The MUFC IPO - why the club won't benefit for over two years...

So the Manchester United IPO has finally happened. Having failed in Hong Kong and Singapore, the Glazers and their increasingly desperate bankers ditched their own ludicrous $16-20 per share price range and the shares have limped on to the NYSE at a still very, very aggressive price of $14 per share.

The whole saga has been a grubby and unedifying spectacle in our club's history that does very, very little indeed to improve the club's finances. The whole exercise has only been undertaken to help the Glazer family with their cash flow problems.

From the latest SEC filing we have confirmation that at the lower issue price, the club will receive net proceeds (after underwriters' discounts and commissions) of c. $110.3m (around £70.7m).

The club will use all this $110.3m to repay $101.7m face value (£63.6m) of the 2017 US$ notes at a price of 108.375% of nominal value.

These US$ notes pay 8.375% interest so the annual saving before tax will be:

£63.6m x 8.375% = £5.3m per year

Because interest is tax deductible, this reduction in interest paid will increase taxable profits. As a consequence of the IPO, United will pay US Federal Income Taxes at a rate of 35%. The net interest saving  after tax will therefore be:

£5.3m x (1 - 0.35) = £3.46m per year

This net saving is the equivalent of the matchday income from one game at Old Trafford. It is just over 1% of the club's annual revenue and around 3-4% of EBITDA.

Before any United fans begin celebrating this tiny saving, there is a further sting in the tail.

The prospectus informs us that the club, and not the family, will bear the expenses of the IPO. From page 151 we can see that these expenses total $12.3m (c. £7.9m).

With so little debt repaid and United bearing the £7.9m of expenses, it will take until the end of 2014 for the club to even break-even from the IPO, let alone benefit financially.

And the Glazer family? They receive their $110m straight away.

That's "Glazernomics" folks.....!

LUHG

An apology to Sir Alex and a restatement of the fundamental issues

Sir Alex Ferguson

Readers will no doubt have seen Sir Alex Ferguson's statement that he will not benefit financially from the IPO. As one of the people suggesting he was likely to participate in the $288m "2012 Equity Incentive Reward Plan" the club are putting in place, I'd like to apologise to Sir Alex for the suggestion that personal gain was a motivation in his support for the owners. I think it was a valid question to ask in the light of his comments about "real fans" last week, but I was wrong about my assertions. I have frequently stressed on this blog the miracles Sir Alex has achieved at United and was proud to promote the SAF25 fans' book last year. I'm extremely glad he is not caught up in the murky finances of our club.

The real issue

The key issue with the IPO is not however the share options that will be granted, but the continuing financial costs to the club of the Glazers' ownership. I thought it might be helpful to set out the costs and savings that stem from the financial structure that has been in place since 2005. There have been a few comments on this blog questioning the financial costs of ownership so I wanted to set them out again in full with full sources.

The costs divide into several categories. Firstly "cash costs" of £402m, money paid out of the club's coffers. The most important element of this is interest (£295m). Second are the limited repayments of debt since 2005, these comprise £37m of the original bank debt and £93m of repurchased bonds. Please note I have not included the repayment of the PIKs as the club did not pay for this. Adding these together we get costs of £531m, around two thirds of United's total wage bill over the last seven years to put the figure in context.

For information I have also set out various costs paid by the taking on of additional debt rather than paid out of cash flow. I have not added this £79m to the £531m as there would be an element of double counting (I include repayments in the cash costs so can't include debt additions too).

There are two key savings from the financial structure totalling £180m, firstly the dividends which the plc used to pay and secondly corporation tax saved because interest payments are tax deductible.

I have assumed dividends would have increased 8% per year from 2006-2012. This compares to 7.6% per year growth in the seven years up to the takeover and is faster than the 7% growth in EBITDA seen since the last full year of the plc (2003/4).

Corporation tax is as set out in the Manchester United Limited accounts (but not paid because of deductible interest higher up the corporate structure).

The net cost: £531m - £180m = £351m is a vast number. It is the gross transfer spend of the club in the ten years from 2001/2 to 2010/11. It could alternatively have funded a 60% ticket price cut in every year since the takeover. It could have been used to build out Old Trafford to be a 100,000 seat stadium. It was used for none of these things. It is the cost in cold hard cash of the Glazers' ownership.

Crucially, this figure ignores the fact that even after all this waste of money, the club still has £437m of debt on the balance sheet and that this will still be around £360m after the IPO.

The IPO

The IPO is a huge wasted opportunity to stop this enormous outflow of money from Manchester United. The SEC F-1 prospectus confirms that the IPO will only reduce the club's debt by around £78m, saving (after tax) only around £5m per year. Longer term, the IPO will cost the club more each year in higher US taxes (the corporate tax rate is 35% vs. 24% in the UK).

The real beneficiaries of the IPO will be the Glazer family who will receive around $150m from their sale of 8,333,333 shares and the unnamed senior executives (but not Sir Alex) who will be entitled to 16,000,000 shares under the "2012 Equity Incentive Reward Plan". All these people will make money and the club will be left with the vast bulk of its debts.

The IPO gives no opportunity for supporters to take a meaningful stake in their club. The shares on offer represent 10% of the club but with under 2% of the votes.

It has been mentioned by some people that the club is constrained by the bond terms as to the amount of debt it can repay. It is true that until 2013, the club can only repay 35% of the bonds. That figure is £182m compared to the £78m the IPO will repay. It is in any event only five months until this restriction falls away. If this IPO was about paying down debt, the vast majority of the $300m (£193m) proceeds could be applied to debt repayment today, with the balance being applied in January.

Agendas

People have queried my "agenda". My agenda remains the same. I want Manchester United run for the glory of Manchester United, not to make money for owners who do not care about it. I want the money United makes to be ploughed back into the club, invested in players, stadium and cheaper tickets, not wasted on financing costs. I want debts taken on only to expand the facilities of the club. This is not a pipe dream. It is how almost every European football club is managed, for the glory of the club. It is how the other financial titans; Barca, Real and Bayern are run.

As part of the IPO roadshow, the senior management team at United (Woodward, Arnold and Bolingbroke)  have done a video presentation. For the next few days you can view it here: 

http://www.retailroadshow.com/custom/mu/muroadshow.asp

In the video presentation they confirm that the club's transfer budget in the future will usually be a net £20-25m, the average spend over the last fifteen years. That is a choice being made by the Glazers, more concerned with maximising profits. A debt free United run like a normal football club could afford to compete with biggest clubs in Europe, we aren't even trying.

LUHG

The Manchester United IPO some initial observations

There’s been a lot written about Manchester United’s proposed listing on the New York Stock Exchange (“NYSE”) since it was announced on Tuesday night by the filing of an SEC Form F-1 (the document is available here), this post is designed as a brief summary of my thoughts on the subject.

This is a massive change in strategy by the Glazers and a positive one financially

Since the takeover, the club have insisted that the debt loaded onto United is not in any way a problem. As recently as last March, David Gill was reiterating this to the House of Commons Culture Media and Sport Select Committee.

Suddenly, the attitude to debt has changed. The SEC filing clearly states:

“We intend to use all of our net proceeds from this offering to reduce our indebtedness”

The Glazers do not need to take this approach, they could float United and retain the proceeds themselves. The fact they have chosen not to do so is very telling and has the potential to transform the financial position of the club. As I have mentioned again and again on this blog, over £500m has been spent on interest, debt repayments, fees and derivative costs since 2005. In the first nine months of the 2011/12 financial year alone the club spent £71m on interest and bond buybacks. The elimination or significant reduction of these costs is huge news.


The other key aspect of this debt reduction is that the prospectus makes it clear that there is no intention to pay dividends in the forseeable future. Interest payments will not simply be replaced with dividend payments.

The 2010 bond issue was supposed to lock in long-term (seven year) funding, and yet only two years later, that entire costly structure is being ripped up.  A major change of heart has taken place.

The family can still cash in some shares under the "over allotment" mechanism

Although the prospectus says all the net proceeds will be used to reduce debt, the family can still sell some of their shares (as opposed to the new shares in the main offer) under the "over allotment" option. This is a feature of many IPOs, whereby the owners make additional shares available for sale if demand is higher than expected. Over allotment is not normally for more than 10-15% of the shares being offered.

At this early stage we are missing some very key details

The SEC filing is a “preliminary prospectus”. It contains no details on the number of shares being issued or the price of these shares. It is subject to revision.

The success or failure of the offer will have a lot to do with the valuation the offer puts on United. In the past, the Glazers have appeared to have placed a higher value on the club than most analysts or potential buyers. The FT recently reported that Morgan Stanley had left the IPO syndicate (of underwriters) because of disagreement over the valuation.

It is not too late for this offer to collapse spectacularly if the Glazers attempt to sell shares on too high a valuation or if financial markets weaken further. This is not a “done deal”.

The share offer will be significantly greater than $100m

The much quoted “$100m” issue is a red herring. There is a requirement in a preliminary prospectus to estimate the cost of registration fees and as these are dependent on the size of the share offer, a “placeholding” assumption has to be made. That is where the $100m figure comes from. It is not a guide to the size of the eventual offer. There is little or no point raising $100m (£64m). The exact amount raised will depend on the valuation placed on the company and the state of the markets in the next few weeks but I would expect at least $300m.

This is not a change of ownership

Sadly for those of us who want supporters to have a meaningful stake in Manchester United, this IPO is of virtually no use at all. The “A shares” on offer will only have very limited voting rights. Even if the Glazers sold 90% of the club in the IPO (which they won’t), the “B shares” the family will hold would still have a majority of the votes as each B share has 10x the votes of an A share.

Non-Glazer shareholders will therefore have virtually no influence over the club.

This remains a very short-sighted and depressing approach to governance. The experience from Spain and Germany shows that supporter participation in ownership is a huge plus for football clubs. United’s unwillingness to engage with supporters as anything other than potential customers remains an enormous problem that can probably only be solved by intervention by government.

They’ve chosen New York rather than London because they want to maintain control

The principal advantage to the Glazers from listing in New York rather than London is that the A/B dual share structure is acceptable in the US and not in the UK. Well known companies such as Google, Ford, Facebook and (infamously) News Corporation all have dual voting structures. It would be very hard to float a company with such diminished voting rights for outside shareholders in London.

The downside of US listing is the higher tax that the club will have to pay. United has been UK tax registered for all of its existence but will now be subject to US Federal Income tax on profits at the high rate of 35% (the UK rate is 28%). The fact that the Glazers are happy for the club to pay a higher tax rate tells us a lot about the importance of the A/B share structure to them.

Is this all about a post Fergie world?

Why is this all happening now? We can only speculate, but it seems to me that the Glazers are preparing for a Manchester United without Sir Alex Ferguson. As we know, the club has achieved great success on the pitch on a pretty low transfer spending since 2005. Would another “big name” manager come on board with this limited budget, especially as City, Chelsea, Real Madrid and Barcelona continue to flex their financial muscles?

What happens next?

The underwriting banks and the company will now undertake a road show for potential investors. United have ninety days from the date of the preliminary prospectus to file their “final prospectus”, which includes the price and number of shares being offered. The IPO can still be cancelled at any time prior to this….

Watch this space.

LUHG

PIK repayment trail goes colder as United's ownership shifts to Delaware

Followers of the United finance story will know that unexpectedly on 22^nd November last year, the Glazers found the £249.1m required to pay off the infamous PIKs.

In December, filings at Companies House showed that this money had been raised by issuing two new shares in United's UK parent company Red Football Shareholder Limited (2 new shares being 0.0002% of the issued share capital). RFS then bought two shares in its subsidiary Red Football Joint Venture (which owed the PIKs) for the same sum and RFJV used the money to repay the debt.

Today, with the filing at Companies House of Red Football Shareholders' "Annual Return", we learned a little bit more about that strange share issue. The Annual Return shows that 100% of RFS' shares (including the two new and very expensive ones) are now owned by a new company called Red Football LLC. Previously, all the shares had been owned by Red Football Limited Partnership, a Nevada company.

A quick search in the usual places shows that Red Football LLC is a new company in Delaware, the most secretive of all US states when it comes to corporations. The company, which through a string of four UK subsidiaries now owns 100% of Manchester United was formed on 4^th November 2010, just under three weeks before the PIKs were repaid.

A 2009 report by the Tax Justice Network named Delaware, home to half of all US corporations, as the most secretive financial location in the world (beating strong competition from the Cayman Islands, British Virgin Islands etc). It is virtually impossible to get information on Delaware companies and it is almost as if the Glazers are trying to keep information about the PIK repayment secret. We don't know who the directors of Red Football LLC are, who its shareholders are or how it obtained the £249.1m.

This matters because there are really only two explanations for the repayment of the PIKs; either the Glazers have found some sort of equity to repay them (even though nobody can identify where that could have come from) or Red Football LLC has borrowed the money to repay the debt and the threat of the club's cash being used to service this new debt is still there. If it's the former then United are in a strong financial position despite the wasted £45m spent annually on bond interest. If it's the latter then the there is a high chance of the Glazers taking the £100m+ (and rising) of dividends to which they are "entitled" at some point in the future.

Naturally, we can't ask the Glazers anything about this as they won't talk to the fans and their employees in M16 don't appear to know. In my view that is not how the biggest football club in the world should be managed.

LUHG

Red Football parent companies issues two new shares each: for £249m!

As expected after passing resolutions on 22^nd November allowing the issue of new shares to repay the PIKs, the two parent companies of Red Football (Red Football Joint Venture and its parent Red Football Shareholder) have today filed documents at Companies House confirming they have issued new shares. You can see the documents here (RFJV) and here (RFS).

Both companies issued two new shares each on PIK repayment day (22^nd November). For both companies, one share has a paid up amount of £31,578,649.41 and the other share £217,525,995.10 for a total of £249,104,664.51 (that is how much was paid for the shares). Crucially, these new shares rank pari passu with the existing shares in each company, that is to say that they have no additional rights that the existing shares do not have. Could the split between two shares (13% and 87%) represent the proportions of the PIKs owned by the Glazers and third parties respectively?

Prior to these share issues, RFJV had 988,183 shares in issue and RFS had 990,002 shares in issue. Given these new shares represent only around 0.0002% of the shares already issued, we can pretty safely conclude that they have not been issued to a third party (who would pay £249m for 0.0002% of United?) and have therefore been issued to a Glazer company. We will know definitively in January or February when the "Annual Returns" are filed at Companies House.

We are thus left with the mystery of where the Glazers got £249m from. I stand by my view that this money probably came from a debt financing at the level of one of their US holding companies (the next company in the chain above Red Football Shareholder Ltd is "Red Football Limited Partnership" of Nevada). Others may think that the family had the cash knocking around somewhere. Today's filings probably mean we will never find out the truth as if there has been new debt issued it is in America where we cannot see the details.

At least we're top of the league.... Happy Christmas and happy New Year.

LUHG

PIK repayment: The Glazers issue shares to someone (or maybe themselves)....

Two of the Glazers' UK holding companies; Red Football Joint Venture Ltd (the company which owed the PIKs) and Red Football Shareholder Ltd (its parent) filed documents with Companies House today. The two identical documents are dated 22^nd November 2010 (the day the PIKs were repaid) and are records of Ordinary Resolutions of each company authorising them to:

"....allot ordinary shares in the Company or grant rights to subscribe for, or convert any security into, ordinary shares in the Company...."

That means the companies are now authorised to issue new shares (or rights to subscribe for or buy new shares).

You can download the documents here for RFJV and here for RFS (if you really want).

So what's going on?

Well all we know for certain from this is that in order to pay off the PIKs, the Glazers are issuing more equity (or rights to equity) in one or both of United's parent companies. The mystery of course is who they are issuing such equity to.

It could of course be themselves. If they have found the £243m needed to repay the PIKs down the back of a sofa in one of their many Florida properties, they could be subscribing for more shares themselves using that money. Or it could be a third party who has provided finance to repay the PIKs (i.e. new debt for old).

Will we ever know? It's hard to say, as it depends on the exact structure used in any refinancing and whether it took place in the US or UK.

There will be a "post balance sheet event" note in the RFJV and RFS accounts when they are published in the new year. That may tell us more.

Watch this space.

LUHG

The Glazers and the “Rich List”: why Forbes can’t add up

The Glazer family are rich, asset rich. They own what is generally considered to be the world’s most valuable football club and an NFL franchise. But what is their net worth?

That titan of business journalism Forbes has just published its semi-annual list of “400 Richest Americans”. Malcolm Glazer (and family) come in at no. 136 with an estimated net worth of $2.6bn. They comment:

“Owns NFL's Tampa Bay Buccaneers (team valued at $1 billion); controls English soccer's Manchester United, worth $1.84 billion (the sport's most valuable team burdened by a near 50% debt load). Inherited watch business from father at 15; formed real estate company First Allied. Today owns more than 6.7 million square feet of retail space. Opening of Glazer Children's Museum in Tampa slated for September. Sons now manage family assets.”

Given that the two key assets in this calculation are sports teams, it’s handy that Forbes also provide its own valuations for those, the most recent being their 25^th August 2010 valuation of the Tampa Bay Buccaneers and their 21^st April 2010 valuation of Manchester United.

Forbes’ sports valuations are always calculated as “enterprise value”, that is the combined value of debt and equity (unless the debt relates directly to stadium construction which is not relevant in these cases). Forbes also helpfully show what proportion of this “team value” estimate relates is debt.

The debt figure for United in their April valuation ($844m or c. £540m) clearly doesn’t include the PIKs which is a pretty major oversight. We know that the PIKS were around £228m at 30^th June, so even if only 80% are owed to 3^rd parties, that’s another c. $283m of debt they’ve missed (£228m x 0.8 x $1.55 exchange rate). That would takes the net equity value of the two sports clubs to $1.6bn:

So where do Forbes get the other c. $1bn in their estimate of the Glazer fortune from?

Forbes mention First Allied Corporation, but they clearly haven't looked at it in any detail as they seem to believe that the company “owns more than 6.7 million square feet of retail space”.  This is indeed the number of the main page of the First Allied website, but when one looks at county or mortgage records for the sixty-four centres First Allied say they own, the actual square footage is only 4.7m....

This 4.7m square foot of space is generating around $6m per annum in cash flow at present (that isn’t an estimate, it’s from the CMBS filings each centre makes), that’s before any central business costs. Is that worth $1bn? The answer is clearly no. Only half the centres generate any positive cash flow at all. Putting them on a capitalisation rate of 8.5% yields a value of around $70m. Which still leaves a $889m hole in Forbes’ big number.

Maybe the Glazers have over $800m just sitting around? If that were true, why not repay all the PIKs? Or invest in the Bucs playing squad? It sounds unlikely.

So Forbes end up looking pretty dumb for not being able to add up their own numbers or include $283m of PIK debt in their calculations and the Glazers look asset rich but suspiciously cash poor.

LUHG

Another month, another First Allied centre misses a mortgage payment

September's shopping centre is "The Terraces at University Place" in Charlotte, North Carolina. It missed its most recent mortgage payment which was due on 11^th September. The vacancy rate across First Allied's portfolio increased slightly compared to August (up to 11.3% from 11.1%). Vacancies rose at seven centres and declined at five.

"The Terraces" has c. 65,000 square feet of shopping space divided into 26 frontages. Five of those lots accounting for 23% of the space are currently vacant. The occupancy rate has gently declined over the last three years (from 85% at the end of 2007 to 77% today), but in recent months the rate has actually ticked up (from 75% in June). So why would The Terraces stop paying its mortgage all of a sudden?

In an interesting piece in the Tampa Bay Tribune on First Allied's problems, Mary MacNeill a ratings analyst at Fitch was dismissive of reading too much into loans going delinquent for a short time saying; "If it's just one month in the summer, that could be just a vacation." I'm happy to agree that in normal circumstances cheques can get lost in the post and payments missed only to be made good by borrowers when the mistake is noted. In the case of First Allied Corporation however, we have the benefit of more information and an extensive pattern of behaviour.

In addition to the Terraces, five other First Allied centres are currently delinquent; two are two months late on their payments, one four months late, and two five months late. None of these older delinquencies has so far proved to be a clerical error. One would imagine such "errors" would be swiftly spotted by borrower and/or lender and corrected. In fact three of the five properties have already been placed in the hands of the "Special Servicer" which works out problem loans. None of these delinquencies appear to be mere clerical errors.

Then we have the four former First Allied centres that we know have already been foreclosed on and seized by the lenders. After these centres went delinquent, they never corrected their missed payments either. They just stopped paying their mortgages and were eventually foreclosed.

Returning to The Terraces, and looking more closely at the data, the reason for the delinquency is quite clear. The original Lehman Brothers mortgage was taken out in August 2005. It's a fifteen year balloon loan with a five year interest-only period. So for the last five years, the interest only payments have been $895,000 pa (including payments on the "B loan"). Now the interest-only period is over and from 11^th September onwards, The Terraces need to make capital repayments too. The balloon payment at the end of the mortgage is c. $11.2m and the total loan $13.34m, so that's $2.08m of capital to be repaid over the next ten years, an additional $208,000 per annum.

Put simply (and you can see the numbers from the CMBS trustee's spreadsheet here), the centre cannot afford these new payments of c. $1.1m. In the first six months of 2010 it only generated $416,269 of cash flow, or $832,538 on an annualised basis.

First Allied and the Glazers therefore have a choice, to support the centre with equity injections in the short-term, hoping that occupancy or rental rates rise, or to stop paying and let the centre go to the wall. Other centres in similar positions (weak occupancy and interest-only periods ending) ARE being supported in some way, they have not gone delinquent yet.

Perhaps I'm wrong about this, and a late bank transfer and an apology will roll out of Rochester to make good the missing mortgage payment in the next few days. Or perhaps, more likely, this is tenth First Allied shopping centre on starting on its way to foreclosure.

A quick comment on the monitoring First Allied Corporation

When I last wrote on this subject, various people pointed out that "walking away" from over-indebted commercial real estate was often a smart move in the current market and didn't prove that the owners couldn't cover the loans, just that there was no point throwing good money after bad. I totally accept and understand this. I have never claimed that the escalating problems at First Allied Corporation somehow "prove" the Glazers have no money, in fact their support for many centres that couldn't otherwise pay their mortgages shows the opposite.

My work on First Allied hopes to demonstrate two things; firstly that their predilection for using high leverage is not supported by much skill in doing so, and secondly that First Allied Corporation generates no meaningful cash flow for the family. This is after all (along with United and the Bucs) one of only three major businesses they own (unless they have lied about their business interests in UK regulatory documents). When thinking about the Glazers, their investment in their sports teams (or lack of it) and most importantly how they intend to service the debts loaded on the Red Football structure, First Allied is a key component and one that isn't producing a penny right now....

LUHG

So they bought the PIKs in 2008, where did they get the money?

Since Bloomberg revealed that the Glazers picked up around 20% of Red Football Joint Venture's PIKs in 2008, people have been asking "where did they get the money from?".

Bloomberg believe:

"The Americans, who also own the Tampa Bay Buccaneers, may have paid as little as 12.6 million pounds ($19.6 million) for the stake if they bought it at 35 percent of full value."

A wise man who posts under the name "redloner" on various United forums has a very good answer, pointing out that the Glazers' actually borrowed £10m from Manchester United on 19th December 2008.

How very convenient.

How very modern capitalism.

You buy a business with money you don't have. You struggle to repay that money. You borrow more money from the very company you bought. You use that cash (interest rate 5.5%) to buy your own original debt (keeping the tax break on it, thanks Mssrs Darling and Osborne). You roll up the new debt at 14.25% (now 16.25%) per annum. Finally you use the company's own cash to repay those loans, the receiptsare of course tax free (because you offet them against capital losses in your property business)....

Nothing illegal, nothing wrong, either here on in the US. Just something that, funded off the worship of thousands for an incredible football club seems to me to be wrong, wrong, wrong.

LUHG

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 hedgefund.net 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 27^th 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 (30^th 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?

LUHG

First Allied Corporation watch no. 2: more defaults as predicted

This is the second in an occasional series keeping an eye on the Glazer family's US property business, First Allied Corporation. As with previous posts on this subject, if you don't see the relevance of any of this to the fortunes of Manchester United or the Tampa Bay Buccaneers I suggest you stop reading now!

Information on First Allied comes from monthly and quarterly reports by the company to the trustees of the Commercial Mortgage Backed Securities ("CMBS") which contain the relevant mortgages, and from the company's own website which shows vacant space. My original work on First Allied, used by the BBC Panorama team, was based on information available in the May CMBS filings. We have now had three months of additional data (the August filings are in) and as I predicted originally, First Allied continues to deteriorate with no signs of a pick-up in performance.

In May I identified 34 shopping centres (out of a total of 64) which I thought were at serious risk of going bust in the next twelve months (to add to the four that had already gone that way). Three months on and the mortgages of five of these centres have become "delinquent", that is to say the centres have started to miss mortgage payments. Whilst occupancy rates at some of First Allied's centres have risen, at others occupancy has fallen further and overall the vacancy rate has increased slightly over the three months (from 10.5% to 11.1%).

The delinquent centres are:

So these five centres, originally valued at over $38m with over $7m of equity, have become delinquent in the last four months. For all but Ulster Terrace, the issue is clearly very poor occupancy (readers may recall University Plaza in Houston as it was featured on BBC Panorama). Ulster Terrace is interesting because First Allied's website shows it as fully let (it was only 79% let in July), yet it has still failed to make a mortgage payment. The explanation is that Ulster Terrace is one of the 31 centres coming off interest only deals in 2010, in this case the interest only period ended in April. On my calculations, Ulster Terrace will still be unable to meet the new higher payments, which will now include repayment of the capital, even when fully let. I expect many other centres to run into similar problems in the next few months.

Returning to the original list of 34 "at risk" centres, 15 have seen material changes in occupancy (more than 5%) since May, occupancy has fallen by more than 5% at 8 centres and risen by more than 5% at 7 centres. The changes in occupancy and the level of their debt service coverage ratios ("DSCR") at current occupancy can be seen in the chart below:

Four centres are probably out of the woods for now, with DSCR back above 1x (the same goes for another, Murphy Crossing in Texas, where occupancy has risen 3% since May). Whilst these five centres are no longer at risk of default, five new centres (Golf Glen Mart Plaza, Heritage Plaza, Preston Lloyd, River Plaza and Allen Central Market) which had previously been covering their mortgages, have now joined the "at risk" list after seeing falls in occupancy.

First Allied's problems are not just a product of a weak US economy struggling to come out of recession, they are in large part due to aggressive financing structures put in place before the credit bubble burst. For 15 shopping centres, the terms of the mortgages on them make insolvency virtually inevitable.

I believe the state of First Allied Corporation explains much about the Glazer family's ownership of Manchester United and the Tampa Bay Buccaneers. If centres with negative cash flow are ignored, the portfolio generates around $9m of pre-tax cash per annum but these cash flows are before any of First Allied's central costs and before tax. The whole business is generating virtually no cash flow at all (and that is before we take into account centres being given short-term support by the parent company). So for a Bucs fan wondering why there hasn't been any investment by the owners after a 3-13 season or for a United fan wondering how the Glazer family is going to repay "their" PIKs, the state of First Allied provides some uncomfortable answers....

LUHG

Blacking Out

Is there a skill in the business management of sports teams? The Glazers obviously believe there is and that it's a skill they possess. Here's how they described themselves in the 2006 refinancing document:

The experience and success of the Glazer family in managing a sports club is well illustrated by its ownership of the Tampa Bay Buccaneers. The Glazer family acquired the club in 1995 when it was, at that point, one of the worst performing teams in the NFL both on and off the field of play. Since ownership the Glazers have transformed the business immeasurably:

Sporting success: winners of the Superbowl in January 2003

Financial success: the attraction of new sponsorship and commercial opportunities

Stadium development: now home to one of the NFL's finest facilities [paid for with public money, not by the Glazers. Anders]

Sustained investment in the playing squad

Enthusiastic fan support; seven years of consecutive sell-outs and a season ticket waiting

list in excess of 100,000 people.

Well that was then and this is now.

The 2003 Superbowl win was the last instance of "sporting success", with two lost Wild Card playoffs the only other post season achievements since. Last year of course, the Bucs only managed 3 wins out of 16, their worst season since 1991.

Many Bucs fans blame the poor on-field performance on a failure to make "sustained investment in the playing squad" with the franchise spending way below the salary cap. This summer's lack of big names and reliance on a large numbers of rookies seems unlikely to change many minds on the subject.

Poor performance, under investment and a weak economy have all contributed to the complete evaporation of the season ticket waiting list (sound familiar?). Despite price discounting and the abolition of most seat deposits and long-term ST contracts, only 40,000 season tickets have been sold for the coming season (in a stadium seating 66,000).

As fans feared, the Bucs announced earlier this week their first "blacked out" home game for thirteen years, a preseason against Kansas City Chiefs. NFL rules say that games cannot be shown on local TV within a 75 miles radius of the stadium if the game is not sold out. It's an attempt to encourage fans to go the game (not totally unlike the English ban on the live broadcast of 3pm Saturday football). More blackouts during the main season look certain.

Last season several Bucs home games "should" have been blacked-out, but the club stepped in and bought up unsold tickets and declared the games were sold out. For whatever reason (is there ever a reason to do with the Glazers that isn't financial?), that isn't going to be repeated this year.

Is there a skill in the business management of sports teams? Judging from the Glazers' record in Tampa, United fans will hope it isn't a transferable skill....

LUHG

First Allied watch - no. 1 in an occasional series

Even the World Cup won't stop this blog from keeping an eye on what's happening in the Glazer family "empire" (more Brittas than Roman).  This is the first of an occasional series of updates about First Allied Corporation using the company's own published vacancy information and the relevant CMBS trustee reports (which are published monthly). Those readers who don't see the relevance of any of this to Manchester United can look away now.

For those who can't be bothered with the detail, the key points from this update are a) another centre has gone "delinquent" (i.e. has stopped paying its mortgage) and b) the First Allied Corp portfolio continues to weaken.

Market trends

Industry data across First Allied's major markets (Texas, greater DC, Georgia and North Carolina) remains quite weak, with property values still declining and only small signs of retail rental rates stabilising.  The charts below (source: Loopnet.com) show some of the trends, First Allied's properties tend to be in "metro" (i.e. suburban) areas:

Atlanta retail real estate prices remain weak

Dallas retail real estate - City recovers, suburbs in decline

Greenbelt MD (greater DC), rents stagnant

Charlotte prices declining....

but rents stabilising

June occupancy data

Occupancy rates across the business are inherently volatile, a single letting or tenant departure can have a material impact on a centre's occupancy.  In the last month, twenty centres have seen their occupancy rise and sixteen have seen their occupancy fall.  Occupancy in six centres has fallen by more than 5% percentage points, and another six centres have seen occupancy rise by more than 5% percentage points.  The large  falls are significantly greater than the large rises:

You can see how these changes knock on to run-rate debt service coverage ratios below (all figures are post interest only periods where these expire in 2010).

New letting activity has helped push run-rate DSCR back above 1x for Frisco Gate and Gleneagles Plaza, with Smoky Hill almost back to this level.  On the downside, River Plaza will no longer be able to cover its mortgage at current occupancy and Stonecrest Park is now at risk.

Trustee reports

The main news from the June trustee reports relate to Ulster Terrace (Denver, Colorado) which has now gone delinquent (last mortgage payment was 11th May 2010) and Lakeview Crossing (Dallas, Texas) where the "Special Servicer" reports "Imminent default due to cash flow problems."  Schoolhouse Plaza (Ohio) remains delinquent for a second month.

Conclusion

There is nothing in the latest data from First Allied or the mortgage trustees to change my original view on the company.  The coming months will see more and more centres run into severe financial problems as interest only periods end and tenant demand and rents remain weak, and the Glazers will have to decide whether to support them financially or let them fail.  There's more chance of the United States winning the World Cup than First Allied generating any significant cash flow for it's owners in 2010.

LUHG

Is Malcolm Glazer a better boss than Tom DeLay?

Edit: 8th June 2010.  If you think I'm being harsh, check out these two comments on this statement from NFL commentators including one of the main sports writers on the Tampa local paper, The St Petersburg Times:

St Petersburg Times
Adam Schein

I couldn't help but laugh at the swift statement issued by the Tampa Bay Buccaneers spokesman Jonathan Grella today. The man used to be press spokesman for disgraced House Speaker Tom DeLay. Plus ca change.....

This is what he said:

"Buccaneers fans should know that the Glazer family is as financially well-positioned as ever before.

"Companies they own generate revenues in excess of $800 million each year.

"Sophisticated real estate experts know that the family's refinancing of their commercial real estate before the global meltdown has proven to be the wise move.

"While First Allied represents only a small portion of their asset portfolio, it continues to generate significant profits, enjoys over 90-percent occupancy, and has long term non-recourse financing.

"This franchise remains committed to bringing the resources to build its next championship team.''

Let's do the paragraphs one by one.
1. On my calculations, the three companies generated revenue of c. $780m (it depends on the exchange rate you use for United), so no missing gems. As someone once said, “Turnover is vanity, profit is sanity, cash flow is king”. Revenues are not profits and First Allied proves it. Old friend of United, AIG, had revenues of $96bn the year it went bust. Anyway, it's interesting that he chose to quote a revenue figure.

2. As these details have never been published before, we must wonder who these "sophisticated real estate experts" are. Maybe the commercial property lending department of Lehmans? Anyway, how wise is it to remortgage in 2005, 2006 and even worse in 2007? Of the 35 remortgaged properties, nine already can't cover their "wise" loans and eleven more will join them when interest free periods end. 

3. I have looked at every shopping centre they own (bar one that had 2008 cash flow of $0.5m) and "significant profit" is not possible. The $9.7m I have quoted is cash flow before income taxes (be they personal to the Glazers or corporate taxes) and before any head office costs (First Allied operates out of three offices and employs such cheap staff as Edward Glazer). The cash flow will fall to just over $7m per annum as interest only periods end, if occupancy rates don't pick up.

The 90% occupancy doesn't tally with actual data. On their website, First Allied like to include buildings they don't actually own, but are on the site. You can see a "142,438 sq ft" centre here (including Walmart). The 90,000 sq ft Walmart isn't owned by First Allied (I checked the county records), so occupancy is 88.3% not 96.5%.

I calculate occupancy to be 86%, but frankly it doesn't matter. The centres in trouble (DSCR below 1x) have occupancy that averages 79%, the one with DSCR above 1x average 94%.

Non-recourse just means that the bancruptcy of a centre doesn't knock on to other companies.  Brilliant.

4. Does being "committed to bringing the resources" actually mean anything?  If you've got resources, why not bring them?

LUHG

Debt Junkies: The true story of First Allied Corporation

Today, in conjunction with BBC Panorama and The Guardian, this blog is publishing full financial information on state of the Glazer family's real estate business First Allied Corporation. Although all information is from verifiable public sources primarily Commercial Mortgaged Backed Security ("CMBS") filings, First Allied's own website and US county and state records, it has never been made public before today.

Analysis of mortgage filings for 63 of First Allied's 64 shopping centres shows the portfolio is hugely overleveraged and that without major improvements in financial performance in the next few months, half the centres will not be able to generate sufficient income to pay their mortgages and therefore risk going bust. I can for the first time reveal that four centres have already gone into foreclosure. The majority of First Allied's properties are currently in negative equity leaving the family little or no room for manoeuvre. Although the US recession and property crash have proved the triggers for this crisis, the root causes are the disastrous decisions made by the Glazers in the mid-2000s as the US property boom neared its height, shattering their self professed reputation as savvy business people.

After years of speculation about the state of the Glazer family's businesses, the evidence I am publishing today explains the real reason behind the Glazer family's underinvestment in the Buccaneers and at United and shines new light on the family's inability to pay off "their" PIKs without using Manchester United's cash.

Given the amount of data I have discovered and analysed, I have created dedicated pages and links on my blog covering various areas:

The four centres that have already gone bust

Download master property and mortgages spreadsheet

Centre Court Shopping Center, Atlanta, GA – a case study of a First Allied centre

Explanation of methodology and sources

Introduction

Having sold all their other substantial business assets (nursing homes, trailer parks, radio stations and controlling stakes in listed companies) in the last ten years, First Allied is the third major leg of the Glazer family's empire alongside the two famous sports clubs. When I wrote about the company before on 9^th March, I stated that as a private US corporation, it would never be possible to obtain any detailed financial information on the business. I am glad to say that I was wrong about this.

In February, First Allied's Crosswoods Commons shopping centre entered the foreclosure process (which was completed in March) and I was able to review the centre's mortgage document which had been filed in the Federal District Court for Southern Ohio as part of the foreclosure process. The case documents showed that the mortgage the centre had defaulted on, although issued by Lehman Brothers in 2005, had been "securitized" and placed into a Collateralised Mortgage Backed Security. Because CMBS are freely traded, mortgage holders whose loans are in such vehicles must report regularly on the financial performance of the property on which the mortgage is secured. When I started to look at which other First Allied shopping centres had mortgages in CMBS, I was amazed to find that loans on 63 of the 64 properties listed on the company's website had been securitized (the final property was remortgaged in January 2008, but the credit crunch caused the market for new CMBS to dry up shortly afterwards and the new mortgage was not securitised).

Using the prospectuses of the twenty four CMBS vehicles which contain the traceable 63 First Allied mortgages, the CMBS' most recent investor reports, information on the company's own website (http://www.firstalliedcorp.com/), county and state records (where available) and First Allied's listings of vacant property (conveniently the company lists all its available space on http://www.loopnet.com/) gives a greater insight into the financial performance of the portfolio than one would expect to obtain from a quoted real estate company.

Summary of key financial findings 

1. Today, First Allied has total mortgage liabilities of c. $570m, secured on properties with a total estimated value of only c. $556m. This debt has barely changed from the $581m originally borrowed, whilst the value of the shopping centres has fallen sharply from their total appraised value of $744m when the loans were taken out. I estimate that 31 properties, virtually half the portfolio, are in negative equity.

2. Despite generating rental income of over $76m and cash flow before interest of c. $47m the debt burden of interest and repayments is so severe that the whole portfolio is currently only producing $9.7m of surplus cash per annum before tax. This is a tiny sum for what is supposed to be a large and successful real estate business and totally inadequate to even cover the interest accruing on Red Football Joint Ventures Payment in Kind notes or to invest in the Bucs playing squad.

3. Whilst the foreclosure of First Allied's small (10,000 sq ft) Crosswoods Commons centre in Ohio in February 2010 was reported by the US and international media, this blog is today publishing previously unseen documents which show that an additional three centres have already gone bust. First Allied paid $30m, including almost $5m of equity, for these properties in 2003, 2004 and 2005. With such a huge amount of capital already tied up in the centres and with the property cycle nearing its trough, the only explanation for the Glazers' failure to inject further equity into the businesses in order to them is obvious. The family do not have the money.

4. The great majority of First Allied's mortgages (58 of 63) were taken out with Lehman Brothers, perhaps the greatest symbol of the excesses of the credit boom in the United States.

5. The crisis at First Allied is only partly due to the recession in the United States and is mainly caused by the excessive debt the Glazers have loaded onto the portfolio. Having put almost half the portfolio on the market in 2004 (presumably to raise funds for the bid for United), the Glazers made a disastrous change of strategy later that year and started a binge of remortgaging which continued in 2005, 2006 and 2007. During this period, the Glazers extracted more than $115m in equity through remortgaging, less than 20% of which was used to buy new properties. Although the family realised significant profits during the 2005-7 period, because they both bought and remortgaged properties at inflated valuations, the Glazers piled unsustainable amounts of debt on many of their assets and it is this that is now causing such a severe strain on the business.

6. The total estimated net equity value of the current portfolio (valuing centres in negative equity at zero) is only $59m compared to $162m when the mortgages were originally taken out and an estimated $400m+ at the peak of the commercial real estate market in late 2007.

7. An incredible 44% (28) of First Allied's shopping centres have already been placed on "watchlist" by the trustee banks of the relevant CMBS, indicating they believe there is a significant risk of default on their loans.

8. More than one in four properties (17) already has a "debt service coverage ratio" ("DSCR") below 1x (i.e. income does not cover mortgage payments). Unless occupancy rates pick up sharply, these centres are likely to go into foreclosure in the next few months as reserves are depleted.

9. The mortgages on 48% of the portfolio (31 centres) were taken out in 2004 and 2005 and have five year "interest only" periods which expire this year. At current levels of occupancy, 16 of these properties will see their DSCR fall below 1x when their interest only period ends and repayments kick in, meaning more than half the portfolio will be at very high risk of being seized by the mortgage trustees in the near future. Many of the assets remortgaged in 2005 are so over leveraged that they would be unable to pay their mortgages when repayments begin even if they were fully let at current market rents. Looking beyond the current year, a further 9 centres have interest only periods that end in 2011 or 2012.

10. When First Allied took out the mortgages on the thirty three centres either currently unable to make their mortgage payments or which will be in this position as interest only periods end, they had a total appraised value of over $394m and a net equity value of $80m, all of which is at risk of being wiped out.

Thoughts and conclusions

There are some obvious conclusions to draw from this research and also a lot of unanswered questions:

1. Unless someone can point to other assets acquired at the time, the £272m of "equity" the Glazers contributed to the acquisition of Manchester United was at least in part really debt secured on First Allied's shopping centres. First Allied itself was actually a party to the original preference share agreements with the hedge funds. As there is strong anecdotal evidence that loans secured on shares in Zapata (the quoted company they controlled at the time) were also part of this "equity" element, we are left wondering how much, if any, true equity the Glazers ever put in....

2. Although in Manchester United and the Tampa Bay Buccaneers, the Glazer family own two very valuable assets, they themselves clearly have very little cash. Until the United bond issue, they were unable to take more than a few million pounds in fees from the club and actually resorted to borrowing from it, something that makes more sense now we can see the state of their US business. Forbes estimate that the Bucs have $143m of debt, only $7m below the limit imposed by the NFL and in recessionary times a franchise experiencing TV blackouts and having to cut ticket prices (an anathema to the Glazers) seems unlikely to be able to pay the family any significant dividends.

3. With First Allied contributing so little income, the argument that the United bond issue was undertaken entirely for the purpose of using the club's cash and profits to repay the PIKs is indisputable. There just is no other source of cash flow or assets to borrow against that the Glazers can use. If anyone can suggest a credible alternative view, I am very happy to investigate it.

4. The argument of many fans that the family is under investing in the Buccaneers because of their financial problems (which the Glazers dismiss, claiming they are undertaking a canny but prudent "rebuilding" strategy) is certainly lent greater weight by this research. There seem to be few ways the Glazers could conduct any other "strategy" at Raymond James Stadium as again there is no obvious source of cash for investment.

5. The Glazers are not business geniuses. Malcolm's long term track record is better of course, but since he became incapacitated, the whole structure has begun to creak at the foundations. Adding United's debt (including the PIKs) to Forbes' estimate of the Bucs' borrowing, the mortgages described above, and estimates for the family's residential mortgages, we arrive at a figure of at least $1.8bn of total Glazer family debt. This is supported by $225-250m of EBITDA (depending on how far the Bucs' EBITDA fell last season from the $69m earned the year before), a terrifying debt to income ratio of almost 8x.

6. I can only assume that David Gill and Sir Alex Ferguson have no idea about the true state of the Glazers' finances and believe they really are wealthy and successful. I will be writing (again) to David Gill to ask whether he feels United supporters should worry about the family's ability to repay "their" PIKs in the light of this research.

7. As with United's management, I assume NFL commissioner Roger Goodell's defence of the Glazers during his annual address is February when he said: "I talk to the Glazers on a regular basis. I will tell you that they are sound owners. They are terrific for the NFL and we have not seen that there is any stress that would affect the way they operate any of their professional teams, much less the Tampa Bay Buccaneers." was a product of not knowing the truth about the situation. Perhaps the NFL Finance Committee should look into the situation.

For those of us who have watched as ever more debt is piled upon Manchester United, the story of First Allied revealed in this research has some chilling parallels. First Allied Corp is not a property development company, it is a property speculator, using high levels of debt to try to ride the real estate cycle and enrich its owners. In the same way the Glazers have brought nothing but debt, risk and huge costs to United, they have added nothing to their portfolio of shopping centres, built nothing, created nothing. This would be of less concern if the management of First Allied had proved themselves adept at timing the market, but sadly the opposite is true. Not only did the Glazers borrow too much, but they did so at precisely the wrong time and at unsustainable, inflated valuations.

The more I discover about the Glazer family, the more they seem to be an unappetising morality tale for our times. Their story is one that takes in financial "innovation" by out of control banks like Lehman Brothers, which in turn allows pointless real estate speculation and creates the mirage of wealth creation, before the whole facade starts to crumble. Now we know that we can monitor the performance of First Allied on a monthly basis (and I will be doing just that you can rest assured) as well as the sports clubs, the facade is well and truly down.

LUHG