Monday, 1 June 2015

Good housekeeping at Manchester United – explaining the May 2015 refinancing


In the decade since the purchase of Manchester United by the Glazer family, the debt placed on the club has been “refinanced” four times. This week marked the latest of these refinancings.

A refinancing is where old debts are swapped for new debts. They are the corporate equivalent of switching mortgages or consolidating credit card debts into a single loan. The aim is usually to make the debt more affordable, sometimes by locking into a cheaper interest rate, sometimes by extending the life of the loan, sometimes both.

This post explains what United have done on this occasion. It is intended to explain what’s going on in layman’s terms.

The previous situation

Before this latest change, Manchester United plc (acting through two of its subsisidiary companies) had a $315.7m (£206m) “Secured Term Facility” (a bank loan) with Bank of America Merrill Lynch International Limited and $269.2m (£176m) of US dollar bonds called “8 3/8% Senior Secured Notes due 2017”. There was also a “Revolving Credit Facility” (essentially an overdraft) with a group of banks. The Revolving Credit Facility has never been used.

The Secured Term Facility paid an interest linked to LIBOR (a benchmark interest rate) plus a “margin” (markup) based on the level of United’s debt compared to its profits. The maximum margin was 2.75% if net debt was more than 4x EBITDA (cash profits) and the minimum margin was 1.5% if net debt was less than 2x EBITDA. This financial year net debt will be around 3x EBITDA meaning the total interest rate (using 3 month LIBOR of 0.29% and a margin of 2.25%) will be c. 2.54% per annum.  The interest cost is therefore c. $8.0m or £5.2m. The Term Facility is repayable in one amount in 2019.

The Senior Secured Notes are the remaining bonds that were originally issued in 2010. They pay a fixed interest rate of 8.375% per annum and therefore cost $22.5m or £14.7m. The notes are repayable in one amount in 2017.

The total debt today is $585m or £382m. The annual interest cost is c. $30m or £20m.



After the refinancing

United are changing both elements of the debt and increasing the size of the Revolving Credit Facility.

The Secured Term Facility, still with Bank of America Merrill Lynch, is being reduced from $315.7m to $225.0m. The repayment date is being extended from 2019 to 2025. The interest rate margin range is reduced from 1.5% - 2.75% to 1.25% - 1.75%.

The $269.2m of Senior Secured Notes are being redeemed (paid off) and $425m of new Secured Notes are being issued. The new notes are repayable in 2027 not 2017. Crucially, the interest rate on the new notes is 3.79% rather than 8.375%.

The total amount of debt is increasing from $585m (£382m) to $650m (£425m). The extra £43m will be available for the club to use.  None of this debt requires repayment or refinancing for another 10 -12 years. Following the refinancing, the interest bill will fall from around $30m/£20m per annum to around $20m/£13m.


Thoughts

This refinancing is an unequivocally good thing for Manchester United.

The amount of debt has increased slightly but the increase provides more cash for the club.

Crucially, the interest cost is now very low for a club of United’s profitablity. Even in this season of no Champions League football the club will make over £100m of EBITDA. An interest bill of £13m is therefore covered over 7x. Back in 2008 over 70% of EBITDA went on interest, next year it is unlikely to be 10%.

Around 75% of the interest is at a fixed rate for the next twelve years. Even if rates rise (as they must do at some point), United will be protected from much of the impact.



The financial story of Manchester United is no longer about the debt. It is about how effectively and wisely United spends its money.

39 comments:

Ali said...

Good analysis, thanks for this. However I do notice a lack of LUHG sign off here. Are we moving more towards LULG now?

Anonymous said...

Are they planing to reduce the gross debt, or are they just going to refinance it every time? It seems that they have stopped repaying the bonds, like they did few times before.

Anonymous said...

I see you've finally come to your senses, Mr Green. This has been a fantastically successful LBO for everyone concerned.

You still can't help cherry-picking figures so suit your argument, though. You picked out the 2008 financial year because that happens to be the year when the highest % of EBITDA went on interest. In reality, that year's total interest was abnormally high due to a refinancing, The latter years show there was plenty of cash available to invest in new players.

Ultimately, it's not the Glazers fault that Ferguson caught the transfer ''yips'' after the catastrophic Hargreaves-Anderson Summer of investment and bottled it in the market thereafter. It's also not their fault that the same manager, for reasons that are still unfathomable to this writer, chose a fellow, unqualified Scot, as his replacement.

Never mind. We'll be back on top in the not too distant future thanks to the Glazers can-do attitude that has led the club to extraordinary commercial success.

All the best (you can't win them all),

GCHQ

manchesterunitedman1 said...

just imagine SAF had listened to one of his players who begged and begged him to let him play, yet he ignored the "kid" and brought back out of retirement his love child paul scholes.
Well the "kid" is going to be one of the finest players in the world and we GAVE HIM AWAY FOR NOTHING.
No one makes Ferguson accountable for this, can u imagine if it was wee Davie Moyes who let Pogba go!

Anonymous said...

I think we can forgive Ferguson a few mistakes, don't you? Or do you think he was bad for the club?

Anonymous said...

What has Ferguson/Pogba got to do with this report? Stop clutching at straws. Be man enough to admit you were wrong and that the Glazers are good owners.

Anonymous said...

People don't hold SAF responsible for Pogba because he wasn't. Pogba wasn't showing in the reserves that he was ready to make the move, he wasn't showing the form he did the year before in the u18’s. His situation is very much like Pereira's. Pereira this season was consistently great and looked too good for the reserve but the season before which was his first out of u18’s was slightly dissapointing especially in the first half. Pogba was the same, you could see the flashes but you could see the weakness that he need a year in the reserves to improve. If he had stayed then the season after he would have almost certainly been pushing for more involvement but playing a young player who isn't ready just to appease them would have been crazy and setting a dangerous precedent

Paul said...

Hargreaves started the European cup final in Moscow where Anderson also came on as a sub and scored one of the penalties that won our 3rd title. Whilst both players didn't live up to the hype the following seasons, I would hardly call that catastrophic... Poor choice of words to some points well made.

Anonymous said...

Anders has offered up a fair assessment, which is inline with his blog throughout.

GCHQ is rather full of himself but then he's on the side of the parasites who've infested our club, so no surprises there.

The fact of life under the Glazers is that the parasites have taken over the host - funded by astounding off-field commercial / TV revenue growth, and nothing (bar an act of fate) will change that now until they choose to depart.

We can all now look forward to years of these people rinsing the fuck out of United. Sad indeed.

OnlyaRed

Anonymous said...

Fergie's yips and Glazers' piks. One man's hesitation is another man's opportunity. Or the taking of an opportunity by one forces the other to hesitate.
Poor Fergie deserves every penny he receives from his outrageoulsy paid ambassadorial role. If they are going to have you carrying the can, you might as well fill it up. In 10 years time the Glazer Agitprop machine will have us wondering how on earth the noble and benevolent Glazers managed to save the club from Fergie's ineptitude.

Anonymous said...

Well said GCHQ... I applaud the time Anders puts into explaining the numbers, just a shame about the lack of objectivity.

Anonymous said...

Look....bottom line is...who is buying United ?....United profits or Glazier's pocket ?....That was the argument from the start and still is...And if United were to go on sale when debt free,who gets the sale money ?...United or the Glaziers?.....I'm a City supporter and still think it's disgusting how they have made United buy themselves for their eventual bank account.

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