using two forms of debt in what City insiders call a leveraged buyout. Firstly, the family borrowed a touch over £130 million from various New York-based hedge funds. These so-called Payment-In-Kind (PIK) loans, which the family is ultimately responsible for meeting, roll-up interest annually. Secondly, the Glazers borrowed hundreds of millions more in principle cash debt from banks, including JP Morgan. In 2006 the family refinanced this debt placed it on the club’s books, securitised against the shares and club assets.
It is the PIK loans, which roll-up interest annually until the debt matures at a future date, that are causing greatest concern. In this case the interest charged is widely reported as an eye watering 14.35 per cent annually, with the maturation date in 2017. By then the initial £130 million loan will have reached £580 million.
The principal cash debt now stands at £519 million, according to the last published accounts, which are more than 18 months old. These loans are relatively inexpensive, attracting interest at between two and five per cent annually. Cheap money in times of extreme illiquidity in the commercial lending market.
Together – and with an assumption of interest added over the past 18 months – United owes more than £700 million.
What is a bond issue?
The Glazer family has asked US bank JP Morgan to explore a bond issue in which the club will effectively write IOU notes to potential investors who buy debt. On these IOUs the club promises to pay investors their money invested plus interest at a fixed date in the future. The success of the issue depends on how many investors buy United’s bonds: a factor of risk (default) versus potential rewards (interest payable). The risk to investors is diluted by spreading the debt among many parties.
Why refinance now?
The Glazer family has sought to refinance the PIK loans on many occasions over the past two years but the global recession has reduced to almost nothing the amount of money available on the commercial debt market. Unless the family can refinance it will be liable to pay the huge PIK loans in full on maturation. A firesale of the club – stripped of all its assets – is the inevitable outcome.
What are the advantages of the bond issue?
A successful bond issue will swap one kind of debt for another kind of debt but at a far cheaper interest rate. For the Glazer family this makes complete sense by removing the burden of the punishing PIK loans. The club’s books would actually be laden with more debt, although this point is moot: the Glazer’s debt, is effectively the club’s debt anyway.
What are the catches?
The principal bank lenders have a say in the running of the club under the terms of the £500 million cash loan but only if United does not meet certain financial targets. The club is meeting those targets but as preferential lenders JP Morgan and others expect the club to pay down some cash debt in addition to the PIK loans. This is why a full-scale £600 million bond issue is now mooted. This may have the effect of increasing interest payments on some parts of the club’s cash debt.
What do the fans’ groups say?
Manchester United’s Supporters’ Trust (MUST) questions why “any potential bond investor [would] be prepared to take on this risk if the return is going to be less than the current lenders receive and now in an environment where the risk is clearly much higher than the time at which these loans were first negotiated?”
“Is the financial situation for the Glazers as bad as recent speculation has suggested?” asks the group.
“Despite the extra income from TV and the huge ticket price rises they have been clawing back expenditure both at Manchester United as well as at the Tampa Bay Buccaneers where fan discontent is starting to mirror that at Old Trafford.”
“Whether they do manage to shift the debt onto other lenders the situation for United fans and our club will be little changed – weighed down by the millstone of the Glazers debt and with the supporters having to foot the bill through ever increasing ticket prices and reduced expenditure on players,” the group said in a statement.
“The Glazers have taken us from being a club that were the richest in the sporting world to now the most indebted. In the four years before the Glazers’ takeover Manchester United invested over £80 million in the form of players like Rooney and Ronaldo. In the four years since the Glazer takeover the turnover has doubled but, despite protestations to the contrary, independently published figures suggest the net transfer spend is now negative.”
“This is surely the time for the Glazers to exit and make way for a new investor interested in working with the supporters to build a stronger football club and business together,” it concludes.
What about transfer spending?
Simple arithmetic says that to pay down cash debt and account for rolled-up interest on the PIK loans United cannot spend more than £20 million per season. Even that figure is optimistic. Money from the sale of Cristiano Ronaldo remains unspent. The question is whether the Glazer family pays down debt more quickly than in the past or reinvests in the squad.
Will a white knight save United?
This is highly unlikely. While United is heavily indebted the club is as the leading sports franchise by the influential US-based Forbes magazine, ahead of Dallas Cowboys and Washington Redskins. With a market value reaching more than £1.3 billion, any investor in the club will need seriously deeps pockets. In comparison Roman Abramovic has invested a total of around £400 million in Chelsea, including buying the club, paying off debt and bringing in new players. Meanwhile, Sheik Mansour’s investment in Manchester City totals just £304 million.
So what does the future hold?
United must refinance or the club’s indebtedness will continue to climb sharply in the coming years. While the club can meet cash debts through revenues, the looming maturation of PIK loans is wiping out almost 100 per cent of the club’s annual profits. Despite making a pre-tax profit of £88 million, debt repayments, transfer spending and rolled-up interest meant United’s holding company – Red Football Joint Venture Limited – increased its indebtedness by £33 million in the last published accounts.
The catch: there is little incentive for current investors to swap cash debt for a bond and the financial market is still deeply frozen to commercial borrowers.
The club has doubled turnover in the past four years through strong growth in TV, commercial and match-day revenues. It may need to do so again in the next four years simply to stand still. The alternative is a frozen transfer budget and inevitable player sales.