Thursday, 12 July 2012

Why have the Glazers changed their strategy on the debt? A theory....

The big news in United's "preliminary prospectus" (the Form F-1 SEC filing) was 1) that the proceeds from the IPO will be used to repay some of the club's enormous debt and 2) that no dividends will be paid "in the foreseeable future".

The big question that stems from this, is "why?". Why after seven years of running a highly leveraged balance sheet and only two and a half years after the bond issue have the Glazers executed a huge u-turn? Why suddenly decide to reduce the club's debt?

I believe it is highly unlikely that the change is due to a sudden realisation that cash wasted on interest should be available for investment, although that may be a positive knock-on effect, but because of the financial pressures the family is under.

What follows is only my theory (and apologies if you don't like speculative articles like this), but one that I think is near the truth....

The amazing disappearing PIKs
Followers of the United financial story will know that out of the blue in November 2010, the Glazer family found £249.1m (around $400m) which they injected into the club as equity and used to repay the infamous "payment in kind securities" (PIKs). These short-term debt instruments had festered on the balance sheet of Red Football Joint Venture Limited for more than four years and had accrued £111m of rolled up interest on top of the original £138m loan.

In August 2010, the PIKs had become even more expensive as the Red Football companies breached a key debt covenant (section 8.2 of this document). The covenant stipulated that total debt in the group (from Red Football Shareholder Limited downwards) should not be more than 5x EBITDA (essentially cash profits before transfers). If debt exceeded this limit (set when the PIKs were issued in 2006), the PIK interest rate would rise from 14.25% pa to 16.25% pa. With debts in August 2010 totalling £773m and EBITDA of £102m the rate duely rose, making the PIKs even more toxic and in need of repayment.

The bond issue of February 2010 had created a "carve out" which allowed the Glazers to take £95m of the club's cash out and it was widely assumed (and mentioned in the bond prospectus as a possibility) that this money would be used to pay off a chunk of the PIKs. But the Glazers didn't use the carve out to repay them in November 2010. The exact source of funds is unknown.

What I do know, from impeccable sources, is that the money was borrowed by the Glazer family. They didn't have £249m in cash, few people do (and the other bits of the family empire are leveraged up already). The money was borrowed by one of their US companies from a single US financial firm.

Throughout the summer of 2010, the family and their advisers were hawking the deal around the market. Amusingly an old college friend working for a private "intelligence company" was retained by an American debt investor (I won't embarrass him by naming the investor) to look at the deal and initially asked me for help. The invitation to meet the potential investor was quickly dropped after they did some due diligence on who I was.

So that's what we know. Since November 2010, the club has been carrying the bond debt, and the Glazers have been stuck with what you might call "PIK2", expensive personal debt secured on their equity in United, presumably costing less than the eye watering 16.25% of the PIKs, but more than the senior bond debt's c. 8.7%.

Could there be another total debt covenant attached to "PIK2"?
Stories about a potential IPO (in Asia) first started to circulate in mid 2011 as the first anniversary of the PIK repayment approached. As we now know, nothing came of the attempts to list in either Hong Kong or Singapore, but the Glazers kept going. Despite terrible market conditions, a moribund IPO market, weak results due to the Champions League etc, they have persisted.

The explanation for this burning desire to IPO the club must be to do with their personal circumstaces, and yet they are not seeking to cash out but to repay debt. I believe that it is highly likely that the PIK2 debt has "total debt to EBITDA" covenants attached to it of a similar sort to those in the original PIKs. Such covenants would be very common for quasi-equity financing of this sort. Breaching these covenants could be very costly for the Glazer family and the existence of such would go a long way in explaining their apparent change of heart on the debt. Under such a scenario there would be a very strong incentive to try to reduce the debt across the Red Football group of companies, and the easiest method is an IPO.

The change of strategy actually dates back to Q4 2010 and PIK repayment
It is worth noting that although the prospectus sets the new strategy down in black and white for the first time, the Glazers have been pursuing deleveraging for a while, using bond buy backs, and that this new approach began as soon as the PIKs were repaid.

The club first bought back bonds in the final quarter of 2010 (when £24m were repurchased) and has now spent a total of £92.3m. No less than two-thirds of the cash the club had at the time of the bond issue (all that Ronaldo and Aon windfall) has been used on bond buy backs. The peculiarity of holding almost £150m of cash when issuing £520m of bonds and then, just a few months later, using that cash to buy back those bonds is striking.

Something has definitely changed...
So since the repayment of the PIKs and their replacement with "PIK2" we have seen a completely new financial strategy. The best part of £100m has been whipped to buy bonds and now we have an IPO being launched into terrible markets to reduce the debt further. None of this proves they are under pressure from debt covenants in PIK2, but it all fits with the theory.

Even fellow "lineal descendants" can fall out
The other chat coming out of the US about the Glazers is that Darcie, Edward and Kevin don't like having wealth tied up in this pesky soccer club that Joel, Avram and Bryan are so fixated with. If the six of them are personally on the hook for $400m of "PIK2" and covenants are in danger of being breached, you can sort of see their point.

Theories and facts
Apologies again for such a speculative post. My theory may ring true to you or may sound like laughable rubbish. It would be lovely to think the Glazers have had a damascene conversion to prudent financial management and eschewed the crippling debts of the last seven years, but you'll forgive me for seeking a baser motive.

Perhaps there are multiple reasons for the change in tack, including fears that becoming uncompetitive on the pitch will hurt the club's value, as well as the sort of direct pressure on the family I have described above, and perhaps the reasons are less important than the fact the burden on the club is being reduced. That won't stop this blog trying to identify the "whys" not just the "whats" of the whole sorry saga.

LUHG

22 comments:

Ed said...

Anders - as you've mentioned previously on this blog the Glazers run their businesses (all of their businesses) with debt as a strategic choice. To deleverage United not only does not fit with the Glazers' financial strategy at the club over the past seven years, but it does not fit with the Glazers business strategy in a wider sense.

On the preponderance of the evidence your 'j'accuse' moment is a LOT more believable than a sudden change of the collective Glazer heart on debt.

Rood said...

a speculative piece but not beyond the realms of possibility - does seem like a strange time to goto market, perhaps the rumours of a difference of opinion among the Glazer siblings are true.

the most interesting thing will be to see how many shares they manage to sell and at what price ...

Anonymous said...

Hi Andy
Well the 2 previous refiancing exercises were concerned with total indebtedness; both were designed to deal with mezzanine debt- the original preferred piks and its successor the pik loan.

I don't believe the third (the IPO) will be any different.

Your argument about debt covenants being breached would only hold if the pik replacement was itself a pik. Surely the Glazers would have tried for a different remedy given their past history with payment in kind securities. Interestingly, the pik loan (pik1) covenants required complete repayment in the event of an IPO, assuming the same with PIK2 would require the Glazers to sell some of their shares post lock up- the over allotment is unlikely to be big enough.

It might be of interest to keep an eye on beneficial ownwership disclosures post IPO. The Cayman incorporation makes that somewhat difficult as small shareholders aren't entitles to the shareholder list. I think that the SEC will require some filings in that regard even if the Cayman conpany benefits disclosure-wise from its status as a foreign private issuer.

As an aside, our status as an emerging growth company, foreign private issuer, and Cayman incorporated, means that we will be a very private public company.
Indeed as an exempted Cayman company, the club does not have to hold an AGM. This is not inconsequential; and it would be good to get some comment from the clus as to its intentions.

Jim

ja said...

Great stuff Andy, and with Swiss Ramble taking a time out, please continue.
Just a quick correction for you before the you're an ABU crowd pile in,
final para
'Perhaps their are multiple reasons'

should read
Perhaps there are multiple reasons

jdw said...

Great stuff Andy!

jdw said...

Andy,

A thought and a question:

#1 - Family Feud

"The other chat coming out of the US about the Glazers is that Darcie, Edward and Kevin don't like having wealth tied up in this pesky soccer club that Joel, Avram and Bryan are so fixated with. If the six of them are personally on the hook for $400m of "PIK2" and covenants are in danger of being breached, you can sort of see their point."

That's very interesting as it's how a lot of Family Fortunes end up getting split apart / sold off. Certain of the kids want to get their Money and really don't care about the Empire the old man put together. Getty Oil is the classic example. Times Mirror, the Wall Street Journal, etc. Even things like estate planning can impact it: the O'Malleys sold the Dodgers in part due to that.

Old Man Glazer is 85 and in poor health. Once he's gone, if Darcie & Edward & Kevin want their Money rather than having it tied up in family business being run (into the ground) by their brothers, it had the potential to force some splitting of assets to pay them off.

Of course if Joel & Avram & Bryan are so obsessed about United that they want to keep it, they might be willing to having everything else & a chunk of United shares sold off to retain it. Might get stuck with them.

#2 - Red Football Junior Limited

I asked this in the last article. This company is listed in the prospectus... what do you make of them?

They are consistently mentioned in terms of the debt, such as:

“Our senior secured notes consist of two tranches: £250 million 83/4% senior secured notes due 2017 and $425 million 83/8% senior secured notes due 2017. Our senior secured notes were issued by our wholly-owned finance subsidiary, MU Finance plc, are guaranteed by Red Football Limited, Red Football Junior Limited, Manchester United Limited (UK) and Manchester United Football Club Limited and are secured against all of the assets of Red Football Limited and each of the guarantors. The proceeds of our senior secured notes were used to refinance existing debt, reduce Red Football Limited’s liabilities to its hedging counterparties, pay fees and expenses related to the offering and for general corporate purposes.”

They jump out in this chart:

http://www.sec.gov/Archives/edgar/data/1549107/000104746912007026/g67816.jpg

As owning 28% of Manchester United Limited (UK) broken out from the 72% that comes down more directly from the rest of the layers of holding companies. Manchester United Limited (UK) appears to be the top of the operations side of companies before we get into the holding companies. So in a sense that 28% is a piece of the true value (the football operations) of the house of cards, and quite possibly first in line if things further up the tree go south.

Any thought that this 28% relates to the Great £249.1M PIK Mystery, along with other mysteries of the Glazers financing?

I do know it’s been around since at least 2007, but do wonder if it’s a 100% Glazer why they didn’t take this opportunity to roll it in line with the rest of the Red Football Limited right above it and have a cleaner line of holding companies.

PlayingLikeNadal said...

Andy, nice musings. I've been following your blog and quite enjoy your articles, especially since I'm a non-financial person.

I would like to know your thoughts on the following...

a. If the family is cash poor and has a significant chunk of its wealth tied up in MUFC, why doesn't it offload the club (as oppose to having to always trail the globe looking for capital? Surely, they're sick of the bad press, negative image, etc?

b. Why would anyone in his/her right mind want to invest in shares of the club if there was no significant financial stake or dividends?

Thanks and keep up the heat on Glazernomics!

Anonymous said...

PlayingLikeNadal

Going outside anders' somewhat specious musings, dividends is most likely to be what the IPO is about. When dividends start to be paid, they will be paid equally to A and B shares, allowing the Glazers to finally get an income stream from the club.

Moreover, the Green Shoe (over-allotment option,) and a subsequent follow on offering, will allow the Glazers to monetize a portion of their equity and deal with any personal debt associated with the PIK paydown.

These are things we know - far removed from wild speculation.

Anonymous said...

What is your prediction for the IPO? I struggle to see why anyone would want shares that offer so little, but they obviously wouldnt do it unless they thought it would be a success so i must be missing something...

David said...

Hi anders, just back from holiday and delighted to read yet another article about the scumbags from across the water. They must curse you with a vengeance and to say you are a pain in the arse to them....is wonderful. Just watch your back as you could have a hefty reward on your head. Please keep up the pressure on them, out of interest do you know what the reaction is within the financial markets over there to this IPO ?

s7_mufc said...

Why are they issuing Class A share?They can issue around 30% of ordinary share to clear the debt and still keep majority stake.I'm guessing they are going to sell a more than 30% because some of the Glazers' children want out.

Stefan Szymanski said...

Almost everything the Glazers have done since buying the company has been difficult to explain, so this seems par for the course.

Here are two possibilities

(i) Refinancing: the current debt still has pretty high interest rate, so why not get rid of this debt and refinance at lower costs. In current markets that might be feasible.

(ii) Raising capital for other Glazer businesses while retaining control of the club. I'm sure they believe the club will increase in value in the next 5-10 years, and so do not want to sell out. But if they pay off the debt they could use the club as security for their own borrowings.

Anonymous said...

Anders

I'm not a Red, but know a number. Just curious. Any idea how muc the Glazers might have spent/wasted (delete according to taste) on professional fees for the PIK's (1&2?), plus the IPO?

Must runs into the $100m's? Underwriting fees don't tend to be cheap!


Jedi

redmann said...

Andy,

Apologies if this covers old ground, but what is the advantage in buying back bonds over using the 93m to payback back PIK2?


Cheers

Anonymous said...

Surely someone must have already thought of this but if the Glazers want to sell non-dividend non-voting shares to reduce debt then why don't they try to sell them directly tom the fans in the UK, they are the only people who have a motive to buy shares which won't profit

Anonymous said...

rumour is the ipo has been binned luhg

Anonymous said...

A speculative piece it may be but clearly a fair assessment of current strategy and well explained.

However, there is nothing to say that if this can be summised in reaction to events, then it can also have been deliberately conceived as either a possibility or a probability before it began to dawn on commentators what might actually be going on.

I would like to know much more about their friends, business partners and their stashes in Cayman Islands etc.

I appreciate that it's a thankless and possibly endless task to find and follow all the trails. But that's where the truth lies the most.

mis sold ppi said...

Thanks for sharing me such a nice information about finance and insurance..

David said...

anders, sure you will have seen the article in todays Sunday Times business News about the Glazers written by Michael Moritz, one of the top investors in Silicon Valley. Scathing in his assessment of the Glazers, do you know him and is this an indication of possible backlash against the glazers in their own backyard ?

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

Great post! As a Man Utd fan since as a kid, I think nearly every utd fan want the yanks out but i feel they are here to stay for while. While i'm no financial expert, hopefully we can win enough trophies to get us out of the financial mess that the glazers got us into. YANKS OUT!

commercial property in Cambridge said...

This is a wonderful post. I have been following your blog quite a long time and always got some great information. Right now I was searching for commercial properties current status and here I found perfectly figured article thank lot mate.