Friday, 24 May 2013

The history of Manchester United's debt

Last night United announced to the New York Stock Exchange that it was repaying around half of its outstanding bonds using a new bank loan from Bank of America. This will reduce the club's interest bill from around £31m per year (pro-forma post the IPO) to around £21m per year.

This blog sets out how United's debt has risen and fallen since the 2005 takeover and how much it now costs.

The history
For completeness, the table below shows flow of borrowings and repayments from the original takeover up to the most recent (March 2013) accounts. Initially the debt sat in either a subsidiary of Red Football Limited or Red Football Joint Venture Limited. Following the pre-IPO reorganisation, MU Finance Limited holds the debt for the new parent, Manchester United plc.

The table above can be more easily summarised in this graph, which shows the total gross debt at each stage.

The story is one of rising debt after the takeover as the preference shares accumulated rolled up interest. These were repaid in the 2006 refinancing, adding to the debt on the club itself and bringing in the famous PIKs. By June 2010 after the bond issue, total debt including the PIKs had spiralled to a terrifying £753m. 

The story thereafter is well known. The PIKs were mysteriously repaid (at a cost of £249m) in late 2010. The club spent around £90m (the Ronaldo cash) buying back the bonds it had just issued. Last year another £63m of bonds were repaid from the element of the IPO proceeds that the Glazers didn't keep.

By the end of March this year, the debt (made up overwhelmingly of the remaining bonds plus a small MUTV loan and the mortgage on the freight terminal) was down to £367.6m. The figure oscillates with the movement between £ and $.

The costs
As I have frequently pointed out, the interest bill from all this debt has totalled c. £350m  since the takeover and the total cost (including fees, derivative losses and debt repayments) is almost £600m. Paying interest has taken far more of the club's cash than has been spent on transfers.

The annual  interest cost is falling however, both in absolute terms and as a proportion of profits. From over 80% of EBITDA (cash profits) going on interest in 2006, next year the figure will be around 12%.

The future
I have predicted before that the club would refinance as quickly as possible (there are penalties on repaying bonds early but these expire over time).

Over the next three to five years the club should generate enough cash to pay the remaining sum off. It is tax efficient to keep some debt, and future dividends may take priority over further repayment.

The reduction in the amount and cost of United's debts is an unequivocal good thing.

The question for supporters is who benefits? Will David Moyes be given significant funds? Will ticket prices continue to be frozen (or indeed will the club contemplate reversing some of the 50% plus hikes they implemented after the takeover)? Or will the extra cash from TV deals, commercial income and a lower interest bill flow out of the club in dividends.

Most major football clubs reinvest the bulk of their money back into fans and football. In England at clubs like Arsenal, Liverpool and United, profit still remains the focus. On the weekend the German model is on display at Wembley, that's too often the English way of football.



RedRover99 said...

Andersred - Brilliant analysis as always - a question - you write "It is tax efficient to keep some debt, and future dividends may take priority over further repayment" - how much debt should the club keep? Do you think it is a good idea to pay dividends to the shareholders? (if so, how much?) Keep up the good work!

Anonymous said...

You say Liverpool - but Liverpool have been making losses. And the Liverpool owners who own Red Sox have been reinvesting all profits back into the Red Sox.

GCHQ said...

Hi Anders,

I'd like to think even you would now be good enough to admit that the Glazers are clearly providing a net benefit to the club thanks to their outstanding commercial expertise. The £21m of interest payments are now completely irrelevant in the grand scheme of things.

The Glazers continue to make the old PLC board, who failed to grow the club's commercial income at all in a five year period (01-05) after our 1999 treble success (!), look like the inept executives that they were. Let's not forget that a select few were pointing this out to United fans many years ago in the face of outright hostility.

Thanks to the Glazers we now sit in an excellent position going forward with the added benefit of the FFP regulations keeping a check on the sugar daddy clubs. It's time to give credit where credit's due.



jdw said...

Great post, Andy!

I'm sure you've talked about it before, but what is the most reasonable speculation about paying off the PIK's? If it was a normal money bags owner, they would take money out of one of their other investments to pay it down. But we know that with the exception of the Bucs, the rest of the Glazer's investments were in the crapper in 2010.

Anonymous said...


So what you are saying is that united is the only club making strides commercially? And that the we should be grateful to the glazers for this? Having a world class team winning constantly doesn't really matter I guess...

GCHQ said...

Anonymous 18:40

We had a world class team in the years after the 1999 treble success. Why do you think we weren't making strides commercially then?

It took some American 'Can-do' attitude to shake the club out of its slumbers. Malcolm could see what was happening back in 2003 when he started buying shares and for that he deserves immense credit.

Anonymous said...

Two worries:
1) The potential dark cloud concerning the 'mysterious' PIK repayment.
2) The prospect of the club's very strong financial performance attracting a private equity consortium to pay a premium debt purchase for the Glazer's stock and load more debt onto the club.
Thanks for helping the fans make sense of the situation at MUFC, Anders.

Anonymous said...

Great detail in that analysis. Thanks.
Just a few points for your consideration:
1) The new loan (more details on EDGAR) is for 5 years (to 2018), so it seems more an interest saver than a long term replacement for the bond. Loan amount is around stg210m (which, I presume, is to cover principal amount of stg 190m plus redemption penalties of around 15m). The loan includes obligatory capital repayments (up to 5% pa) and is repayable at any time.
I'd assume that this loan will be repaid entirely from future free cash flow, so the repayment schedule is largely irrelevant.

What approach do you reckon the club will take with the residual dollar bond? It's very expensive at 8+%; surely there is a plan for this too. Maybe, a pref share issue?

GCHQ, just the man. Perhaps you can tell me what the margin was on the old merchandising operation. I love how you continue to insist on zero commercial growth during the last 7 years of the PLC resign while at the same time insisting that we shouldn't directly compare Bayern or Real Madrid with United in terms of commercial income. You don't see a contradiction?
We moved from a low margin merchandising operation to a high margin commercial stream post NIKE.
A like for like comparison requires us to equate margins (or allow for merchandising expenses). There was also a recategorisation of some commercial revenue in the period- matchday catering moved to Matchday revenue.
The Glazers did bring some Can-do. No doubt. Commercial growth has been great and the outlook is very good; but we need some perspective.

In terms of commercial growth, United were a top 5 commercial earner in 2005 just as we were in 2012(3rd in 2005 and about the same in 2012 (but catching up fast). Excluding United from the reckoning, the top 5 commercial earners in Deloitte's FML increased commercial income by an average of stg50m in that period. That is a good independent guage for how the PLC might have fared in the same period. A PLC earning 95m in 2012 isn't far behind what the club actually achieved under the Glazers.
Perhaps GCHQ and Andersred can comment?


Joe said...

Regarding the PIK debt, or whatever was put into place to replace it, surely that is the responsibility of the Glazers?
They wouldn't be able to load it back onto the company now would they?

Anonymous said...

I see the idiot (GCHQ) is back, backing up his claims with no facts whatsoever.

Anonymous said...

It seems the club is in good financial shape once again. We made it (thanks to SAF who kept winning on a reduced budget and no thanks to the Glazers who got lucky).

So what do we do now? Do we still want the Glazers out? I don't, especially as it could lead to another leveraged buyout and we'd go through this whole thing again. What we need to do is get the FA to outlaw these highly leveraged takeovers. That would save us from going through this again when the Glazers do eventually sell and, taking an unselfish view here, will stop the fans of other clubs being ripped off in this way.

DrFager said...

Im not sure why everyone thinks we are out the woods.

The club still has 370m in debt, and we have no clue what happened to the 250m PIKs.

When the club is debt free, we can talk about the effect of this ownership and the cost to the club. (Heading towards 1b being siphoned out of the club)

Until that time this is all an exercise in futility. The club is still very much in debt and the Glazers have been nothing but leaches.

Anonymous said...

I love this whole 'they got lucky' approach, not to mention all the hand wringing over what might have happened to the PIK loans. Some people can't live without a bit of drama in their lives. While most of you have spent years wringing your hands over the Glazers, I have enjoyed watching my team experience one of the finest periods in the clubs history. Who cares about what might have been. It's all much of an irrelevance. No one knows what might have happened if the Glazers never bought our club. It might have been better, it might have been worse. Who gives a toss! It's done and dusted. Get over it. I am no fan of the Glazers but I refuse to get caught up in this navel gazing. Enjoy the ride.

Anonymous said...

"The costs
As I have frequently pointed out, the interest bill from all this debt has totalled c. £350m since the takeover and the total cost (including fees, derivative losses and debt repayments) is almost £600m."

Can't help disagreeing with your numbers. Looking through Statements of Cash Flows I've got the following:
Interest Paid 2006-3Q2013 is £357.650m
Costs associated with Debt Issue are £13.964m
Which gives a total cash outflow associated with the debt of £370.614m (I'll introduce debt debt repayment later)

There are two types of "cash flow" that don't represent a cash out flow from United: the notional interest on the PIKs and various "Issue Discounts". (Issue discounts are effectively added to the debt principal amount - they may have an impact at the time the debt is repaid, but there is no cash flow impact at the time of issue.) The PIK interest and the issue discounts are only important because they are deductible against taxes, the interest in the year it is incurred and the discount through an amortisation process. The amount of the interest was £111.105m, while the total amount of issue discounts amortised to date is £34.167m

When taken together, the interest paid, the notional interest on the PIKs and the amortised issue discounts represent a deduction of approximately £516m against tax. This provides a reduction in tax payable (given tax rates that fell from 30% to 28% over the period) of approximately £146m. In turn, this suggests that the net cash cost to United of the interest and financing charges has been in the order of £225m.

In addition, a little over £93m has been spent repurchasing the bonds. (The bonds repurchased subsequent to the IPO didn't affect United's cash flow - they simply replaced a debt obligation with an equity obligation.) So, combining the net cost of the interest etc. with the debt repayments, the cash outflow has been about £318m. (A little less than the £600m you posit.)

Of course that's not the end of the story - we still have to consider the savings in dividends that would have been paid if we were still a plc, and the improvement in our cash flows that is directly attributable to the change in ownership. The former, I believe, could be as much as £120m (although I'm sure you would espouse a figure below £100m). Whatever your views on dividends, it's hard to see that the cash cost (to date) can be more than £220m, and that's without considering the improvement in cash flow resulting from the IPO. If we go back a couple of years we can find you stating quite categorically that there was little room for improvement in commercial revenues. Presumably, then, you would accept that some or all of the subsequent growth was due to a superior approach to the commercial side of the club. How much of the benefits accruing to the club, currently and in the future, you are prepared to ascribe to the Glazers is up to you, but it would seem to be churlish to deny that they are to some extent responsible.

The bottom line is that so far the IPO has cost us perhaps £220m less whatever cash flow benefit you believe the Glazers have brought to the table. Going forward the costs will be interest plus whatever portion of the debt is repaid using funds generated by the club. Swapping equity for debt through a follow-on offering would, as previously, have no cash flow impact (other than a subsequent reduction in interest payable).

Anonymous said...

Oops - I should, of course, have mentioned that the costs going forward will be mitigated by the improvements in cash flow ascribable to the IPO.

Anonymous said...

Anon @7th June 05:45

There are above-the-profit-line Glazer specific expenses as well:
1 Management charges of c 25m- A backdoor dividend used by PE types and notably terminated on IPO.
2 Exceptional expenses of around 10m carried by the club- pre ipo professional fees.
3 Red football add. expenses of around 20m; Andersred cites a figure of around 40m, which I think is on the high side- The 2006 IM report estimates an extra 1.5m pa for the Red football structure.

Below the profit line, we also have:
4)Dividend of 10m to Glazers pre-IPO
5)Debt repayments relating to pre bond debt.

In the interest of balance, I would note that not all interest is LBO or Glazer related- a small amount relates to positive debt (loan stock and Terminal facility).

It should be noted that your analysis ignores any mention of the positive impact of having 225m (your estimate) presumably reinvested in the club. That sorta dosh could have:
1)Expanded stadium-more revenue
2) Acc. commercial expansion- more offices, consults, purchase of marketing firm etc

Anonymous said...

Cheers Anders, keep it up. It may take a few more years but it is far from over and your efforts and sacrifices will not have been in vain.

Josh Robertson said...

I believe you said have some debt is good for tax reasons, why is that and what is a good amount of debt to have?

Paul said...

Hi Anders, hope there is a new article coming soon as they are always a fantastic read ;)

Anonymous said...

Any chance of a breakdown of the recent results Anders, enjoy the site a great deal.

Anonymous said...

Good read . It would be nice to a new article. Been waiting for 4 months :-)

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Ambuj Arind said...

Hi, I wanted to ask you a question. Actually 2 questions.

1. Do you think the Glazer management has improved United's revenues, than if they were not in charge, by their business approach in any way ?

2. When, rather than if, the interest payments are paid out and the Glazers decide to pay out dividends, would it be only on the 10% listed on the NYSE or on the full 100% including the Glazer's 90% share ?

livescores said...

Wow great work Andersred and great analysis thank you for sharing the information i read this debt stuff information first time and it's interesting keep up the good work.

Paul said...

Anders mate, bit disappointed there hasn't been an article for a while.

I for one have followed this site for a number of years looking forwards to your posts as they are always a fantastic and insightful read.

This site helped me understand a lot about the club I love in terms of how it is run and I take my hat of to you for doing something which must be time consuming again because you love Manchester United football ball.

However in the absence of an article for quite sometime and their frequency ever decreasing I would ask that you tell readers on this page whether you intend to do anymore.

Feel you owe than to the guys who have supported your site and you and found a lot or interest reading your fantastic articles.

Here's hoping for many more ;)

Anonymous said...

Hi Andy.
Thanks again for your info... I have the same feelings and Paul Belbin, to a tee - Well said by the way there is nothing there I disagree with at all.
I sense too from not just this post Andy but previous posts it’s almost like the situation is accepted and they have won too..OK, maybe it was never a battle we were going to win anyway...but still imo it should be impossible accept it and all they did and all they risked..and even what happens going forward should never make up for it either...the magic has long died after years of abuse and all this talk about the financial situation resolved...and even stuff like we can now compete with Barcelona, real Madrid, Bayern, PSG? Seriously? we keep hearing things are financially better and we have an unlimited war chest (LOL) but where is the proof in the pudding?...memories are still fresh from a truly embarrassing financially restricted transfer window and end up with a sub-par quality and cheaper options like Fellaini – Does that help convince that things have changed and were competing with PSG and co?
So what, we have 80million…what will that buy us anyway after years of neglect to the squad? Were still hanging on to past it players and rubbish ones because it seems we can’t afford to sell them/replace them…the situation we find ourselves in needs WAY MORE than 80m…in today’s market that will buy you about 2 good players, at best and who says they wont be milking at least some of this again anyway? We will probably instead end up buying 2 or 3 more Fellaini type players instead of what we actually need and are long overdue. We are still probably going to be looking for Glazer value in the transfer market and you probably know it too, how is that going to help us, or signify change? Still far too much will be sucked out for debts/repaying bonds and now share dividends which will still effect our ability to compete with Europe’s elite again – Seems like too many have accepted the situation, and Andy my friend it appears you may have too mate. what they did was wrong. You were right to take them on, and you still would be too.
lastly It may be good news that the management are now talking to supporters groups, but so what? is this something to really celebrate or pat them on the back for anyway? All of this is should only be normal anyway. Its only about time!! As for improving the brand - That’s questionable btw after having so many Mickey mouse sponsorship deals with Japanese roofing contractors and the likes - which makes us look like total whores and probably even goes some way to devaluing the so called brand!
Keep the blogs coming mate, and LUHG!
Daniel Hearn.

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