Tuesday, 16 November 2010

The full details on the terms of the PIKs

Following the news that the Glazers are redeeming the PIKs, this is now only of academic interest, but I thought it might be useful for readers to see the full terms and conditions of the PIKs. I was supplied these documents a few weeks ago in confidence by a bond market participant who is now happy for them to be published.

There are two documents:

This confirms the interest rate (14.25% rising to 16.25% if debt to EBITDA exceeds 5x), the redemption terms and other details of the loans. It shows that the PIKs can be repaid at any point with at least five business days notice. It also shows that there are no penalties for early repayment after the first two years. In other words, there is no structural reason why the PIKs could not be repaid without penalty since 16th August 2008. The issue has always been availability of funds.

This confirms that the PIKs are secured on 100% of the equity of Red Football Limited.

As I wrote yesterday, we are left with many questions about the future financial structure of the Red Football group. I think it is time the Glazers and their employees answered some questions on all this.



United Rant said...

So why did David Gill keep telling us that it was nothing to do with MUFC when the debt was secured on the club.. or at least shares in the club. Isn't the CEO supposed to be concerned about ownership issues. Far too busy trousering his £2m a year salary.

Anonymous said...

United Rant: Because technically, Gill was 100% right. It's like you borrowing money to buy shares in Barclays and the debt is secured on your shares. Barclays wouldn't be responsible for paying off the debt you borrowed to buy its shares.

Anonymous said...

proven to be wrong anders

Anonymous said...

Could you post Red Football Limited results when available,interesting times ahead

redloner said...

If you're a bit short of cash, wouldn't it be a great wheeze to refinance the debt you own a chunk of, then pay yourself part of the money you've raised from the refinance.

Especially if you bought that piece of debt on the cheap, using borrowed money. £36m from a borrowed £10m. Genius!

Wafty Crank said...

Anonymous - "proven to be wrong anders"

Bad tit, sir. We'd all love to be proved wrong, but there's already well over £400m gone out the door which could have been spent on players or kept ticket prices reasonable. You think we're going to see that again? You think there won't be at least as much again going out the club before they are gone?


Anonymous said...

Interestig point redloner...they could possibly refinance to a slightly lower interest fee now and at the same time free up some cash reserves on their own...

LSD_Eindhoven said...


What are your thoughts on this from T Panja:

"PIK holders were contacted by representatives of United’s owners last week and agreed to a waiver allowing the family to take 50 million pounds out of the team to buy back that amount of the bond. That permission isn’t needed now that the Glazers are buying back the PIK debt."

This is a confusing development (though seemingly redundant) on top of everything else.
A week ago the PIKS, it seems, were to remain but the Glazers were focusing on delevering the bonds! What the bloody hell?
Wouldn't early partial redemption of the bond be expensive- they would need to be redeemed above par?
Now that the piks are (to be) removed, there are, I believe, no restrictions on how the carveouts and annual dividend entitlements are used; so presumably cash can be directed to other uses such as paying down the bond debt. Maybe this waiver business provides some insight in to their plans.

Your thoughts would be appreciated?

PS Could RF invest in its own debt? Could the club purchase, say, 50m of the bond on the open market as opposed to proceeding with a formal redemption of the same amount?

Matt said...

I now think Rooney is off in Jan and the deal is done already. Hopefuly not, but we'll see.

Anonymous said...


the answer to your PS is YES !

Darren said...

That's what I thought too. I don't think there's anything to stop the Glazers taking dividends out of the club, buying bonds on the bond market and then earning the 10% coupons for themselves. MUFinance can't of course pay off any of the bonds until 2013, and not until 2017 without paying penalties.

It'd be good to get Andy's opinion though on why the Glazers were considering doing that while the PIKs were still in place, rather than using the cash to pay down PIK. Seems a strange one.

LSD_Eindhoven said...

'tis strange, surely.
In many ways, the bond has become-
in light of recent developments- an expensive and now largely reduntant refinancing exercise; its secondary (probably primary) function was to release cash to deal with the PIK. The Glazers wanted to delever at the RFJV level as opposed to the RF level. Seemingly, they have now managed to do so without exercising those careveouts, etc.
IF we had retained the old term loans, cancelled the original swap(as done), and rehedged, I believe the fixed annual cost would be around 28m pa (reducing in line with repayments) Vs the current bill of 45m.
Now, there would be a tricky mandatory repayment schedule to meet but as we could essentially repay(without penalty) at any time before the mandatory dates (using, say, the equivalent of some of the 'carveout money' ) the club could have managed to negotiate its way to 2014\2015 before having to refinance a reduced principal amount.
As it is, the bond matures in 2017 but it will be refinanced a good bit in advance to avoid potentially adverse credit conditions later on.

Again, I wouldn't mind hearing Mr Green's thoughts on this.

andersred said...


I think your analysis is spot on as usual. If the issue with the bank debt was the repayment profile there were far cheaper ways of alleviating that problem than doing the bond issue.

I end up thinking that supporter pressure, probably reflected by the elimination of all excess ticket demand, could have told in the end.

I very much doubt there was a desire to deleverage, rather a desire to stop the ongoing leveraging caused by the PIKs. The Liverpool sale valuation is telling in this, as is the extensive nature of the sale process Liverpool conducted. There just wasn't any demand at the sort of valuations the Glazers have in mind for United. This is despite the fact that Liverpool (with a properly financed stadium) is more of a growth asset than United.

If a valuation multiple of c. 10x EBITDA is more appropriate for United than the Glazers' 15x, the PIK issue was becoming potentially huge with total leverage around £740m currently and eating fast into an EV of c. £1bn. But taking the carve out risked a major revolt. Answer? Refi the PIKs another way and look for an opportunity to use the carve outs further down the track.

Speculation of course! I've given up on prediction and certainty.


LSD_Eindhoven said...

Hi Anders

It was entirely rational, and reasonable to assume that the Glazers would use the carveouts, etc, to deal with the PIKS. Assuming the converse would be unreasonable.
There was too much circumstantial evidence to thing otherwise. The JPM credit report assumed the same and we are talking about an informed document- the contents would have been approved by the Glazers. They 'certain'ly envisaged using club cash but hadn't 'predicted' or factored in the very negative and very public reaction.
I am somewhat skeptical of recent developments; I think we witnessed a bit of fancy finagling designed to create the illusion that we are finally shot of the PIK. I would wager that formally this is the case (in the sense that refinancing took place outside the UK group) but the club will bear the costs (of the substitute debt) indirectly through dividends.

From the press statements released by the club, It looks like the careveouts will be retained for the time being at least. It will be interesting to see if a consistency emerges wrt to annual dividends.

I can't fathom the variability in the valuation multipliers. Within a specific industry you would expect some consistentcy to emerge.
The very fact that such a broad spectrum of multipliers have been used to value different clubs within football should serve to remind us how inherently volatile football is as a business. The notion that any one club sould have a specific multiplier to determine its EV is odd.

Anders, if you get a chance, will you have a look at the T. Panja comment posted earlier.
And keep up the 'speculating'.