Thursday, 16 September 2010

A smart trade by the Glazers but a massive PIK burden remains

Tariq Panja at Bloomberg has done some cracking, old fashioned investigative journalism and has discovered that the Glazer family themselves bought around 20% of Red Football Joint Venture's infamous Payment in Kind loans ("PIKs") in 2008.

During 2008, at the height of the financial crisis, hedge funds all over the world were faced with huge redemptions from clients trying to cash in their investments, in total estimated that $512bn was withdrawn from funds. The panic to get money out led to many funds becoming forced sellers of very illiquid assets which in turn threw up bargains for those who had cash to buy such assets. It appears that one of the funds holding the PIKs found itself in this situation and the Glazers took advantage, paying around a 50% discount for PIKs with a face value (at that point) of around £36m.

This was a smart trade by the Glazers by any standard, neutralising the risk of how to repay this slice of the debt at a very reasonable price. If left unpaid, by the time they reached maturity in 2017 this 20% element would represent a c. £130m liability for the Glazers on its own. But does this change things materially for Manchester United Football Club? In my view the answer is no.

The enduring mystery of the PIKs is why the Glazers have let them escalate to the extent they have over the last four years. At 14.25% (now 16.25%) interest rates, the PIKs represent some of the most expensive corporate debt imaginable. Replacing them with any other form of borrowing would make sense, using any available cash the family had would make sense, leaving them to build makes no sense at all. Why (other than this purchase of 20% in 2008) haven't the family repaid them? It seems logical to assume that they can't, that they haven't got the money available or assets they can borrow against. All the evidence from their other businesses points to this being the case.

So despite today's story, the situation seems to be this; the 80% of the PIKs still owned by various hedge funds (current value around £185m and growing at 16.25% per annum) have to be repaid or the Glazers lose the club. Other than spending £14m two years ago, no action has been taken to repay them and the only obvious source of the money to do so is Manchester United Football Club. Today's news is good for the club, but still leaves a huge sum to be repaid (see chart).

The club have to publish their accounts by 27th October. Strong indications are that none of the £95m that could have been paid out to Red Football Joint Venture had gone at the financial year end (30th June). The question is, has this money gone since that date? Companies are obliged to publish a note of significant "Post Balance Sheet Events" in their accounts. If this money has gone we can expect that note to tell us. Of course David Gill or Joel or Avram or somebody could just tell us the plan for the PIKs, but why would they want to talk to supporters?



Darren said...

So the interest on the PIK debt this year will only be £30m. Lovely jubbly.

UTID said...

Wait a second.

The PIKs are held on the books of RFJV.

The Glazers bought 20% of the PIKs in 2008.

However there was no reduction in the PIKs on the books at 30 June 2009.

This suggests to me that RFJV now have an interest expense to the Glazers at 16.25%.

One more way of them getting cash out of the club, no??

andersred said...


Good point. Any redemption would be equally spread among the holders so if they redeem £95m using the club's money they get 20%....

They win both ways....


Anonymous said...

Shows they Aint as stupid as people have protrayed them

Sniper said...

as I'm not finding my last comment, bcz I'm a new user..
I'd Like to put it again here...
and plz... if anyone can help here, I'll be thankful for his answer:
Hello Andy..
your Blog is really intresting...
Glazers are ruining our Club!
I'd just would luke to ask you few questions, that are really important to me... They are the real summary of Glazer's story with United..
Is, if Red Knights buy the club.. the dept will stay.. or with Glazers selling the club the dept will disappear? then the dept is Glazer's dept?
Tank you

theBomber said...

They ain't stupid, just evil bloodsucking leeches.

Patrick said...

Would People not regard this as some sort of positive news coming out of the club for a change.And if the Glazer family did 20% of these Piks why would they rush to demand repayment.The Finance Picture seems to be more stable than what it was and that can only be a good thing

BPacman said...

Hi Anders,

Very interesting blog as usual. Been reading for a while but just wanted to post and say keep up the good work!



Business TV Shows from yBC.TV said...

Anders - wondering if you can clarify

So far I have not see anywhere that this 20% was paid off. Merely that they acquired it at a large discount.

Presumably the whole point is that they are going to seek repayment in full to crystallise that profit now?

I mean writing it off would just be silly no?


(long time lurker)

andersred said...

The 20% hasn't been paid off, it is just owned by (effectively) the same people who own RFJV and hence are liable for the debt.

To repeat the comment I made on the other post on this subject:

This is only good news for the club if the Glazers recycle their 20% share of any PIK repayments and use that money to make further repayments. If they just pocket their 20% share of any sums repaid, the club (assuming the club is the source of the cash) will be footing the same bill. The only difference being 20% of that goes to the owners....


The Druid said...

We didnt know they had bought 20% of the PIKs till just now. So is there a possibility they have bought more of them? At a stretch, even all of them? Or can we definitively rule that out?

Anonymous said...

The Druid, We don't know if they have bought more as that type of information isn't in the public domain. Bloomberg did a good job of sniffing out the information. My guess (and that is all it is) is that they probably haven't bought more. 2008 was a significant period of dislocation in the credit markets and these PIKs (like other PIKs) took a hammering in terms of the levels at which they traded. In 2009, the credit markets recovered steadily and that continued into this year, more or less. The PIKs are trading in the high 90s (ie, close to par value) so the incentive to buy them to get them "on the cheap" is largely gone at this point.