I received an e-mail this morning from a poster on the blog asking me to share some of his analysis with the readers. He works in a financial planning department, is a qualified Chartered Accountant, and has Masters in Economics and a Masters in Finance. In summary, a pretty smart cookie.
I’ve edited his analysis and hopefully this should give us all some more understanding of what is going on at our club at the moment. This is not sugar coating the issue, rather weighing up the negatives, as well as the positives, thanks to a situation we’ve been forced in to because of the Glazer takeover.
First, let’s try to clear up some common misrepresentations:-
- There is a difference between Profit and Cash Flow. Profit made on player sales represents the difference between the sale value of the player minus the written down value of the player in the books of the company. So to say that the entire amount of £80.7m mentioned in the accounts as profit made on Cristiano Ronaldo is wrong as Cristiano was bought for around £12.8m and after accounting for accumulated depreciation/amortisation (which would be a small amount in his case as he was a very young player when bought and his remaining ‘estimated economic life’ would be long) I would say the figure related to Ronaldo is closer to £70m. The remaining £10m is down to sales of other players and youth team/ reserve team players that we have moved on, which is likely to continue in the future as well because United have recently sold on the youth players we think are not good enough to make it at Old Trafford.
- Similarly I read some comments on the lines of “If we had purchased Carlos Tevez for £25m, our profits would have been lower by £25m.” Again not correct. Players are the operating assets of a football club and any purchase made will reflect in the cash-flow statement and not in the Profit and loss statement. So if had in fact purchased Tevez for 25 million, our profits would have been almost unaffected except for the annual depreciation on him, which would have worked out to £2m pounds assuming an estimated working life of 10 years (he is 25 now, so him playing until 35 is a justified assumption)
- Financially, the GLAZERS and THE CLUB are now virtually one and the same, whether we like it or not. Underneath all the corporate veil and the mesh of companies (holding companies, subsidiaries, etc) the sad truth of de-listing is that the company and the Glazers are now one, whether we like it or not. The Glazers debt is virtually our debt, so we can safely say that the secured debt mentioned in the accounts is bollocks and the real debt is closer to £710m pounds after including the PIK loans of around £200m on the Glazers personal Balance sheet. There is nothing the club can do to stop siphoning off of funds from the club to the Glazers and that is sadly a fact for all of us.
The published accounts are as follows:
Match day Revenue is more or less maxed out and shouldn’t exceed £110-112m next year as almost all Old Trafford games were already at full capacity this year, and so no substantial further rise can be foreseen. Unless you consider we are due another yearly rise in ticket prices. There is also the future potential of increasing capacity in the South Stand.
Media Revenue can be expected to rise further to an estimated £105-110m as the payments from the Premier League on media engagements continue to rise. Media revenue is also dependent on United reaching the last stages of the UEFA Champions league and cup games.
Commercial Revenue is again expected to rise next year to around £80-82m as the new shirt sponsorship deal and deals with Airtel and other commercial partners kick-in in full next year. This year figures reflect only a small part of those as they were struck in the middle of the year. The full benefit of those will be realised in 2010 with commercial revenues likely to be significantly higher next year.
Based on the above estimates, the picture for next year should be as follows:
The EBITDA is the key figure that we must focus on, because it represents the cash available for us to repay the debt and interest as well as finance the player purchases.
The depreciation and amortisation figures are just book entries and do not involve cash outlays, which is the key thing for any leveraged acquisition. (Believe me I know what I’m talking about as I work in the Financial Planning department for a company called Tata Steel which itself was involved in $12 bn leveraged buy-out of Corus Steel in the UK, which many of you might know about as it has been in the news lately with Gordon Brown involved in some discussions with the company). As you know, we cannot depend on profit on player sales as they are a one-time ‘extra-ordinary’ income and such huge windfall profits cannot be expected every year.
Also, we must keep in mind that losses on player sales might occur in the future, such as the loss on Louis Saha, Juan Sebastian Veron happened in the past, we may see the same for players such as Nani, Owen Hargreaves, etc. if they are moved on for less than their written down value.
The original Glazer line of giving Sir Alex £25m a year seems to be partly covered, as out of the approx EBITDA of £90-95m every year, £25m could go to player purchases (plus any profit from player sales could be safely re-invested after paying off the tax on capital profits – yes, profit on sale of players do attract taxes!) leaving around £60-65m cash for payment of interest and repayment of debt.
However the real spanner in the works has been thrown in on account of the financial markets going into free-fall. This meant that the Glazers could not refinance the extremely high interest bearing PIK loans (14.25%) and this led to extremely high total interest payments over the last few years (£41.9m and £45.5m is just the interest on Secured bank loans part – add the PIK part as well and the total is closer to £68-70m every year). Also, the cash saved by the club over the last few years from not using up the £25m a year transfer fund (the club has a net spend of £32m over the last few years I think as pointed out by Scott when comparing Sir Alex Ferguson’s spending with Rafa Benitez) has all been lost on fruitless expenses such as derivative fees, fees to financial institutions, hedge losses, etc.
Also, these PIK loans are lowest in the hierarchy of repayments; any repayment would first have to go towards the bank secured “Senior” loans of around £510m remaining on the balance sheet.
You could easily ask why not pay-off these extremely high interest loans first to get rid of them – the answer is that it would not be allowed by the “Senior” bank lenders as these PIK loans are ‘Junior’ loans which can be repaid only after senior debt is repaid.
Also other restrictive covenants based on profits/losses, EBITDA multiples, etc. would be imposed leading to restricting our movements in the transfer markets.
This is where this BOND issue of almost £500m comes in. If it is successful, then the senior loans of the bank could be paid off. This means that the hierarchy of loans is gone. The bonds are planned to be secured on the clubs assets and if you read one of the articles where it says the Glazers can then use the remaining cash at the moment to pay dividend to themselves whereby they can use £70m or so to pay off the PIK loans or use it as they deem fit.
This is where I think, this bond issue is going to help us. It removes the restrictive covenants that the bank loans have put on the club, enabling us to pay off the crippling PIK loans quickly, as well as have greater freedom in financial matters such as further raising of funds.
The Revolving credit of £75m that the club seems to have signed is basically a short term measure or a working capital loan – it should NOT be used to buy players because in principle, short-term funds should only be used for short term assets (and long term owned funds for long term assets) as otherwise there will be ‘asset-liability mismatch’ in financial jargon leading to other issues and expenses such as the hedging loss suffered by the club to match the interest rates, exchange rates etc.
Conclusion: Despite all of Sir Alex’s protestations to the contrary, he does not have all of the £80m from Cristiano Ronaldo’s sale. In theory, yes he does still have that amount of money in the bank account/cash flow, but if the above bond issue does go through as planned, and the Glazers do indeed take away around £70m of the remaining cash, then Sir Alex might just have to restrict his spending. Coming from a working class Scottish background and will put financial prudence and long term financial safety of the club first over immediate success.
Positives: All is not lost, if the PIK loans are taken care of, then in the long term the rest of the bonds and loans can be re-financed, plenty of takers should be available considering that the business model remains essentially healthy and sound. Young players coming through this club are exciting and very large reinforcements are not needed anyway, just a few decent players here or there should help us tide through. EBITDA levels are expected to remain competitive.
Negatives: The club must continue to build on its success. A drop outside the top four could be financially disastrous. We simply cannot afford to finish outside the top four as it would involve a straight loss of almost £40m a year (£25m from UEFA plus all the matchday revenue and commercial revenue brought by it.) Our days of break the bank signings seem to be over. Even if we do make any marquee signings, it will be out of borrowed funds (the revolving credit facilities) and would put us under great pressure to succeed to balance the books in the long run, making the situation even more precarious. Sir Alex knows this and hence the constant assertions of there being “no value in the market.”
The Glazers have taken the club for a ride and needless expenses on financial institutions could been avoided. However, we must also keep in mind that all this was in some ways necessary to move away from being a PLC which was also holding us back as was highlighted by Sir Alex himself at the time of the takeover. Some of these expenses were a necessary evil, but the financial downturn came at the wrong time which has made the situation even worse then it had to be. This answers the question as to why David Gill later approved the takeover in the first place (at the second time of asking the offer from the Glazers was improved upon over the first offer).
We cannot just wish away the Glazers, so the sad truth is we must stick with them and hope people such as David Gill are able to steer it away from all the complications and that the players under Sir Alex are able to continue their success.
The analysis has been restricted to the amount of publicly available information as the club is now no longer a PLC and hence information is not freely available about the goings on inside the club.
Manchester United are accustomed to selling themselves to the world.
This week their globe-trotting policy is being taken to a new extreme in the form of a series of “road shows” across three continents, after the Glazer family settled on a £500 million bond issue to safeguard their much-criticised ownership of the club.
Yesterday a United delegation held road shows in Hong Kong and Singapore in an attempt to woo various financial institutions and attract the investment that would reduce the burden of the club’s overall debts, last recorded at £699 million.
Today and tomorrow they return to Europe and David Gill, the chief executive, will host sales pitches in London, Paris, Frankfurt and Zurich. From there they will fly to the United States, where the Glazers, on home soil, will extol the benefits of investing in the world’s most profitable but debt-ridden football club.
If it sounds frantic, or indeed desperate, it is certainly an approach that throws up as many questions as answers.
United announced a record turnover yesterday of £278.5 million and pre-tax profits of £48.2 million for the financial year ending June 30, 2009.
But it took the £80 million sale of Cristiano Ronaldo to Real Madrid to convert a loss into a gain and, with an unpredictable financial climate ahead, the Glazers have decided that a bond — whereby the debts are secured against money borrowed from investors, who would in turn expect a considerable return on their investment when it matures in 2017 — is the best way to secure their much-maligned regime at Old Trafford.
The announcement prompted an angry response from the Manchester United Supporters Trust, which has been resolute in its anti-Glazer stance since the family bought the club in 2005.
“Now is the time for the Glazers to go,” Duncan Drasdo, the chief executive, said. “This bond issue is just rearranging the deckchairs and still leaves the club with huge debts, which they expect supporters to continue to fund. The day the Glazers put the club up for sale you can expect celebration on the streets of Manchester. Most supporters have had enough.
“Under their ownership the club has become liable for more than £260 million in interest payments alone and the latest trading statement would have shown a substantial loss were it not for the sale of Ronaldo.”
In the business plan that accompanied the Glazers’ refinancing of the club’s debts in 2006, it was spelt out that a net sum of £25 million would be available each year for Sir Alex Ferguson to strengthen his squad and that if “there is a need to acquire a ‘superstar’, there is an incremental £25 million capital spend bucket available to the club”.
However, having sold Ronaldo last June and lost Carlos Tévez to Manchester City, United responded by signing Antonio Valencia from Wigan Athletic for £17 million and making a series of bargain-basement signings — Gabriel Obertan, Mame Biram Diouf and Michael Owen — to augment their attack.
Ferguson insists that it his decision to avoid further spending, saying that there was “no value” to be found in the transfer market last summer or during this month’s transfer window.
He has cited on several occasions that United made a club-record bid in excess of £30 million to sign Karim Benzema from Lyons, but the France forward joined Real for £35 million, with his wage demands and other associated costs proving beyond the “value” set by the manager.
United’s financial performance continues to exceed the Glazers’ expectations, but the cost of running the club is more than they accounted for. Their projected sums in 2006 accounted for a turnover of £234.2 million for the past financial year (actual figure £278.5 million), but they severely underestimated the running costs at £141.3 million. United’s wage bill alone for the past financial year is understood to be £122 million.
Even in a year when they have sold Ronaldo without replacing him, the Glazers have found themselves feeling the pinch.
Link: Manchester United stake all on £500m bond issue | Manchester United – Times Online
The ownership of Manchester United’s Carrington training complex could be transferred to a holding company controlled by the Glazer family and leased back to the club, according to the prospectus *circulated to potential investors in a £500m refinancing scheme this week.
The £500m bond and a new £75m credit facility, which will add to an overall debt pile of more than £700m, will be secured on the majority of property owned by Manchester United, including Old Trafford.
But Carrington, the state of the art complex that opened in 2000 to replace Manchester United’s old training ground The Cliff, is specifically exempted.
“The Carrington training ground will not be encumbered and may in due course be transferred to a holding company or affiliate of the Parent. In the latter event, we will be granted a lease in respect of the Carrington training ground,” said the offer document in a section describing Manchester United’s business and assets.
The club currently own the freehold on Carrington and the idea of one of the assets most readily associated with them being transferred to the Glazers’ own holding company, and potentially sold, will cause further disquiet among fans concerned that money continues to flow out of Old Trafford despite consistent success on the pitch.
The prospect of the club losing the training ground has disturbing echoes of Leeds United, who during their financial collapse were forced to sell their Thorp Arch training ground and lease it back.
Covering 108 acres near the village from which it takes its name and dubbed “Fortress Carrington” by locals thanks to the high security fences that surround it, the complex contains 14 pitches of varying sizes as well as physiotherapy and rehabilitation areas, restaurants, conference rooms and a TV studio.
Companies undertaking a bond issue are legally bound to list all kinds of potential risks attached to the offer, and the MU Finance plc prospectus contains warnings over everything from the potential impact of Sir Alex Ferguson’s retirement to terrorist attacks and the danger of football becoming less popular.
But here too it is made clear that the indenture covering the bond issue’s notes “will limit our ability to sell or transfer, but not prohibit us from selling or transferring, our training ground or our stadium”. If either is sold, it says it will enter into a long-term lease “to enable us to have substantially the same access to such property as we currently do”.
Representatives of fans’ groups that have long opposed the Glazer takeover said that the detail contained in the offer document, including the revelation that the family had taken £22.9m in management fees and loans out of the club, would increase levels of discontent. “People are starting to connect the fact that they are asking us to stump up more in ticket prices and they’re not investing in the squad and on top of that they are taking money out for themselves. That is going to make it difficult to get away with another rise,” said Duncan Drasdo, chief executive of the Manchester United Supporters’ Trust.
The 322-page prospectus, the basis for a bond offer that most experts expect to be priced at around 9%, sets out in great detail the “high degree of risk” involved, together with the Glazers’ strategy for continuing to maximise revenues.
Results released this week showed that income from matchday operations, TV contracts and commercial activities continued to rise, contributing to an increase in turnover to £276.8m. But without a £80.7m profit from transfer activities, including the sale of Ronaldo to Real Madrid, the club would have made a substantial loss. It also reveals that United have already received almost half of a new £80m four-year shirt sponsorship deal with Aon upfront, despite it not beginning until next season. It prioritises the targeting of new sponsors in areas not traditionally associated with football as a means of generating further revenue growth.
City sources expect the bond issue to succeed if it is priced and marketed correctly. But there were some dissenting voices yesterday, arguing that the yield from the bond should be closer to 9.5% given the company’s profile and questioning the wisdom of investing in an unrated bond in such an uncertain sector.
“Most traditional high-yield investors won’t touch this,” Jonathan Moore, a high-yield analyst at Evolution Securities told Bloomberg yesterday. “It’s unrated, so some investors can’t take it, and there’s a very busy new-issue calendar so there are plenty of alternatives. Most people just won’t focus on something with far too much leverage, limited free cash flow and lumpy earnings.”
Link: Glazers open the door to sale of Manchester United’s training ground | Football | The Guardian
Not the standard 4-4-2 formation is it?
That’s the corporate and financing structure of Manchester United FC.
The diagram comes from the prospectus to the £500m senior secured notes offering launched on Monday morning.
The document provides a fascinating peak into the structure of the English Premier League champions, acquired by the Glazer family in a £790m leveraged buy-out in 2005, both in terms of its finances and the club’s recent performance on the pitch.
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The proceeds of the offering — and £30m of spare cash — will be used to repay existing senior credit facilities (£507m), the partial repayment of interest rate hedging liabilities (£8m) and fees (£15m).
The issue is being underwritten by JPMorgan, Bank of America Merrill Lynch, Deutsche Bank, Goldman Sachs, RBS and KKR.
Here’s how the issue it will work in practice (you may need to refer to the diagram above) :
(emphasis ours)
(1) On the closing date of the offering of the Notes, approximately £400 million of the proceeds of the offering will be loaned to Red Football Joint Venture Limited, the immediate parent company of Red Football Limited, on an interest-free basis from Manchester United Limited, which will then subsequently be passed to Red Football Limited by way of a capital contribution. This loan from Manchester United Limited to Red Football Joint Venture Limited will remain outstanding.
(2) In connection with the offering of the Notes and the repayment of our existing senior credit facilities, the terms of our existing interest rate hedging arrangements will be modified. The mark-to-market value of these hedging arrangements as at 6 January 2010 was a liability of approximately £35 million. In connection with the modifications to our existing hedging arrangements, we will crystallise the liability owed to our hedging counterparties as at the date of issue of the offering of Notes and we expect that we will make aggregate payments to such counterparties to reduce the liabilities by approximately £8 million. The amount of such liability and payments to our hedging counterparties will depend on changes in the mark-tomarket value between 6 January 2010 and the closing date of the offering of Notes. In the event we increase the payments to our hedging counterparties, we will use available cash to fund such payments.
Note that none of the cash is being used to directly repay the £200m of PIK notes that the Glazer family used to finance the buyout.
However, the refinancing will allow the Glazer’s to start repaying the PIKs, which have a coupon of 14.25% that rolls up annually and reside in the Red Football Joint Venture near the top of the tree.
This is because the new facilities are more flexible than the ones they are replacing.
Cash and liquid resources include cash at bank and in hand and deposits held at call with banks. Of our cash and liquid resources of £116.6 million as at 30 September 2009, as adjusted to give effect to the offering of the Notes and the application of proceeds therefrom, we may, without restriction, make a distribution or loan of up to £70.0 million to our immediate parent company, Red Football Joint Venture Limited, that may, in turn, use the proceeds of that loan for general corporate purposes, including repaying existing indebtedness. See ‘‘Description of the Notes—Certain Covenants—Restricted Payments
Post the refinancing, the club’s total of gross borrowings will stand at £512.7m — made up of £500m of notes and debts from other subsidiaries. However, that figure will rise if the £70m referred to above is up-streamed to Red Football Joint Venture. Pro-forma net debt post refinancing will be £466m.
And if the PIK notes are added in, total debt held by all of the various Man Utd vehicles would stand at over £700m.
The notes, issued by MU Finance, are due in 2017 but there is a call option that allows the borrower to buy it back in three years.
The notes are not rated.
As for the interest hedging arrangements, Man Utd has suffered a £35m hit. Ouch!
This looks to be due to swap arrangement: the club has been paying a fixed rate of just over 5% on £450m of debt in exchange for a floating rate.
In relation to our existing senior credit facilities, we entered into interest rate hedging agreements to hedge the interest costs on a notional amount of £450 million. Under these hedging arrangements, we receive floating rate LIBOR in exchange for paying a fixed rate of approximately 5.08%. In connection with the offering of the Notes and the repayment of our existing senior credit facilities, the terms of and the amounts outstanding under these hedging arrangements will be modified. The mark-to-market value of these hedging arrangements as at 6 January 2010 was a liability of approximately £35 million.
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Man Utd has also entered into a new six year revolving credit facility to allow it to borrow an additional £75m, to be used for working capital and, we assume, for player transfers:
Although we have not historically drawn on our revolving credit facilities during the summer transfer window, if we seek to acquire players with values substantially in excess of the values of players we seek to sell, we may be required to draw from our revolving credit facilities to meet our cash needs.
That’s a quote from the 15 pages of risk factors in the document.
Here are the rates and covenants on that facility:
Loans under the new revolving credit facility bear interest at a rate per annum equal to LIBOR (or in relation to a loan in euro, EURIBOR) plus the applicable margin and any mandatory cost. The applicable margin means 3.5% per annum.
In addition to the general covenants described below, the new revolving credit facility contains financial covenants requiring the restricted Group to maintain a consolidated EBITDA of not less than £65,000,000. We will be able to claim certain dispensations from complying with the consolidated EBITDA floor up to twice (in non-consecutive years) during the life of the new revolving credit facility if we fail to qualify for the Champions League.
Which brings us to the results.
In the 12 months to September 30, 2009 (the most up to date figures available), Man Utd generated revenues of £288.9m and EBITDA of £98.7m.
But for the fiscal year ended 30 June 2009, revenues were £278.5m and EBITDA of £91.3m.
So, in 2009 the club swung to a pretax profit of £48.2m from a loss of £21.4m, helped of course by the enormous profits made on the sale of Cristiano Ronaldo.
Match-day revenues accounted for 39.1 per cent of total revenues, media 35.8 per cent and commercial deals 25.1 per cent.
Net interest payments were almost £42m and operating profits before depreciation and amortisation of players’ registrations and goodwill were £91.2m. When amortisation and depreciation are included that figure drops to £9.35m
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The prospectus also reveals that HM Revenue & Customers are investigating players’ image rights contracts.
HMRC’s initial investigation has focused on payments made in the financial years 2005/06, 2006/07 and 2007/08 but HMRC has reserved its rights in respect of earlier years. HMRC’s position is that payments in relation to image rights may be a form of remuneration and, as such, should be taxed as income. On 18 September 2009, we submitted a letter to HMRC, setting out our view that these payments are not taxable as income. We are currently waiting for a response from HMRC. There is a possibility that this matter may lead to litigation. Should HMRC succeed in any such litigation the club may be liable for, amongst other things, approximately £5.3 million (which relates to employer’s NIC contributions during the period 2000/01-2009/10).
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Details on related party transactions can be found on Page 86 and show the following.
To kick things off there are £10m of loans which have been extended to the Glazer’s:
Manchester United Limited made loans to its directors on 19 December 2008 which have an aggregate value of £10 million. The agreement governing these loans was subsequently amended on 5 November 2009. The interest rate on the loans is 5.5%, stepping up to 7.5% after the fifth anniversary, payable in cash annually. The loans are repayable on demand from Manchester United Limited after the fifth anniversary, and prior to that upon the occurrence of certain events of default.
Some juicy management fees:
Management fees During the period from 1 July 2006 to the date of this offering memorandum, management and administration fees of approximately £0.6 million, £1.8 million, £1.4 million, £3.1 million and £3.1 million were paid to our affiliates. Under the Notes, we are permitted to pay up to £6 million per annum to one or more entities related to our ultimate shareholders for administration and management services. We expect to enter into a management services agreement.
Yep, that’s £6m per annum permitted under the new financing deal.
And there’s also a consultancy agreement:
On 30 June 2009, Manchester United Limited entered into a consultancy agreement with SLP Partners, LLC (SLP), a company related to certain of our ultimate shareholders. An annual fee is payable by Manchester United Limited to SLP, capped at £2.9 million per annum. This agreement will be terminated prior to the issuance of the Notes and no further payments will accrue thereafter.
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The notes will be priced next week on completion of an international roadshow, which has kicked off in Hong Kong. Early indications are that the deal could be priced to yield around 8.5% to 9% and that demand is strong. Which raises the possibility of the issue being increased.
Link: FT Alphaville Modern football finance: Man Utd edition (updated)
Sir Alex Ferguson will be handed £75million to spend on new players by Manchester United’s owners in a bid to haul the club out of its financial crisis.
The Glazers have borrowed the money and will give it straight to Fergie to spend on his squad in a bid to encourage investors to buy £500m-worth of bonds.
United’s owners have taken the decision to increase their borrowing as they attempt to make the bonds more attractive to potential investors.
They believe the scheme will have more chance of succeeding – and bringing down their overall level of debt – if Fergie is able to strengthen his squad with big-name signings.
The Glazers’ re-financing plan involves a bonds issue to ease the debt burden which is threatening to cripple the club.
But United’s owners have also entered into a new credit facility to raise £75m to be used as ‘working capital’ – a transfer fund for Fergie.
Although United made a £48m profit in the last financial year, that was only possible because of the world record £80m sale of Cristiano Ronaldo to Real Madrid.
Fans already opposed to the Glazers’ ownership of United have used the release of the latest set of financial results to call for them to leave the club.
Duncan Drasdo, chief executive of MUST (Manchester United Supporters Trust), said: “Now is the time for the Glazers to go.
“This bond issue is just rearranging the deck chairs and still leaves the club with huge debts which they expect supporters to continue to fund.
“The day the Glazers put the club up for sale you can expect celebration on the streets of Manchester. Most supporters have had enough.”
How big is Manchester United’s debt?
Manchester United’s holding company carries £509.5m in debt secured on the club and its assets. A further loan, secured on the Glazers’ shareholding in the club, is believed to be worth £200m.
What is the current interest rate?
The interest rate on the £509.5m secured on the club ranged between 2.15% and 5% above the rate at which banks lend to one another and was spread between four loans due to be repaid between 2013 and 2016. The offer document reveals that, fearing uncertainty over interest rates, last year it swapped those rates for a fixed rate of just over 5%. That hedging position had lost the club around £35m by 6 January this year. The interest rate on the so-called Payment in Kind loans taken out by the Glazers from US hedge funds is 14.25%. It “rolls up” annually, meaning that a debt of £138m has already ballooned to £200m.
Why launch the £500m bond issue now?
Partly because confidence has returned to the bond markets. The Glazers hoped to refinance in 2008 when the markets turned against them. The MU Finance plc offering is just one of a glut of issues coming in the early part of this year. But there are other reasons to move quickly, in the hope of capitalising on results boosted by a transfer profit of £80.7m and a run of recent on-pitch success that has realised bumper sponsorship and TV revenues. If the Glazers’ own finances are beginning to be squeezed, it would also increase their appetite for refinancing the debt secured on the club.
Why structure it this way?
Under the terms of its four bank loans, the Glazers were unable to use the club’s revenues to repay their own high interest PIK loans. A note in the document makes provision for up to £70m to return to the Glazers’ ultimate parent company for “general corporate purposes, including repaying existing indebtedness”. For the first time they appear to have a mechanism to funnel some of the club’s revenues to the parent company to repay the PIK loans.
What if they default on the PIK loans?
The hedge funds would not gain any say over the operational side of the business, but they could prevent it incurring fresh debt or paying out dividends, as well as gaining the power to block any potential sale.
On what terms will the bond be offered?
The price will not be set until a roadshow has gauged interest. Experts say the offer documents assume an annual yield (interest) of around 9.25%, or £45m a year. The bond’s term will be for seven years, with a buy-back option after three.
Isn’t that more interest than the club is currently paying?
Yes. But – as well as giving them a mechanism to divert £70m to the parent company – the Glazers will claim it offers greater certainty in managing United’s cashflow and debt repayment and consolidates various loans with different end dates into a single sum.
Do the Glazers have a plan?
The prospectus trumpets their success in increasing ticket prices, achieving 8.5% compound growth between 2006-07 and 2008-09 and a further 2.5% increase this season. However, it warns corporate hospitality sales will remain “challenging” then, confusingly, suggests they will be a key engine of growth. Aside from an £80m shirt sponsorship deal with Aon, £35.9m of which has been banked up front, and its ongoing £303m Nike deal, they say they will be able to greatly increase the £19.5m brought in from other global sponsors.Beyond that, and the possibility of a game-changing development such as a European league, it admits that much is dependent on the team’s continued success on the pitch. In the meantime, they insist they can continue to service the debts and finance a successful team from existing cashflow.
What is their exit strategy?
If they can successfully refinance and start to reduce the amount they owe through the onerous PIK loans, they will still hope to at some point sell the club – still saddled with debt – on at a large profit. But the pool of potential buyers appears to be contracting all the time, and the possibility of having to deal with a tumultuous post-Alex Ferguson era is an ever-present fear.
Does Ferguson have money to spend?
Yes, money could be found to fund player transfers. But to say all of the £80m-plus raised has been made available is disingenuous, because under the new terms of the bond issue up to £70m of the club’s free cashflow of £116m could be diverted to the parent company to help repay the PIK. The club also plans to use a new £75m credit facility provided by a syndicate of banks led by JP Morgan to help fund player transfers, according to the offer document. But that facility, which replaces an existing undrawn £50m overdraft, will add to the overall £700m debt pile.
Link: 10 key questions about Manchester United’s debts under the Glazers | Football | The Guardian
There is plenty of talk about our debt issues at the moment, where just like in 2005, the less than satisfying performances have come at a time of more doom and gloom about the Glazers.
I received an e-mail this morning from a poster on the blog asking me to share some of his analysis with the readers. He works in a financial planning department, is a qualified Chartered Accountant, and has Masters in Economics and a Masters in Finance. In summary, a pretty smart cookie.
I’ve edited his analysis and hopefully this should give us all some more understanding of what is going on at our club at the moment. This is not sugar coating the issue, rather weighing up the negatives, as well as the positives, thanks to a situation we’ve been forced in to because of the Glazer takeover.
First, let’s try to clear up some common misrepresentations:-
- There is a difference between Profit and Cash Flow. Profit made on player sales represents the difference between the sale value of the player minus the written down value of the player in the books of the company. So to say that the entire amount of £80.7m mentioned in the accounts as profit made on Cristiano Ronaldo is wrong as Cristiano was bought for around £12.8m and after accounting for accumulated depreciation/amortisation (which would be a small amount in his case as he was a very young player when bought and his remaining ‘estimated economic life’ would be long) I would say the figure related to Ronaldo is closer to £70m. The remaining £10m is down to sales of other players and youth team/ reserve team players that we have moved on, which is likely to continue in the future as well because United have recently sold on the youth players we think are not good enough to make it at Old Trafford.
- Similarly I read some comments on the lines of “If we had purchased Carlos Tevez for £25m, our profits would have been lower by £25m.” Again not correct. Players are the operating assets of a football club and any purchase made will reflect in the cash-flow statement and not in the Profit and loss statement. So if had in fact purchased Tevez for 25 million, our profits would have been almost unaffected except for the annual depreciation on him, which would have worked out to £2m pounds assuming an estimated working life of 10 years (he is 25 now, so him playing until 35 is a justified assumption)
- Financially, the GLAZERS and THE CLUB are now virtually one and the same, whether we like it or not. Underneath all the corporate veil and the mesh of companies (holding companies, subsidiaries, etc) the sad truth of de-listing is that the company and the Glazers are now one, whether we like it or not. The Glazers debt is virtually our debt, so we can safely say that the secured debt mentioned in the accounts is bollocks and the real debt is closer to £710m pounds after including the PIK loans of around £200m on the Glazers personal Balance sheet. There is nothing the club can do to stop siphoning off of funds from the club to the Glazers and that is sadly a fact for all of us.
The published accounts are as follows:
Match day Revenue is more or less maxed out and shouldn’t exceed £110-112m next year as almost all Old Trafford games were already at full capacity this year, and so no substantial further rise can be foreseen. Unless you consider we are due another yearly rise in ticket prices. There is also the future potential of increasing capacity in the South Stand.
Media Revenue can be expected to rise further to an estimated £105-110m as the payments from the Premier League on media engagements continue to rise. Media revenue is also dependent on United reaching the last stages of the UEFA Champions league and cup games.
Commercial Revenue is again expected to rise next year to around £80-82m as the new shirt sponsorship deal and deals with Airtel and other commercial partners kick-in in full next year. This year figures reflect only a small part of those as they were struck in the middle of the year. The full benefit of those will be realised in 2010 with commercial revenues likely to be significantly higher next year.
Based on the above estimates, the picture for next year should be as follows:
The EBITDA is the key figure that we must focus on, because it represents the cash available for us to repay the debt and interest as well as finance the player purchases.
The depreciation and amortisation figures are just book entries and do not involve cash outlays, which is the key thing for any leveraged acquisition. (Believe me I know what I’m talking about as I work in the Financial Planning department for a company called Tata Steel which itself was involved in $12 bn leveraged buy-out of Corus Steel in the UK, which many of you might know about as it has been in the news lately with Gordon Brown involved in some discussions with the company). As you know, we cannot depend on profit on player sales as they are a one-time ‘extra-ordinary’ income and such huge windfall profits cannot be expected every year.
Also, we must keep in mind that losses on player sales might occur in the future, such as the loss on Louis Saha, Juan Sebastian Veron happened in the past, we may see the same for players such as Nani, Owen Hargreaves, etc. if they are moved on for less than their written down value.
The original Glazer line of giving Sir Alex £25m a year seems to be partly covered, as out of the approx EBITDA of £90-95m every year, £25m could go to player purchases (plus any profit from player sales could be safely re-invested after paying off the tax on capital profits – yes, profit on sale of players do attract taxes!) leaving around £60-65m cash for payment of interest and repayment of debt.
However the real spanner in the works has been thrown in on account of the financial markets going into free-fall. This meant that the Glazers could not refinance the extremely high interest bearing PIK loans (14.25%) and this led to extremely high total interest payments over the last few years (£41.9m and £45.5m is just the interest on Secured bank loans part – add the PIK part as well and the total is closer to £68-70m every year). Also, the cash saved by the club over the last few years from not using up the £25m a year transfer fund (the club has a net spend of £32m over the last few years I think as pointed out by Scott when comparing Sir Alex Ferguson’s spending with Rafa Benitez) has all been lost on fruitless expenses such as derivative fees, fees to financial institutions, hedge losses, etc.
Also, these PIK loans are lowest in the hierarchy of repayments; any repayment would first have to go towards the bank secured “Senior” loans of around £510m remaining on the balance sheet.
You could easily ask why not pay-off these extremely high interest loans first to get rid of them – the answer is that it would not be allowed by the “Senior” bank lenders as these PIK loans are ‘Junior’ loans which can be repaid only after senior debt is repaid.
Also other restrictive covenants based on profits/losses, EBITDA multiples, etc. would be imposed leading to restricting our movements in the transfer markets.
This is where this BOND issue of almost £500m comes in. If it is successful, then the senior loans of the bank could be paid off. This means that the hierarchy of loans is gone. The bonds are planned to be secured on the clubs assets and if you read one of the articles where it says the Glazers can then use the remaining cash at the moment to pay dividend to themselves whereby they can use £70m or so to pay off the PIK loans or use it as they deem fit.
This is where I think, this bond issue is going to help us. It removes the restrictive covenants that the bank loans have put on the club, enabling us to pay off the crippling PIK loans quickly, as well as have greater freedom in financial matters such as further raising of funds.
The Revolving credit of £75m that the club seems to have signed is basically a short term measure or a working capital loan – it should NOT be used to buy players because in principle, short-term funds should only be used for short term assets (and long term owned funds for long term assets) as otherwise there will be ‘asset-liability mismatch’ in financial jargon leading to other issues and expenses such as the hedging loss suffered by the club to match the interest rates, exchange rates etc.
Conclusion: Despite all of Sir Alex’s protestations to the contrary, he does not have all of the £80m from Cristiano Ronaldo’s sale. In theory, yes he does still have that amount of money in the bank account/cash flow, but if the above bond issue does go through as planned, and the Glazers do indeed take away around £70m of the remaining cash, then Sir Alex might just have to restrict his spending. Coming from a working class Scottish background and will put financial prudence and long term financial safety of the club first over immediate success.
Positives: All is not lost, if the PIK loans are taken care of, then in the long term the rest of the bonds and loans can be re-financed, plenty of takers should be available considering that the business model remains essentially healthy and sound. Young players coming through this club are exciting and very large reinforcements are not needed anyway, just a few decent players here or there should help us tide through. EBITDA levels are expected to remain competitive.
Negatives: The club must continue to build on its success. A drop outside the top four could be financially disastrous. We simply cannot afford to finish outside the top four as it would involve a straight loss of almost £40m a year (£25m from UEFA plus all the matchday revenue and commercial revenue brought by it.) Our days of break the bank signings seem to be over. Even if we do make any marquee signings, it will be out of borrowed funds (the revolving credit facilities) and would put us under great pressure to succeed to balance the books in the long run, making the situation even more precarious. Sir Alex knows this and hence the constant assertions of there being “no value in the market.”
The Glazers have taken the club for a ride and needless expenses on financial institutions could been avoided. However, we must also keep in mind that all this was in some ways necessary to move away from being a PLC which was also holding us back as was highlighted by Sir Alex himself at the time of the takeover. Some of these expenses were a necessary evil, but the financial downturn came at the wrong time which has made the situation even worse then it had to be. This answers the question as to why David Gill later approved the takeover in the first place (at the second time of asking the offer from the Glazers was improved upon over the first offer).
We cannot just wish away the Glazers, so the sad truth is we must stick with them and hope people such as David Gill are able to steer it away from all the complications and that the players under Sir Alex are able to continue their success.
The analysis has been restricted to the amount of publicly available information as the club is now no longer a PLC and hence information is not freely available about the goings on inside the club.
Link: Another Analysis Of The Debt
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