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

The full details on the terms of the PIKs

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

There are two documents:

PIK Loan Agreement 16^th August 2006

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

Share Charge 16^th August 2006

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

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

LUHG

Known unknowns and unknown unknowns

This evening Bloomberg's Tariq Panja has broken a story that Red Football Joint Venture Ltd (the parent company that issued the famous Payment In Kind loans) is to redeem all £220m of the PIKs on 22^nd November. Perhaps more importantly, Bloomberg report that none of the funds to redeem the PIKs will come from Manchester United.

As has been well documented, under the terms of the bond issue, the Glazers can take £95m from the club whenever they wish. The fact that they are NOT using this dividend entitlement to repay the PIKs raises the obvious question; where is this money coming from?

There seem to me to be three main possibilities (and probably a few dozen less likely ones):

1. Refinancing

The PIKs are being refinanced with a new form of debt, secured (as the PIKs are) on RFJV's shares in Red Football Ltd. If this was the case, it would be reasonable to suppose that the interest rate on this new debt was lower than the 16.25% currently being paid on the PIKs. The question would remain as to how this debt would be repaid in the long-term and whether the burden of this repayment would fall on the football club.

2. Sale of an equity stake

The Glazers have sold a stake in Red Football Limited to a third party outside investor and are using all or some of the proceeds to repay the PIKs. The consequences of this would obviously be hugely uncertain. Who could this investor be? What stake would they own? How would their ownership impact the running of the club?

3. Sale of other assets

The Glazers have secured significant sums from another source, perhaps by selling assets. I find this incredibly unlikely as the only asset valuable enough is the Tampa Bay Buccaneers. The fact that redemption notices for the PIKs have already been issued suggests the funding is already in place which does not tally with a sale of the NFL franchise.

As someone who has repeatedly and vehemently stated that the club's money would be used to repay the PIKs, I can only eat humble pie at this point. Another source has clearly been found and that means I was wrong. I do believe however that until we have concrete answers about the source of this £220m it is best to reserve judgement about what this means for United.

Tomorrow (Tuesday 16^th November) Red Football Limited announces its results for the three months to September 30^th. These results may cast more light on what is going on, but there is a good chance that no further information will be forthcoming as the PIKs are held by the parent company that is not reporting its figures. I will be blogging about the figures tomorrow.

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

The £437m of Glazer costs - full sources

[Now with links to all relevant documents.]


Last week the Manchester United Supporters Trust (MUST) asked me to supply up to date figures on how much the Glazers have cost United since they took over in 2005.  For completeness I thought I’d post the numbers on this blog along with a complete list of sources for the figures.

“RF” refers to Red Football Ltd

“RFJV” refers to Red Football Joint Venture Ltd

Cost	2005-2010	Source note
RF takeover fees and expenses 2006 refinancing:     RF bank debt financing costs                              RF senior facility repayment penalty                              RFJV prefs repayment penalty 2010 Bond issue costs Total professional fees	£41m £9m £2m £13m £15m £80m	[i] [ii] [iii] [iv] [v]
Loss on interest rate swap	£35m	[vi]
Cash interest paid:             to 30 June 2009                                        Est year to 30 June 2010 Total cash interest paid	£171m £45m £216m	[vii] [viii]
Rolled up PIK interest:        to 30 June 2009                                       Est year to 30 June 2010 Total rolled up PIK interest	£62m £21m £83m	[ix]
Management and consultancy fees	£13m	[x]
Loans to Glazer family members	£10m	[xi]
Total costs	£437m

Edit 20:32 19th May 2010:

Some extra information and clarifications following comments received:

The information is divided into RF and RFJV costs. This is deliberate so those who don't agree that RFJV costs will be paid by United can exclude them from the calculation.

One reader has correctly pointed out that the £10m of personal loans to Glazer family members is not an accounting "cost". I included it as it represented a cash outflow from the club. Let's hope they can repay the loans.

The 2006 refinancing costs are too low. I had estimated them from the two companies's accounts. The investment memorandum for the 2006 banking facilities (“Sources and uses of funds” table page 15 of pdf) shows a total cost of £29.1m vs. my £24m estimate.

People have asked for a comparison with the plc.  In the five years to 2005, the plc received net interest income of £3.9m.  Dividends during this period totalled £38m (assuming the final dividend for 2005, which was never paid, increased year on year by the same % as the interim dividend).  So the net cost of interest and dividends for the final five years of the plc was c. £34m.

If we are making comparisons, it would be churlish not mention the one saving that the Glazers’ capital structure brings, corporation tax.  United pay no cash tax because the group interest is high enough to fully offset taxable profits.  Since 2006, this has saved c. £86m of corporation tax that United would otherwise have had to pay.

[i] Total acquisition price inc fees and expenses (from RF Investment Memorandum July 2006) less value of equity acquired (from RF Offer Doc May 2005).

[ii] Calculated from financing costs annual amortisation charge note 17 RF accounts to June 2009.

[iii] Note 31 RF 06 accounts.

[iv] Note 31 RFJV 06 accounts.

[v] 2010 bond prospectus p43 "Use of Proceeds".

[vi] Ibid.

[vii] RF “Interest paid ” 14 mths ending 2006 and 12mths ending 2007, 2008 and 2009.  From RF annual accounts consolidated cash flow statements.

[viii] RF H1 results 2009/10 plus total bond issue (current FX rates) £537m, weighted average coupon 8.55% applied for six months.

[ix] £202.094m of PIKS at 30 June 2009 less £2.504m of unamortised financing costs plus a further 10 months interest at 14.25% pa compared to the £138m initially issued in August 2006.  From note 17 RFJV 09 accounts.

[x] 2010 bond prospectus page 100 “Related Party Transactions”.

[xi] Ibid.

Red Football Joint Venture breaks a covenant

Hot(ish) news this evening.

The Red Football Joint Venture Ltd ("RFJV") accounts for the year to June 2009 became available from Companies House today. You can get them free here.

RFJV really only serves two purposes in the Glazer structure, to hold 100% of the shares in Red Football Limited and to be party to the famous PIKs (which are secured on the shares RFJV owns).

So with new accounts from RFJV, it's all about the PIKs. They were up to £202.1m at the end of June 2009 as expected.

The new news was this in note 18 on page 30 (my underlining):

The interest rate on the PIKs is going up from August 2010! To 16.25%!

Now all the Red Football companies are audited by PricewaterhouseCoopers LLP, probably the most highly thought of accountancy firm in the world. It is inconceivable that the auditors would not have insisted on this change in PIK interest rates being mentioned in the 2008 accounts if it was always going to take place in August 2010. Which means, "something has happened" during the period since the last accounts to push up the rate.

What could that be?

It has to be a breach of a covenant by RFJV, nothing else has altered.

This evening a source confirmed to me that RFJV had indeed breached it's net debt to EBITDA covenant during the year to June 2009. Not by much, debt/EBITDA was 6.2x and the covenant was 6.0x. But this small miss will (based on the June 2009 value of the PIKs rolled on to August) cost £4m in extra interest in the first year.

Three conclusions must be drawn:

1) It seems very likely that the demand for huge upfront payments to secure United's new shirt deal (which Aon agreed to) and the insistence that Real pay for Ronaldo in one tranche were an attempt to get the ratio below 6.0x (through boosting cash and reducing net debt) by the June 2009 year end.

2) The requirement to suck cash out of United to redeem the PIKs is even greater than we thought.

3) The Glazers are not quite the financial geniuses they would have us believe.

LUHG