Mancs debt soars to £700m

Flight · April 9, 2009

Manchester United's parent company's debts increased to almost £700m in their Champions League-winning season despite the club achieving record turnover of £256m

Accounts for United and the club's parent companies published this morning reveal that the club's ultimate owner, Red Football Joint Venture Ltd, paid £68.8m in interest on loans totalling £699.2m in 2007-08. The company made a pre-tax loss of £44.8m in the year.

United's debt increased by £24m in the year as interest on “Payment in Kind” loans worth £152m at the start of the season was rolled over.

United's complex ownership structure means the total debt is split into two strands. The senior debt of £518.7m, which is secured against the club and its assets, cost £45.5m in interest. The PIK loans, now worth £175.5m and accruing interest charged at 14.25 per cent, are secured against shares in the club's immediate parents Red Football Ltd.

Thanks in part to the heavy debt burden Red Football Ltd made a loss of £21.4m for the year. Profit before tax and other charges was £80.4m.

Manchester United chief executive David Gill was paid £1.7m during the year and the club paid an astonishing £470,000 to former commercial director Lee Daley who was at the club for just five months.

The increase in the debt carried by the club will fuel unease among supporters and within the Football Association and government about the financing of England's leading club.

The Glazer family have long argued that the structure is sustainable and point to increases in commercial and other revenue. Despite carrying a huge debt burden the club has been able to continue to invest in playing talent and compete at the highest level.

With the financial crisis affecting the willingness of banks to extend credit however there will be concern over whether the heavily-leveraged model is sustainable in the medium term.

The club's record turnover, up by nearly 20 per cent on the previous season, is largely attributable to increase Premier League television Champions League media revenue. Combined the two contributed £90.7m.

Matchday revenue at Old Trafford brought in £101m and the club's commercial operations generated £64m. The club also made a profit of around £20m on transfers.

The club also signed new commercial deals with Saudi Telecom, Diageo, the Seoul Metroplitan Government and renewed agreements with Budweiser, Travelcare and GSK.

United and the Glazer family are not commenting on the latest accounts.

Noticed that their wages have increased from £85mill to £91mill to £120mill over he last two years. Ours were £69mill two years ago - not sure what they are now.

Will be interesting to see how much they get to spend in the summer.

Maldini · April 9, 2009

That's our future right there if we don't get rid of these two clowns.

growler · April 9, 2009

yeah, I think our debt is a lot more manageable. I think it is half. Also, we have the ability to increase our revenue, whilst I cannot think of how the scum could increase their revenue from last season when they had maximum revenue from their ground, prize money, sponsorship and TV.

We on the other hand have capacity to imrpove match day, prize money, sponsorship and fan based revenue

Duncan Disorderly · April 10, 2009

"accruing interest charged at 14.25 per cent"???

Did they get the money off loan sharks? That's a scandalous interest rate.

Andy Mac · April 10, 2009

"accruing interest charged at 14.25 per cent"???

Did they get the money off loan sharks? That's a scandalous interest rate.

I noticed that, too. Maybe it's Ocean Finance !

bazz · April 10, 2009

yeah, I think our debt is a lot more manageable. I think it is half. Also, we have the ability to increase our revenue, whilst I cannot think of how the scum could increase their revenue from last season when they had maximum revenue from their ground, prize money, sponsorship and TV.

We on the other hand have capacity to imrpove match day, prize money, sponsorship and fan based revenue

Very good points, and could be very precarious for them if they for some reason stop having success (hopefully) and their fans stop filling their stadium for each game and every other revenue goes down.

Interesting times

muleskinner · April 10, 2009

"accruing interest charged at 14.25 per cent"???

Did they get the money off loan sharks? That's a scandalous interest rate.

Still a cheaper rate than George Gillett is paying on his loan to guarantee his loan for LFC.

boohog · April 11, 2009

"accruing interest charged at 14.25 per cent"???

Did they get the money off loan sharks? That's a scandalous interest rate.

Its subordinated debt where the interest rolls up rather than being paid in cash. Subordinated means that it only gets paid out only after ALL the 518m of senior debt + senior debt interest has been paid. As a result its extremely high risk (these kind of structures are blowing up in companies all over the world right now) because you get paid nothing until final maturity of the loan but if the company goes into administration, chances are you lose all your principal and rolled up interest.

And to put 14% in context, these things are trading at prices yielding an effective 40%-200% interest rate right now (i.e. 14% was a bargain for the Glazers rather than being scandalous). These loan sharks (hedge funds actually) as you call them have been utterly screwed because they were numpties (mostly posh South West London toffs with their heads up this backsides) even taking this kind of risk in the first place.

This was the only way the Glazers could raise enough money to buy the club. Thank f*** G&H couldn't access this kind of funding.

RP · April 13, 2009

I thought that Glazer was lent the money by US-based Hedge Funds.

surf · April 13, 2009

Its subordinated debt where the interest rolls up rather than being paid in cash. Subordinated means that it only gets paid out only after ALL the 518m of senior debt + senior debt interest has been paid. As a result its extremely high risk (these kind of structures are blowing up in companies all over the world right now) because you get paid nothing until final maturity of the loan but if the company goes into administration, chances are you lose all your principal and rolled up interest.

And to put 14% in context, these things are trading at prices yielding an effective 40%-200% interest rate right now (i.e. 14% was a bargain for the Glazers rather than being scandalous). These loan sharks (hedge funds actually) as you call them have been utterly screwed because they were numpties (mostly posh South West London toffs with their heads up this backsides) even taking this kind of risk in the first place.

This was the only way the Glazers could raise enough money to buy the club. Thank f*** G&H couldn't access this kind of funding.

Pretty technical stuff. Are you saying that whilst it's a high interest rate, it's a pretty decent rate given the risk involved?

They're still paying 14% which means a decent portion of their revenue goes to servicing their debt?

What's the advantage to the owners of choosing this high-interest loan construction?

boohog · April 14, 2009

I thought that Glazer was lent the money by US-based Hedge Funds.

Not sure technically who the borrower is, but there are subordinated guarantees and security from the football club.

Pretty technical stuff. Are you saying that whilst it's a high interest rate, it's a pretty decent rate given the risk involved?
They're still paying 14% which means a decent portion of their revenue goes to servicing their debt?
What's the advantage to the owners of choosing this high-interest loan construction?

What the market price of these loans is saying is that 14% was not enough for the risk at the time - i.e. the hedge funds completely underestimated the risk and the interest rate should be higher. If you could access the same type of funding today (which you can't) the market price of the loans indicate that it would cost you at a minimum, 50% interest p.a.

On the hedge fund loans there is no actual current impact on cashflow although you see the impact in the profit and loss. All the interest is rolled up into the mortgage - none of it is paid in cash. It will come due eventually and ultimately be extremely costly.

From the Glazer's point of view it was the only way they could get enough debt to buy the club. Assuming their ability to provide equity was limited, there is only so much so called 'senior debt' that banks will be prepared to provide to a company which is based on its operating performance and market conditions. At the time, this amount was 518m. The Glazer's needed to find the remaining 152m to be able to meet the asking price for the club. The only way the senior lenders would allow this is to subordinate that debt to the senior debt. In stepped the hedge funds to provide it.

Ultimately this kind of structure only makes really makes sense in 3 scenarios:

1) If you can quickly sell the club on for a higher value

2) If you can refinance the debt not long after with cheaper facilities (in order to do so would have required bank lending standards to get even more lax than they were at the peak of the market or for the clubs operating performance to improve dramatically)

3) If you are pumping out enough cash to pay down the debt extremely rapidly

None of these are now the case or indeed ever likely to be possible.

richwilks · April 14, 2009

Ultimately this kind of structure only makes really makes sense in 3 scenarios:
1) If you can quickly sell the club on for a higher value
2) If you can refinance the debt not long after with cheaper facilities (in order to do so would have required bank lending standards to get even more lax than they were at the peak of the market or for the clubs operating performance to improve dramatically)
3) If you are pumping out enough cash to pay down the debt extremely rapidly

None of these are now the case or indeed ever likely to be possible.

What does that mean to them though? Chances are that they'll splash £32 million on Tevez and I'd really doubt that will be the only signing they'd make.

They seem to have the money available even if they are running at a unmanagable loss.

Flight · April 14, 2009

What does that mean to them though? Chances are that they'll splash £32 million on Tevez and I'd really doubt that will be the only signing they'd make.

I doubt they will buy Tevez and suspect they will cash in on Ronaldo to fund their transfers this summer. Notice that even in the above poor financial year they made a profit on transfers of £20mill.

Edited April 14, 2009 by Flight

surf · April 14, 2009

Not sure technically who the borrower is, but there are subordinated guarantees and security from the football club.

What the market price of these loans is saying is that 14% was not enough for the risk at the time - i.e. the hedge funds completely underestimated the risk and the interest rate should be higher. If you could access the same type of funding today (which you can't) the market price of the loans indicate that it would cost you at a minimum, 50% interest p.a.

On the hedge fund loans there is no actual current impact on cashflow although you see the impact in the profit and loss. All the interest is rolled up into the mortgage - none of it is paid in cash. It will come due eventually and ultimately be extremely costly.

From the Glazer's point of view it was the only way they could get enough debt to buy the club. Assuming their ability to provide equity was limited, there is only so much so called 'senior debt' that banks will be prepared to provide to a company which is based on its operating performance and market conditions. At the time, this amount was 518m. The Glazer's needed to find the remaining 152m to be able to meet the asking price for the club. The only way the senior lenders would allow this is to subordinate that debt to the senior debt. In stepped the hedge funds to provide it.

Ultimately this kind of structure only makes really makes sense in 3 scenarios:
1) If you can quickly sell the club on for a higher value
2) If you can refinance the debt not long after with cheaper facilities (in order to do so would have required bank lending standards to get even more lax than they were at the peak of the market or for the clubs operating performance to improve dramatically)
3) If you are pumping out enough cash to pay down the debt extremely rapidly

None of these are now the case or indeed ever likely to be possible.

If i understand correctly:

1) they've taken out a 670m loan

2) they're not making any repayments

3) they're not paying any interest

4) when the loan is due they'll pay off the loan and the accumulated interest

So basically they're paying nothing now, if the loan was due after 1 year they'd have to pay 764m (670m increased by 14%).

I guess the interesting questions are:

1) When is the loan due

2) Do they need to pay off the loan, or can they refinance

3) If they need to pay off the loan, how much have they put aside towards that so far

4) Should they be worried?

5) How financially healthy are they at the moment?

6) And what us football fans want to know, is there a point at which it will impact their ability to buy players and if so, when?

Flight · April 14, 2009

1. Almost as an aside, I'd like to quote one of the replies to an article I'll link in this post, as it is as relevant to us :

i thinks its funny how success on the pitch can change ur view of those greedy f*** owners.

2. The figures given in the OP have to be taken in context - they represent the Mancs from June 07 - June 08.

Two things make the figures more concerning for the Mancs than is immediately apparent.

i) The first is that they represent a year in which the Mancs won both the Prem and the CL. The revenues and prize money are, therefore, as good as it can get for them.

ii) The second is that the conditions for operating leveraged equity have got much worse in the last 12 months.

This is the article I said I was going to link.

» Click to show Spoiler - click again to hide... «

Manchester United’s debt, analysed

Written by Azar

The article uses last available financial disclosures of the club as at 30th June, 2007 (download document (PDF) here). The words “current/currently” reflect opinion/fact with the same timeline in backdrop. All figures are in million pounds.

The author is a financial analyst.

It has been some time that people have been talking about a financial crisis in-the-making at Old Trafford. There are also those who insist we are already seeing one. The team, however, is doing extremely well on the pitch. That suggests, at least from a financial point of view (perhaps not conclusively though), that players are happy with their wages. After all, the club spent 74m on wages and salaries in 2006-07 (majority of which must have gone to players).

Even football clubs like Manchester United can hardly rely on money from T-shirts, posters or footballs – they really have to sell football – in the ground and on the TV. For Manchester United that makes up Â¾ of their revenue which is showing excellent growth (30% year-on-year). Compared to previous year, the administration has done a great job in keeping a lid on operating expenses (despite the widespread belief that Manchester United uses a Russian cheque book too). The club has grown from a position of gross loss (persistent gross loss is an outright indicator of a failed business model) to a modest gross profit.

This is all good. But here comes a mighty financial challenge (note: I do not want to carelessly use the word “crisis”). The club incurred financial costs of 81m. That is more than what the club has paid the people who make this club – the ground staff, administration and of course players. This is, at least in an academic sense, a highly inefficient and unsustainable cost structure. But there are worse and more practical issues here.

Despite closing the acquisition transaction in the preceding year, the club incurred more debt and re-profiled existing loans this year. Pricing that Manchester United has received from financiers is not going to make things any easier. And given the deteriorating financial health of the club, overall credit tightening and the very nature of the risk financial institutions have taken on red devil’s football, finance costs will only increase.

If you doubt that then there is one simple explanation I can give.

The collateral offered to financial institutions is 425m of “first fixed and floating charge over fixed assets”. A charge is a piece of paper that gives legal claim to bankers over collateral in an event of default. But Manchester United only has 252m of tangible assets, the rest are largely intangible. In other words, this acquisition exposes banks more than Glazers themselves. The Glazers simply bought the club on bankers’ wallet, and if push comes to shove, they will handover the “soccer club” to banks, endure manageable loss, swim back home and watch “football clubs” play in America. Now wouldn’t a bank squeeze every penny out of Manchester United after taking such a risk on it?

Let us say, my view so far has been very subjective. Then let us look at some crisp objective facts. Financial institutions do not like to keep their credit lines evergreen for corporate customers unless the business model is one of low risk (e.g. a heavily regulated power utility). One day all banks will ask Manchester United to repay the principal amount which currently stands at 666m.

A very dirty (read: conservative) multiple of debt-to-free cash flow (using current figures for both debt and free cash flow) stands easily above 25x! This is too high, even with all the grace period in debt maturity schedule. Going forward, this multiple must come down or the club will be at mercy of financial institutions (whether or not they agree to rollover). What are the possible ways of doing it?

* Stop piling more debt - not possible until the club makes enough operating income to at least repay its finance costs i.e. interest cover above 1x. Currently, this ratio stands at 0.23x.

* Continue to post solid revenue growth e.g. at least at least 15-odd % each year. Keep up the branding. Media money is all about that. There is a reason why TV in Malaysia will not pay 2 cents for covering a Derby match.

* Win competitions. Duh!

* Become more efficient i.e. increase its operating margin. The current 9-odd % is not going to work.

* Buy like Wenger, not like Abramovich. The club does not have financial liberty as many would think.

A 194m accumulated loss on the balance sheet has reduced Glazer’s equity to only 80m (year-on-year 42% decline). This is alarming. Imagine, if loss in financial year 2008 is going to be anything above 80m (2006 loss: 135m; and let us say, Glazers don’t bring in more money from America), the club will have negative equity. In English that means bankruptcy for Manchester United where banks are involved. For clubs where no banks are involved, and Russians are involved, negative equity does not matter because the owner pays for his hobby, not the banks.

Even in the beginning of the article I clearly said, this is a challenge and not a crisis. One has to understand the buyout of Manchester United. These leveraged acquisitions, a couple of years back when things were not as bad, were in fashion. Financial institutions make good money in these. Where time is merciful enough to pan things out more or less the same way as those Excel sheets suggested in investment banks when the deals are struck, the equity investors (like Glazers) in these deals make money for their generations to come.

But huge risks are involved. There are too many assumptions, from the club itself to the economy at large. If you ask me in a nutshell if Manchester United is heading for a serious financial crisis – I will say it is not so certain at the moment. Glazers should really kneel down and thank the outstanding team and some great fans who continue to buy season tickets despite $120+ crude oil and a terribly confused Brown-Darling-King tripod.

The greatest positive surrounding all of this is the debt profile – the club does not really repay any principal in the next 5 years. That is a good breathing space. But even then, for this Glazer deal to let Manchester United live, this club needs to grow really badly. Did not we all think Manchester United is an enormous club? Size is relative. You are only as big as your debt makes you look.

This section obviously stands out :

The collateral offered to financial institutions is 425m of “first fixed and floating charge over fixed assets”. A charge is a piece of paper that gives legal claim to bankers over collateral in an event of default. But Manchester United only has 252m of tangible assets, the rest are largely intangible. In other words, this acquisition exposes banks more than Glazers themselves. The Glazers simply bought the club on bankers’ wallet, and if push comes to shove, they will handover the “soccer club” to banks, endure manageable loss, swim back home and watch “football clubs” play in America. Now wouldn’t a bank squeeze every penny out of Manchester United after taking such a risk on it?

Maybe this is why people who own pieces of the debt have been selling it off at around half of what it is worth ? I would contend that if, over the next two or three years, the Glazers throw large amounts of money at transfers it's all but conceding that they are in no way trying to control the debt at the club and accepting the inevitable collapse and bankruptcy of the club. If, however, they tighten the purse strings, it will signify they intend to contest ownership of the club, long term. I suspect the second to be the more likely scenario and welcome less invested in the quality of their staff. As I said, I'll be surprised if they don't cash in on Ronaldo while his stock is at its highest (finances aside, I've always maintained Ferguson will never get the best from him and this has been the case this term).

Edited April 14, 2009 by Flight

boohog · April 16, 2009

If i understand correctly:
1) they've taken out a 670m loan
2) they're not making any repayments
3) they're not paying any interest
4) when the loan is due they'll pay off the loan and the accumulated interest

So basically they're paying nothing now, if the loan was due after 1 year they'd have to pay 764m (670m increased by 14%).

1) Aye, approx. but its bigger now because of the interest roll up

2) Part of the senior debt of 518m is probably amortising (ie requires some repayment). Not having the exact details infront of me I'd guess it was 1/3 of this, with a repayment of approx 1/10 per year

3) The interest roll up only applies to the PIK (payment in kind) loans which are now nominally valued at 175m (nominally because that is what the mancs have to repay - the real market value to buy them is probably around 20-40m). They are paying interest on the 518m senior loans

4) Yes - only on the PIK loans though as they pay all other interest as it comes due

I guess the interesting questions are:
1) When is the loan due
2) Do they need to pay off the loan, or can they refinance
3) If they need to pay off the loan, how much have they put aside towards that so far
4) Should they be worried?
5) How financially healthy are they at the moment?
6) And what us football fans want to know, is there a point at which it will impact their ability to buy players and if so, when?

1) Can't be bothered to check but I'd guess its a 7/8/9/9 or 10 year structure where the senior debt is paid 1/3 after 7 years, 1/3 after 8, 1/3 after 9 years and the PIK + interest is due after 9/10 years

2) From a quick view of their finances they will have to refinance the majority of this debt. The debt burden is so large it is effectively permanent debt

3) Likely nothing

4) They are in a situation of effective permanent indebtedness so unless a sugar daddy steps in, yes, they should be s*** scared. All they need is 2-4 years of poor results (or a change to the income from sky/CL) and this explodes horribly

5) They are at the most leveraged end of the spectrum of all businesses worldwide. As a general rule, businesses with this kind of leverage in any industry have over a 50% (potentially 75%+ according to some sources) probability of default in this economic environment. Football is a bit different, so I don't think they are in this league, but it is precarious. However I think the same applies to us aswell (although this is because the maturity on our loans are much closer and refinancing will be challenging, rather than an inability for LFC to meet interest payments and to pay down the debt balance).

6) Yes. I don't know - it depends on the Glazers and the finance providers flexibility so I can't answer the question.

surf · April 17, 2009

Cheers Boohog.

It's great having someone on this forum that can put the financial side of things in perspective - and takes the time to do so with some pretty detailed answers.

The Hitman · April 17, 2009

Boohog-I'm assuming you work in corporate finance of some form?

Des · April 17, 2009

Boohog-I'm assuming you work in corporate finance of some form?

He doesn't like to talk about it.

boohog · April 17, 2009

Np surf.

Hitman, Des, I'd answer, but I don't want to get lynched with all the bankers for f***ing up the world

Flight · April 17, 2009

Np surf.

Hitman, Des, I'd answer, but I don't want to get lynched with all the bankers for f***ing up the world

FSA

boohog · April 17, 2009

FSA

shh, I don't want to be the next scapegoat.

Sign In

Mancs debt soars to £700m

Recommended Posts

Flight

Maldini

growler

Duncan Disorderly

Andy Mac

bazz

muleskinner

boohog

RP

surf

boohog

richwilks

Flight

surf

Flight

boohog

surf

The Hitman

Des

boohog

Flight

boohog

Create an account or sign in to comment

Create an account

Sign in

Recently Browsing 0 members

Forum menu

On this day in history

On this day in Liverpool history

Browse

Activity

My Activity Streams