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

MUTV: “Is this the road paved with gold?” Probably not.

Arnold the optimist and a typical Hong Kong street

Earlier this week, the Press Association's Chief Football Writer Simon Stone wrote an article "Reds Rise to Commercial Challenge" in which he got very excited about United's latest commercial partnership. In case you missed it, the club have agreed a deal with Hong Kong telecom giant PCCW that:

"....makes the company the Official Integrated Telecommunications Partner and Official Broadcast Partner of United in Hong Kong".

This basically means that PCCW will have exclusive rights to broadcast MUTV, MUTV online and MU Mobile content in Hong Kong. These will be available on the "now TV" platform as well as PCCW's other "quadruple-play" services.

Stone's article describes the deal as offering "the first glimpse of how they [United] intend to maximise their massive global potential" and contains a series of quotes from a clearly excited Richard Arnold, United's Commercial Director:

""We continue to support the collective bargaining because it makes the Premier League incredibly competitive... But there are other rights that centre around the club and players, where our access is not paralleled anywhere else. It would be very surprising not to put into place something that allowed you to communicate with fans all over the world."

So far so sensible. Of course United will want to maximise the income that come from media rights that are outside the collective sales process. But Arnold goes on:

"Is this the road paved with gold? Put it this way, a football club has three sources of income; ticketing, sponsorship and media. Media has become the lion's share of that cake through collective bargaining. But the element left over could also be very significant."

Richard Arnold needs to ask Ed Woodward for a quick look at his big Excel spreadsheet as media, at 36% of last year's revenues, isn't even the largest source (that's "matchday") let alone the "lion's share".

Putting that to one side, could Arnold be right about the potential for club owned rights? Is this the road paved with gold?

Let's take a look at MUTV.

Manchester United own 66.6% of MUTV Limited having bought out ITV plc's 33% stake in 2007. The remaining 33.3% is owned by BSkyB plc. The club is very coy about the channel and to my knowledge has never published subscriber figures since the 2005 takeover. The 2004 report and accounts said that subscriptions for the year to July 2004 averaged 95,000 over the year. Last July, David Gill was quoted in Australian FourFourTwo as saying that (depending on the time of year) the channel had "anything between 80 and 100,000 subscribers".

Certainly, MUTV is not a substantial business. Turnover in the year to 30 June 2009 was £6.9m of which £4.9m came from the UK. The channel represents 6.9% of the club's media turnover, 2.5% of total turnover and a tiny 0.6% of EBITDA. Nor has MUTV grown over recent years, 2005 turnover was £7.4m. Although the channel made a pre-tax profit of £284,000, after paying the interest on loan stock of £11m (£6m from United and £5m from Sky), the most recent accounts showed a loss of c. £270,000. MUTV is not cash positive and has never paid its shareholders a dividend.

The channel's "problem", in common with other clubs' in-house TV stations is that its programming is not that compelling. All live first team games are sold collectively whether by the Premier League, FA or UEFA. This leaves MUTV with reserve matches, replays of recent games (after midnight the following day) and a mix of phone ins, interviews and features. Stone's PA article hypes up such highlights (note the following paragraphs are not a press release):

"It means, for instance, that supporters will have access to Sir Alex Ferguson's weekly press conference at 12 noon UK time, barely two hours after it has concluded.

With reserve team games, pre-match Premier League build-up as well as post-match phone-ins, it is the nearest fans are likely to come to the club without access to the actual matches themselves."

Wow.

I don't mean to be rude about MUTV, I've been a subscriber myself, but the fact remains that content like this will always be a minority pursuit. Outside the UK, the appeal of full re-runs of matches is of course further reduced by the fact that virtually all Premier League games are broadcast live. David Gill seemed to recognise the inherent limitations of MUTV in his comments to Australian FourFourTwo:

"It will never get huge numbers of people without the rights and we will never have them. What we have done are little things like pulling the advertising slots back so we can offer to our partners. It is not going to help buy a star player but it is a very important part of our future and I am content with where it is. Yes we would like it to have 300,000 but that is not going to happen - and if MUTV can't, no-one else can."

Returning to Hong Kong and Arnold's "road paved with gold", it's important to see through the hype. MUTV's 80-100,000 subscribers come primarily from the UK and Ireland, combined population c. 68m. How many subscribers will PCCW pick-up from Hong Kong's 7m people? How many will want to watch press conferences and re-runs of games they could have watched live?

No doubt United will do more deals like the PCCW one and that's a good thing, with programming costs fixed, profits will surely rise as more distribution deals are signed. But if the UK can only generate £5m of revenue for MUTV almost twelve years after launch, it is hard to see this as something that will ever make a significant difference to the club's finances.

The Glazers need to look for another road....



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

How many shirts Greg? Don’t believe the hype.....

Another year, another three letter sponsor....

So the new season is about to begin and United supporters are getting used to a new shirt emblazoned with the name of our new sponsor. United's appeal to global brands is not in doubt and the exposure the deal will give to Aon is clearly the major plus for the company's President and Chief Executive, Greg Case as he outlined in this press release (edit, the cached copy I previously linked to has gone, nice work Aon, but thankfully Red News published the full release here) which was also sent as an email to all Aon staff when the deal was announced last year:

"The strong Manchester United brand is compelling because it provides Aon with an opportunity to communicate the value we bring to clients on a broader base than we ever could have achieved on our own. We also will have the chance to maximize the value of our partnership in Asia, Latin America and the Middle East as well as take advantage of Manchester United's strong presence in the United Kingdom and Europe."

Not only that, but Greg goes on to explain how United supporters will become Aon's "walking billboards":

"And speaking about that world famous shirt, more than 6 million Manchester United shirts are sold in a year, giving Aon more than 6 million "walking billboards" annually. With each appearance Manchester United makes, they will add to their fan base in both existing and new markets. Starting in 2010 the Aon-sponsored shirt will continue to build equity for our Firm as it increases its impression rate globally."

How many shirts are sold each year? "more than 6 million" says Greg....

Hang on. Nike never reveal how many replica United shirts they sell per annum. The bond prospectus does not contain the number. The only time Red Football Ltd has made it (sort of) public was in the 2006 refinancing Investment Memorandum (page 14`of the pdf, third paragraph):

"Over the first four years of the Nike deal [which commenced on 1st August 2002], the Club sold in excess of 6 million replica shirts, approximately 40% of those sales (including other apparel) were outside of the UK."

So four years ago United/Nike were selling c. 1.5m shirts a year (of which only around 600,000 were sold outside the UK), today someone has told Greg Case that annual shirt sales are running at 6m!

What's going on? A quick call to Nike yielded the response that:

"annual sales are significantly below the number [6m] you just quoted".....

The football "industry" is never more ridiculous than when it is making exaggerated claims about its own popularity and it makes me wonder what else David Gill told Greg Case about the current state of Manchester United. Perhaps he should pop back over to M16 for a fact finding mission. He could take in a match, West Ham is on general sale.....


LUHG