Saturday, 27 March 2010

Important: JP Morgan assume the Ronaldo money is going to pay the PIKs…...

One of the fans’ central accusations (from information in the bond prospectus) is that the vast majority of the proceeds United received from selling Cristiano Ronaldo to Real Madrid were going to be used to repay a chunk of the Glazer family’s toxic “Payment In Kind” (“PIK”) loans.  A research report published in the last few days shows this payment is the central assumption of no less than the Glazers’ own bankers, JP Morgan.

“We have £100m in the bank” says David Gill.  “It is available to the manager”.

People like me say that the bond prospectus is very clear that £70m will soon be sucked out of the club to pay the Glazers’ own debts (I strongly believe this take place after 31 March so it doesn’t appear in the accounts until August).  David Gill says the PIKs "are not the responsibility of Manchester United".

Now the credit (bond) research team at JP Morgan, the lead investment bank on the bond syndicate and the Glazers’ advisers, have published a research note on the bonds.  I’ll write more about this note next week, but one stark assumption stands out:

Under all three scenarios [of different performance on the pitch], we assume the £70m carve-out of the restricted payments basket leaves the bondholder group [i.e. is paid out of Red Football Ltd to the Glazers’ parent company]. (page 21)

And where is that £70m going?  They kindly tell us (my emphasis):

We have adjusted MUFC's balance sheet cash for the £70 (sic) RP carveout (Restricted cash). We have given this benefit to the Red Football Joint Venture PIK debt, and have assumed it accrues at 14.25% per annum. (footnote on pages 24, 25, 26)

So if there was any doubt, JP Morgan believe the bulk of the Ronaldo money will be used to pay the PIKs (although they point out, as I have, that the money is currently on United’s balance sheet).  I asked David Gill about this subject in my open letter.  He declined to reply of course.  It’s pretty sad we had to wait for JP Morgan to answer it for him……

Our club has received an incredible windfall from the Ronaldo sale.

Here’s what we could have done with this windfall; we could give Fergie £30m in cash to spend on new players, take the remaining £40m and fund a 20% cut in all ticket prices in the Stretty, scoreboard end, Family Stand and NT3 (annual cost £4m) and guarantee that these ticket price will only rise with inflation for 10 YEARS![i]

At a time when its core working class support is being priced out of going to the match by greedy owners and a recession, that’s the sort of thing a football club would do…..

Tell your mates, tell your family, tell everyone.  The Glazers are going to take the Ronnie money and you didn’t hear it from some mad bloke on the net, Manchester United’s bankers said so.


[i] Total 2008/9 ticket revenue (30 home game season) £90.2m (source: Bond Prospectus).  My analysis (available on request) shows 21% of this is derived from non-exec tickets in the Stretford End (West Stand), Scoreboard End (East Stand ) and North Stand Tier 3.  These areas therefore contribute £18.9m per annum.  A 20% cut would cost c. £4m per annum, and £40m could guarantee these lower prices (increasing only by inflation thereafter) for ten years.  Alternatively a 10% cut could be guaranteed for 20 years.


Voxra said...

Superb again, andersred.

Alan, Manchester said...

Great stuff, keep up the excellent work, it is much appreciated by many, many fellow Reds!

Anonymous said...

Absolute crap, how can a club supposedly in so much debt afford to take a cut in 20% on the ticket prices?

Yeah that will help get the club out of trouble right?

andersred said...

Hi anonymous,

I wasn't saying a 20% is what should happen, I was showing what you could do with £70m if the money was being sucked out of the club to pay the Glazers' own debts.....

United sell Ronaldo and get no benefit, because the Glazers just take the money.


matt said...

I'm an accountant and have read the report and it says what good shape we are in and how well the club is run by the present owners...isn't that the Glazers. We can all take sample phrases and put a spin on it but the truth is the report just doesn't say what you say it does. Fergie has said on several occasions he had over 100mill to spend but wasn't going to buy in last summers crazy market, sounds to me like gill fergie and the glazers are doing a great job...whats your point again.

Anonymous said...

hey Matt Read it properly. say it man u r glazer supporter. may be in ur real life u r bad accountant.i m not sure how u read it 1st line and last line.
just say it u r glazer supporter.may be u r glazer accountant.

andersred said...

Hi Matt,

We know the club is in "good shape" operationally already. It made "adjusted" EBITDA (after management fees) of £94m last year.

The "base case" in this report shows that number not really growing for the next few years (£92m, £83m, £88m, £92m and £102m in the next five years).

The upside scenario shows growth (£92m, £87m, £102m, £105m, £124m).

We knew all this already, United is a good business. It is partly so profitable because of the huge increases in ticket prices but let's leave that.

The financial problem at United isn't its operational profitability, its the balance sheet with net debt around 7x EBITDA.

You ask what my point was. Apologies if it wasn't obvious. This balance sheet structure imposed on our formerly debt free club is costing millions of pounds to service and will swallow up all of the windfall from the Ronaldo sale.

In particular this JPM note confirms what I have always said, £70m (effectively the Ronaldo cash) will be used to repay some of the PIKs. David Gill says the PIKs are not the responsibility of the club. I don't know how often you repay debts that are not your responsibility, but this note suggests United will be doing exactly that.

Fergie does have £100m to spend, because the Glazers have kindly put in place a new £75m revolving credit facility.... More debt.

Hope that helps,


Anonymous said...

Hi Anders,

"Fergie does have £100m to spend, because the Glazers have kindly put in place a new £75m revolving credit facility.... More debt."

And United have already received half of the Aon sponsorship money. Am I right? Peter

andersred said...


You are pretty much spot on, United have received 43% of the Aon money up front (last May).

This £35.9m plus the Ronaldo £80m less the money spent on Valencia is the reason why United reported proforma cash of £98m at 31 December 09 (from Q4 09 results presentation).

I didn't mention it in my post and JPM don't model it coming out of the club, but there is another £25m "restricted payment" that can be made to the Glazers at any point Red Football is not in default of the bonds. If you wanted to be pessimistic, £95m of that £98m could disappear overnight, leaving only the new credit facility.


Anonymous said...

Correct implying much less cash during the remaining life of the deal in other words they needed the funds to bolster the balance sheet at the time of the bond issue.

Anonymous said...

Thanks for your answer. Yes I am pessimistic. The Glazers: debt, PIKs, more debt, credit facility, refinancing after refinancing, dividends, wall street fees, another bank loans, the ticket prices etc...only bad things, nothing good. LUHG

Your blog helps a lot. Keep up the good work. Peter

Tom said...

this is all well and good quoting how bad the glazers are but who do we have to come in instead? the red knights wont make much of a difference and if u really know ur figures u'll understand that too. jim o'neill is part of goldman sachs one of the biggest problems in the subprime mortgage crisis of the US which is disastrous. i dont lik the glazers but i wont protest against them unless i see a proper group, with uniteds interest at heart, with the right money and plan to get us out of this mess.

andersred said...

Hi Tom,

I agree that United needs a viable alternative to the Glazers, but that doesn't mean that they aren't bad in isolation and that the fans shouldn't protest.

I think I do know my numbers and I'd suggest people don't dismiss the "Red Knights" until there is something concrete to look at...


Usman said...
This comment has been removed by the author.
Usman said...
This comment has been removed by the author.
Usman said...

Here are my comments amalgamated into a single one instead of 3.

All you've said is that J.P. Morgan are the bankers for Manchester United. And that this banking group, who specifically may not have access to all the mufc details, say £70 is going to be taken out of the club balance sheet to pay a PIK instalment.

Do you know the bankers yourself, and are they the same bankers who themselves deal with the Glazer family?.

Very biased report mate, nothing out of the ordinary or ground breaking by any means.

But i do question your intentions. Do you really have the best for the club at heart? Do you want a say in how the club is run?. Go to barcelona or Real madrid mate, we're not a political football club and you by no means are a football M.P.

30 March 2010 18:37
Usman said...
Furthermore, in the third paragraph there is this quote: **"We see significant potential upside from
increasing demand for football content, international sponsorship
opportunities with a globally recognized brand as well as the potential
to outperform our base case with strong on-field performance."**.

Why have you ignored this critical part of the report for?. Critical enough to be on the front page of the report in clear (technical) language.

*P.s., i liek your blog of factual information and opinion. A bit better than the journalistic codswallop in the media.

Anonymous said...

Boycott season tickets get glazers out and have it in our hands! Luhg!!

Tony Nuttall said...

How do you respond to this from Rob Lawrence on the Manchester Evening News Man United site:
I read the blog and JP report and I can tell you now, you got it all wrong! Firstly, the blogger isn't exactly what you would call independent and open minded. I won't doubt his claimed credentials to be a fund manager, but if he is so, I would be worried he can't read a credit analyst report properly. Your claims of asset stripping are way off the mark, the comment regarding the £70 million is a hypothetical assumption made by the analysts for their financial model of the expected financial position of the club under 3 scenarios. They made this assumption that the Glazers have the right to access this capital, it doesn't mean the Glazers are definitely going to exercise that right! Whether the Glazers access that capital will be determined primarily by the financial needs of the club to ensure success on the pitch."

Usman said...

haha.. the author has taken a lot of hypotheticals as fact.. what an idiot.

Anonymous said...

Andersred, you say: "People like me say that the bond prospectus is very clear that £70m will soon be sucked out of the club to pay the Glazers’ own debts."

The prospectus didn't seem clear on this at all to me, nor to JP Morgan who state that the Glazers have "yet to declare their intentions". It would be very silly for Gill to say the money is available to be spent if it is about to be siphoned off. And very unwise for the Glazers to mislead Ferguson like that, because he clearly thinks at least some of that money is available to him. If he were to feel he'd been lied to I'm sure he'd denounce the Glazers publically and walk out and imagine the protests and boycotts we'd have then.

andersred said...


Weird argument from this Rob guy. Like I said to Usman, this is an "informed" research note, a draft of which the club will have seen and been allowed to comment on (you can see this in a couple of places where it says "MUFC say" and then there is something they've never said in public!).

I don't claim to be independent, but I try to present the facts.

He says:

"Your claims of asset stripping are way off the mark, the comment regarding the £70 million is a hypothetical assumption made by the analysts for their financial model of the expected financial position of the club under 3 scenarios."

The use of this £70m is very important to a credit analyst and they make the same assumption for all three scenarios - the assumption that it is used to pay PIKs. They could have assumed it stayed in the club, but they didn't. Why not? Plus, stand back and ask yourself what this "restricted payment" right is for? Why carve out £70m (plus another £25m)in the bond covenants? We're talking about cash to the value of 25% of the bonds. A carve out to pay this out costs money in higher coupons. It is not put in place for laughs.

His last point:

"Whether the Glazers access that capital will be determined primarily by the financial needs of the club to ensure success on the pitch."

is laughable. If they let the PIKs carry on escalating, they'll need to find £580m in 2017, if not they'll lose the club. Nobody believes they have £580m. So they MUST pay them down. There is no evidence they personally have the liquid assets to do so (not a penny paid off in the last three and a half years) so they have two options; sell assets (Bucs valuation in the doldrums, property business on its arse) or get cash out of the one business doing well. United....

take care,


Usman said...

Hmm.. Despite the difference of opinion, you have a brilliant blog mate. thanks for sharing this info with us ignoramus's :). Goodnight

andersred said...


Let me be clear, there is money to spend this summer. Frankly, if they still own the club they'll let/encourage Fergie to use it. This is a good year financially with a high number of home games. Each home game is £3.5m of extra revenue. The cash interest cost is low (cheap bank debt for the first six months) and the cashflow negative impact of Aon prepayment is yet to kick in....

The business has cashflow seaonality and the summer is the peak period. Add it all up (and remember the RCF is there as well) and they'll be plenty of money, easily enough for a Ribery or Villa.

This all means that Gill can hide behind his comments and Fergie has been told the truth. But none of it changes my point, you do not carve out rights to withdraw 25% of the club's bond liability on a whim. If your main bank's credit research team then assume £70m is paid up the structure, it is worth taking notice off.

I've spent the last three weeks crawling through CMBS filings and US shopping center rental listings, and I am 100% convinced they don't have any other major source of liquidity to pay down the PIKs.

I can't dispute that "they are yet to declare their intentions", it is self evidently true. But if it walks like a duck, swims like a duck and quacks like a duck, I reckon it's a duck. And this is the deliberate planned removal of £70m to pay "their debts".



andersred said...

Cheers Usman!

Stay safe mate.


Anonymous said...

So Anders, taking all this into account do you think there is a good chance of investment in the squand during the next transfer window - or will fans once again be worrying when ever Rooney happens to pick up a knock next season?

andersred said...

If they still own the club (and I'm hopeful a deal to buy them out can be done over the summer) I think they will allow spending.

I do believe they budget for around £25m net spending per annum (they told their lending banks the same number in 2006 and you don't lie to them if you've got any sense). I appreciate they average £7m pa since they bought the club....

I also think they have begun to think about their PR - very, very late in the day. The individual searches going into the ground show they don't want any more banners on display, chuck in the ticket price freeze and a "marquee" signing in the summer would be the icing on the cake to try to calm supporters down.

But like I said, I hope the whole subject of what the Glazers will do will be irrelevant.


Anonymous said...

Excellent performance on "Red Wednesday", Andy.
I wasn'nt impressed by the pseudo-scousers arguments though :).
Can't for any reason think why anyone can argue rationally that the Glazer's ownership is beneficial to United!!
The only point they continuously fall back on is the "sucess" we've had but we all know who has been responsible for that!!

Steve S

Anonymous said...

One of the things that strikes me about this JPM report, in relation to their financial projections for the company, is that they seem to be making an assumption that the Glazers wont be taking that £25m pa dividend to service the PIK interest and that instead they will just allow the interest to roll-up. Common sense tells you that the Glazers simply cannot allow that to happen. Take out that additional £25m cash per annum and the projections look very different.

The Glazers have three choices don't they (1) Take an additional £25m out of the club every year to stop the PIK debt growing and then have to find c£150m in 2017 to pay-off/refinance the PIK debt, (2) Take the additional £25m per annum AND more (around £15m per annum?) to actually pay off the PIK by 2017, (3) Refinance the PIK debt now (4) Allow the PIK debt to grow and then lose the club to the Hedge Funds in 2017.

There were rumours in the press recently about the Glazers looking at refinancing the PIK debt. Do we know if there was any truth in that? Is it possible for them to do that?

Ps. How can ANYBODY be in any doubt that the Glazers will be taking that £70m to part pay down the PIK debt? They've bloody told us that that's what they're going to do! It's suggested in the first MU Finance report that they've already carved out an unspecified amount of cash! JPM are assuming they're going to do it! It was the whole point of the bond issue. So of course they are. When the PIK debt is acruing interest at half a million quid per week they'd be mad not to.


andersred said...

You're absolutely right of course.

The ongoing dividend rights are very carefully constructed. If EBITDA is 2x interest (so around £90m) they can pay out 50% of EBITDA - interest. So it excludes any player contract related costs (i.e. transfers or contract amortisation). So £90m of EBITDA - £45m interest and they can take £22.5m in dividends, but as the JPM report shows, there is a £9m negative cash impact from the Aon prepayment plus £5m of capex.

So before any transfers the free cashflow is down to £8.5m.... What a war chest that is!

A PIK refinancing is a pipe dream in my view. £534m of senior bonds and potentially £75m drawn senior revolver supported by £90m+ EBITDA and then you try to borrow £160m on top but as 2nd lien!

Selling the Bucs could sort it, but NFL franchise valuations are well down and there isn't likely to be a salary cap this year....

So..... If a decent offer hits Florida in June.....


PS. And yes, it is in black and white in all the official docs. I must say I have been surprised how much people don't want to believe it!

Vladislav said...

a question for the author - whats your point? (in this entry and the blog in general)
Glazers are gonna take money away from the club? Of course they will. All of Ronaldo's money? You don't know that, neither do I or anyone here.
Those people own the club. So why is it that they should give money to you instead of themselves?

andersred said...

Hi Vladislav,

I assume your initial question is rhetorical (look it up) rather than literal and therefore stupid.

If I'm right, why bother asking it?

I find it amusing that hundreds of years after cleverer people than you and me developed the theories of empirical thought that allow the creation of things like the internet, the one simple observation of mine in this post meets the same laughable response: "you don't know what will happen".

Anyone can come on here and offer rational and reasoned arguments on the subjects covered, you sadly chose to come on and make such facile points that I'm tempted to delete your "contribution". I won't because for one I believe in free speech, and second I prefer your insightful analysis of the paradoxes of 21st century capitalism to hang here for all to see.

Take care Vlad (and don't worry about whether the sun will rise tomorrow after all "You don't know that, neither do I or anyone here.")

Brilliant stuff.


Vladislav said...

You know, here I was thinking you're an intelligent blogger with different from my views. And having legitimate conversation on the web is actually possible. Silly me....

The moment I come here questioning your statements you start insulting me, call my questions stupid. Scared to respond? Looks like it

p.s. I know what rhetorical means.

Anonymous said...

hey vladislav

i don't know who r u?
but look like glazer pay u some money they getting away from Manchester united. so buck up say u r glazer lover.
this blog only for LUHG .And Real Manchester united fans.

not ur type of jerk.

now u feel insulting or not. reply me back.

Steven said...

My view is that the Glazers will try to stabilize the PiK debt and hope that in three years time the profits of the club will increase enough for any remaining PiK debt to be consolidated into one senior loan. In three years time we could be looking at £650m debt all on the club. Hopefully this will be too big a risk for them and they listen to a reasonable offer.
This really is the last chance saloon for United fans to get rid of these leeches and have a better form of ownership, one that will protect the club from chancers like the Glazers or billionaires who want a "trophy" club to own.

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Stephen said...

Fantastic Blog Anders- your about the only guy who can take all that complex stuff and sort it so us non accountant folk can understand Utd is pretty fooked !

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Anonymous said...


An owner of a business has the right to take dividends out of a business, however football clubs are not a business, moreover a community collective with emotion rather than an investment opportunity. Purchasing such an institution financed with more debt than equity invariably leads to underinvestment (aka capex)which over the long run leads to a diminished asset. In other words, the earnings of the asset are diverted to pay for the acquisition of the asset rather than being used to enhance and strengthen the asset.

This type of financing only works over a short period of time in which earnings must increase rapidly in order for the asset to be sold for a much higher price. The sad fact is that Glazers will recognise this and sell the asset before the tipping point and make a huge profit due to the emotional tie-in wealthy individuals have to ManU.

In short, the FA / Premier League have dropped the ball in allowing this type of financing into our game. They are the real villians here. The Glazers are just chancers while the ManU supporters are the suckers.