Monday, 24 May 2010

United’s Q3 results to be published this week – some things to bear in mind


Edit: 28 May. Results now out.  Initial comments here.

One of the (few) positives of the bond issue, is that Red Football Ltd is now obliged to publish quarterly and annual accounts in a timely fashion. The requirement for quarterly accounts is set out in clause 2 on pages 144 and 145 of the pdf version of the bond prospectus (my emphasis):





"within 60 days following the end of each of the first three fiscal quarters in each fiscal year of the Parent, quarterly reports containing the following information: (a) an unaudited condensed consolidated balance sheet as of the end of such quarter and unaudited condensed statements of income and cash flow for the quarterly and year-to-date periods ending on the unaudited condensed balance sheet date, and the comparable prior year periods for the Parent, together with condensed footnote disclosure; (b) pro forma income statement and balance sheet information of the Parent, together with explanatory footnotes, for any material acquisitions, dispositions or recapitalisations (excluding acquisitions or dispositions of player registrations) that have occurred since the beginning of the most recently completed fiscal quarter as to which such quarterly report relates; and (c) an operating and financial review of the unaudited financial statements (including a discussion by business segment), including a discussion of the consolidated financial condition and results of operations of the Parent and any material change between the current quarterly period and the corresponding period of the prior year;"


The first results under these obligations, Red Football's 2nd financial quarter to 31st December 2009, were published on 2nd March 2010 on the Luxembourg Stock Exchange website (www.bourse.lu) and on the new MU Finance plc webite (www.mufplc.com). The results were somewhat overshadowed by the announcement of the existence of the Red Knights group the same day.


The Q3 results to 31st March 2010 are due within 60 days of that date. As the 60th day falls on Sunday 30th May when the Luxembourg Stock Exchange is closed, I expect the results will be published on Friday 28th May, or even one of the three days between now and then, early publication is at the company's discretion.


I don't believe much of interest will be revealed on Friday but ahead of the results, I thought I'd note a few points to bear in mind about the figures:
  • These figures relate to the period 1st January to 31st March.
  • These figures only relate to Red Football Ltd and its subsidiaries, and not to Red Football Joint Venture Ltd which holds the PIKS. The debt numbers shown will therefore exclude the PIKS. On 2nd March, the Daily Express and BBC website forgot this and published (for a short time in the BBC's case) articles saying "huge fall in Manchester United's debt" when in fact they were comparing the previous RFJV figures with the PIKS to RF's quarterly numbers without them.
  • In the last quarterly figures, the amount of bond debt shown (pro-forma) was £512m. That number was struck using an exchange rate of $1.62 to £ on 29th January. Sterling had fallen to $1.507 by 31st March, so expect the bond debt (in sterling) to be around £532m at the quarter end.
  • All the mood music from inside the club to journalists suggests that at 31st March, the £70m "restricted payment" to RFJV had not been made. If this is indeed the case, expect the club to push the line that "the Ronaldo money is still there". I stick by my prediction that this money will go to pay down some of the PIKS, I just don't know when. Nobody should be surprised that the club don't want this money to publically vanish in the middle of the season ticket renewal period. Those who believe I am scaremongering can go on believing that of course.
  • If the £70m dividend has been paid to RFJV Ltd since 31st March, line (b) in the paragraph from the prospectus shown above seems to suggest that it would not have to be disclosed as it would not fall into the categories of post balance sheet "acquisitions, dispositions and recapitalisations" that must be shown.
  • The club quite correctly warn bond investors not to pay too much attention to one quarter's figures compared to another. The timing of PL home games in particular can cause quite a swing year-on-year, as it did in Q2 when there were two more games compared to last season. A quick look at www.stretfordend.co.uk suggests that in Q3 there were the same number of home games this season and last, but there may be other timing issues which can skew the numbers.
  • The bond issue completed on 29th January, so the "interest charge" for the quarter will be a combination of one month of bank interest and two months of bond interest. It will be interesting (for the dweebs amongst us) to see when the interest rate swap was closed and at what cost. In cash terms, there was a semi annual bond coupon payment in February.
Other areas we may learn more about include:
  1. Are the Glazers already taking their entitlements to £6m pa in "management fees" and £3m pa in parent company expenses? There may not be enough detail to tell.
  2. Have any more of the future US$ coupon payments been hedged against sterling?
  3. Whilst these results don't cover season ticket, exec and box renewals, will there be more comment on hospitality sales (described as "challenging" in the last results)?
  4. How seasonal is United's cash flow? This will be a weak cash flow quarter and the pro-form cash balance at 31st December 2009 was £98m.
So all in all expect a fairly quiet and unremarkable set of numbers.

United remain a very profitable football club weighed down with a significant interest bill and with owners who have just signed up to a bond deal that actually increases the interest bill but introduces rights to take out a high proportion of the club's cash flow for themselves. No light is likely to be cast on the real issues of renewals, transfer spending and the stripping of cash out of the club until later this year and into 2011. And remember, we only get to see the state of RFJV and its PIKS once a year in January or February, six or seven months after its year end.


LUHG

8 comments:

Anonymous said...

hey andy
another great post.

LUHG

Jeremy said...

I would be shocked if they have taken the "Ronaldo money" out. They would be crazy not to be able to say "look, look, it's still there" during a renewal period they know is going to be their toughest yet.

Anonymous said...

Thanks for the info - I will be looking out for the new financials.

Just 1 question, you say at the end that the bond deal 'actually increases the interest bill'.
I was under the impression that the annual interest on the bond will be around the same as the club was previously paying on the senior debt (between £42m and £45m according to the accounts)?

andersred said...

Hi anonymous,

As you say, the interest bill on the bank debt last year looked like it was virtually identical to the interest that will be paid on the bonds.

But the headline number of £41.9m in RF's accounts last year was impacted by the effect of the interest rate swap that RF had in place. This bank debt had an actual cost of LIBOR plus a blended margin of c. 3.5%. RF "swapped" the variable LIBOR element for a fixed 5.0775%.

So instead of paying c. 4.5% on the bank debt at a cost last year of around £22m, RF actually paid c. 8.6%, hence the £41.9m.

When the bond was issued, RF cancelled the swap (at considerable cost), it could have done this anyway of course.

The correct comparison is therefore not £42m on the bank debt vs. £45m on the bonds, but £22m on the bank debt vs. £45m on the bonds.

Hope that makes sense.

All the detail on this subject is here:

http://andersred.blogspot.com/2010/05/no-david-gill-bond-issue-is-not-like.html

anders

Zac said...

Andersred - thanks so much for explaining all this stuff!

Keep it up!

Zac

RB said...

Thanks for the response on the interest question.

If I understand correctly, the club basically tried to hedge against losing out if interest rates went up, but then lost out massively when they went down instead?
The result being that we ended up paying almost double the amount of interest than if they hadnt tried to hedge it at all !

Anonymous said...

That's right RB.

Plus when they terminated those swaps (to swap the debt for bonds) that cost another £35m in fees to be paid.

Bit of a double whammy really.

The banks must be laughing all the way to...the bank.

Anonymous said...

But how can shareholders pledge their companys assets against personal loans taken to buy their shares. Its patently illegal !!