Sunday 31 January 2010

Today's BBC Radio 5 interviews with David Gill and Duncan Drasdo

Half time at the Emirates.  I want whatever they've slipped into Nani's porridge. Get in.

Here is a link where you can download Radio 5's interviews with United Chief Executive David Gill and MUST's Duncan Drasdo.

Full analysis to follow.....

PS. One of these people is paid over £1.8m a year to talk rubbish like this.....


Saturday 30 January 2010

The Empire strikes back.....

So here we go, released from the legal restrictions during the bond roadshow, David Gill and the club hierarchy are coming out fighting against all the criticism they have received. Tomorrow morning, Gill will do an "exclusive" interview on Radio 5.

Football Focus on BBC1 this morning had a piece on the gold and green protests and spoke to MUST, Keith Harris (banker not ventriloquist) and a rather ill informed academic. The club was obviously given the chance to take part but instead sent the BBC this statement:

"Manchester United is the most profitable football club in the world, last year, on a record turnover of £278m, the club made a record cash profit of £91m. Interest payments were £41m and wages accounted for less than half of the turnover.
"The recent bond issue has been very successful and provides the club with certainty in its interest payments, as well as great flexibility with the removal of bank covenants.
"The cash from the sale of Cristiano Ronaldo is available for Sir Alex to spend and it will be spent on players who are available for purchase and who the manager thinks can improve the squad, not to prove to pundits that it exists."

Let's take a look at this statement bit by bit:

"The recent bond issue has been very successful" - They have indeed raised £504m, £4m above the initial target.  That is a successful bond issue.  Well done all.

[The bond issue] "provides the club with certainty in its interest payments" - This is also true.  From now until February 2017, the club will have to pay a fixed £44m per year (unless it chooses to redeem some bonds). The 8.72% they are paying on the £504m is indeed certain.  It is also higher than the actual interest rates on the bank debt they are replacing and is even higher than the fixed rate (5.0775%) that the management chose to lock into in 2007 and is now costing the club £35m to unwind.  But yes, they get certainty.

[The bond issue gives] "great flexibility with the removal of bank covenants" - hmmm.  Let's be very clear about this.  The bond does indeed remove the bank covenants and replaces them with bond covenants.  These are a lot less onerous than bank covenants.  They allow Red Football Ltd flexibility to do the following:
  1. Pay an immediate dividend to Red Football Joint Venture Ltd of £70m (page 130 note 13).
  2. Pay an additional dividend to Red Football Joint Venture Ltd of £25m whenever they wish (page 130 note 14).
  3. Transfer Carrington (for free) to another Glazer company, sell it and let the new owners lease it back to the club (page 78 and onto 79 "Real Property").
  4. Pay £6m a year to the Glazers in management fees (page 100).
  5. Pay £3m a year in "general corporate expenses" to Glazer companies (page 129 note 10b).
  6. If EBITDA is at least twice the interest bill, pay 50% of the net cash profits of the club to parent companies in dividends (page 127 note c(i)).

So who benefits from the "flexibility"?  The football club or the Glazers personally?

"The cash from the sale of Cristiano Ronaldo is available for Sir Alex to spend and it will be spent on players who are available for purchase and who the manager thinks can improve the squad, not to prove to pundits that it exists." - Now I don't want to use rude words in a family blog, but this is a bit much.....

Look at this table from page 44 of the prospectus.

At the end of September 2009, Red Football Ltd had £146.6m in cash (that's the first column entitled "Actual").  Why so much?  Firstly because £80m of Ronaldo money was in the bank and secondly because Aon, our new sponsors paid £35.9m of their £80m four year deal up front.  So that's a bonus inflow of £115.9m in the £146.6m.

The second "As adjusted" column shows the impact of the bond issue (as if it had happened in September because those are the most recent figures).  See how the cash mysteriously falls from £146.6m to £116.6m. This is explained on page 43 of the prospectus.  The bond cash needs to be topped up with club cash to pay off all the old debt, plus some of the losses on the interest rate derivative and the £15m in fees the bond deal cost.  So there goes £30m.

Then look at little note 1 below the table,  "we may, without restriction, make a distribution or loan of up to £70.0 million to our immediate parent company, Red Football Joint Venture Limited, that may, in turn, use the proceeds of that loan for general corporate purposes, including repaying existing indebtedness."

They "may" do that.  If they did that of course, no less than £100m would have gone out of the club.  Have they done it as of today 30th January 2010?  No.  Why not?  Because the settlement date for buyers of the bonds (the date they pay for them) was yesterday the 29th January.  It wouldn't have been possible to pass the money up to Red Football by today because they need to do the "Closing Funds Flow" whereby money moves around group companies.  So today it is true the money is there.  You can guarantee it won't be around for long.

Will they pay up the £70m?  We won't know for certain until the accounts for the year to 30 June 2010 are published next year.  But with the PIK time bomb ticking under the Glazer family (and their other businesses struggling in the US) the answer is obvious.  My bet of a pint to anyone who wants to gamble on the money staying in the club is still there.

So what of buying players?  Even if the cash goes as I described, the club can still buy, with even more debt. The Glazers can take the money from Ronaldo as set out above but out of the kindness of their hearts they've fixed a new £75m bank facility for the club.  Now of course cash is cash whether its Aon cash, cash paid by TV companies over the rest of the season, Ronnie cash or cash drawn down under the £75m facility.  Maybe they have put the Ronaldo money in a separate account called "Look, look it's the Ronaldo fee account" so they can show journalists the bank statement.  It doesn't matter of course,  sell the best player in the world for £80m and push at least £100m of cash out in fees, dividends, derivative payments etc and you end up in exactly the same position.

So if you happen to hear David Gill on the radio tomorrow, remember this, the money IS there this weekend, but the whole design of the bond issue is structured to mean it and a whole lot more will walk out of Old Trafford in the weeks, months and years to come.


Thursday 28 January 2010

How we know they're planning to take out cash..... the final piece of evidence

I'd like to apologise for the dweeby, technical, accounting nature of this post.  Hopefully it will make sense the way I describe it below.  If not please don't hesitate to contact me and I'll try to explain what I mean.  Despite it being technical, I thinks it's important.

The digging around that I and others have done since the bond prospectus was published on 11th January shows conclusively that the Glazers will be able to take huge sums out of United now the old bank debt has been replaced with bonds.

What's obviously harder to prove is that they intend to exercise these rights and to what extent.  We know for certain that they intend to take the Ronaldo money out, it's mentioned on pages 27, 44 and 130 of the prospectus.  We know they are going to grab Carrington, sell it and make the club that built it from its own funds pay to use it, that's on pages 78, 79 and 156 amongst others.

But maybe that's it. Maybe just because they've got the right to take 50% of the cash profits they won't exercise that right.  What sort of smoking gun would you need to find to the prospectus to make a convincing case that not only can the Glazers pillage Manchester United to the tune of hundreds of millions of pounds, but that they intend to?

I think you'd need to find something like this:

This small print appears on pages 43 of the prospectus with the same routing of money also described on page 44 and is defined on page 158 as the "Closing Funds Flow".

For clarity, taking this small print together with other bits of the prospectus, this is what will happen to the £504m of proceeds from the bond issue:

£504m raised
of which:

£15m paid in costs to the banks that organised the bond issue
£489m left in MU Finance
of this £489m:
"approximately £400m" is passed to Manchester United Ltd (the rest goes straight to Red Football Ltd to pay off bank debt).
Manchester United Ltd lends the £400m to Red Football Joint Venture Ltd (the parent company of Red Football and the company with the famous PIKs).  The loan is indefinite and interest free.
Red Football Joint Venture Ltd pushes the £400m back into its subsidiary Red Football Ltd (the company with the bank debt) by making a "capital contribution".

Red Football Ltd uses the £400m it has just received (together with more of Manchester United's cash, to pay off the rest of the bank debt and some of the losses on the interest rate derivative).

Now when I first read this clause it didn't seem very important.  I didn't know why they were doing all this money moving, I guessed (wrongly) that it was something to do with tax.  When I had some free time I asked an expert, a senior accountant at one of the big 4 firms in Manchester (thanks mate).  Being a qualified professional he worked it out pretty quickly.  And when he told me the answer it all made sense.  Let me try to explain:

Under English company law, there are restrictions on companies paying dividends.  It is not generally possible to pay dividends from what are called "non-distributable reserves" without a complex and costly "capital reorganisation".  Without boring you with the detail, a company's net worth (it's "shareholders funds") are divided into different "reserves".  A company (even if it has the cash) cannot easily pay dividends from its "share premium reserve".

This is what the various "reserves" that make up Red Football Ltd's net worth ("shareholders funds") looked like at 30th September 2009:

So despite having a net surplus of over £450m, Red Football Ltd can't really pay dividends because it all sits in the "share premium reserve".  If it had a positive number in the "profit and loss reserve" it could pay dividends up to this amount, but this number is negative (the product of over four years of losses).

So how do companies in this position get around this problem?

One way is for the company's owner to make a "capital contribution".  The owner just pumps money into the company (no new shares are created).  Intuitively you can see why this money from the parent and placed in a separate "Capital contribution reserve" can be paid back to the parent in dividends, it is after all the parent's money.

So suddenly, the £400m flow around the Red Football group makes perfect sense.  The new reserve created by this inflow into Red Football's account allows the company to pay dividends to its parent Red Football Joint Venture Ltd.  It has no other possible purpose (and let me add, this is a normal method of creating "distributable reserves" and is perfectly legal and normal).

And the most important thing about this accounting cash shuffling is this, it creates £400m of dividend paying capacity.  Not just the £70m identified upfront in the prospectus, or the extra £25m dividend they can pay that is hidden on page 130 of the prospectus.  £400m.

Still not 100% certain the Glazers are planning to asset strip our club for years to come?

Some simple questions: why bother creating the accounting room to grab £400m and and pay it out to the owners?  
If asset stripping is a scare story with no foundation, why have thy deliberately made it possible?

If you were a benevolent owner who put the interests of the club first, would you create the accounting mechanism to pay out £400m?
You don't need to be a knowledgeable accountant like my mate to know the answers......



Feeling a little jaded today.  You really can't beat injury time winners against little city.....

But how little are they? Here's a snippet (from the accounts to 31st May 2009 City slipped out on 13th January and the recent United accounts to 30th June 2009):

Turnover City United
Matchday £15.4m £108.8m
Media £48.3m £99.7m
Commercial £28.3m £69.9m
Total £87.0m £278.5m

EBITDA City United
2008/09 -£30.7m £91.3m

Obviously the 40% cumulative ticket price rises at United since 2005 make that £109m number possible, but ask yourself this:

a) Isn't Michel Platini right?  Isn't the financial tragedy of football both United style debt but also the fantasy world of £31m+ annual losses funded by rich men who feel nothing for their club toys?

but more importantly....

b) Aren't City a MASSIVE club?


Monday 25 January 2010

Politicians watch no.2

"Gordon, I've got these bonds I need to shift...."
"Funny you should say that Alex...."

So there you are, waiting for a major politician to step in and apply themselves to the debt crisis in English football when suddenly the Prime Minister himself gets involved.

At his No. 10 press conference the PM, when questioned by lifelong red, Newsnight Political Editor and mercilessly effective biographer Michael Crick (himself nudged into it by a certain Red Issue Sanctuary agitator) had this to say:

"There is an issue here for football supporters, that over the last few years a number of football clubs have become highly leveraged and therefore they have far higher levels of debt than the income they are able to generate from the footballing activities and the television activities,"

Now for some clubs that is no doubt true, but for United (and Liverpool), the real issue is debt piled on by leveraged buyouts and the subsequent asset stripping.  Gordon Brown went on:

"Of course, in many cases there are very simple ways that they can deal with these problems. In other cases, football clubs don't have the income that is necessary to deal with the leverage that they have.

The Prime Minister didn't expand on these "very simple ways" to "deal with these problems".  Perhaps this is where the asset stripping comes in.  Don't worry about those horrible PIKs, the Glazers will have pillaged enough from the club to pay them off in a few years.  Problem solved.  Anyway, there was more:

"But this is an issue and it's an issue football clubs are facing and it's a worry to supporters and I think the management of football clubs have got to look very seriously at their responsibilities to their supporters, that they have high levels of income from the supporters but the debt levels have been at a leverage level that is too high."

Quite.  Sentiments we can all agree with, but if the management of the club you support doesn't just not "look seriously at their responsibilities to their supporters" but puts in place a mechanism to cream off 50% of the profits that the "high levels of income from supporters" generate, what happens then?  Could someone in charge do something?

"It's an issue for the clubs themselves, they have got to deal with this issue."

Oh dear.  Well it was all going so well wasn't it?  Haven't we learned that letting industries prone to excessive debt and greed and that impact the lives of millions, regulate themselves isn't always the best idea?
Now I know the problems of professional football clubs doesn't compare to the banking crisis in either impact or importance.  What I do know however, is that the mindset that allows rich men to dazzle politicians into leaving well alone is just the same and just as wrong.


Don't take my word for it..... ask an expert.

"Scare mongering, don't understand business, very profitable club, unprecedented success since they took over...."

Yes, according to some of the ranting comments on newspaper websites (and implicitly according to Richard "£866,000 per year is a bargain" Scudamore the Chief Executive of the Premier League in his recent relaxed comments about club finances), United fans are totally wrong to worry about Glazer and the debt.

So who's right and who's wrong?  Well, someone who might know is Jim O'Neill, Head of Global Economic Research at Goldman Sachs (one of the banks that syndicated the recent bond issue).  A life long United supporter, O'Neill was a director of the plc in the last few months before the Glazer takeover (he was brought in to try to mend fences with Magnier and McManus during their spat with Fergie).  His career also include long periods  researching bond markets so he has excellent knowledge of all the relevant areas.

Despite working for a bank involved in the bond issue, almost immediately after the issue closed, O'Neill felt strongly enough about United's financial situation to appear on BBC Radio 4's "The World this Weekend" yesterday afternoon (24th January 2010).  You can download the item (which also includes discussion of the situation at Pompey) here.

So what does O'Neill think?

Here are a couple of quotes:

"Trying to use a lot of debt and leveraging the balance sheet on the belief that a company's value and its business will improve forever; in many sectors has proved to be very vulnerable when you have a recession, and in football it's becoming more apparent by the week."

So football is falling into the same debt trap that we have seen across the world of business in the last few years.

"I think it suggests that to run a highly successful football club on the basis of a leveraged debt business.... carries all sorts of risks."

So football is not suited to being run on a highly leveraged basis.

Now none of this will come as any surprise to people who have paid attention in the last five years but let's hope the it filters through to the free market ranters on the web and the ostriches who run English football.


Saturday 23 January 2010

Understanding the finer details of the bond pricing

So the bonds have been priced.  The annual interest bill will be £43.4m per annum, £307.7m over the life of the bonds.  Red Football has raised £504m and will repay £514m in 2017.
This huge sum of money provides no benefit or gain to Manchester United. Not a penny will be spent on players, the ground or Carrington.  Not a penny of this money will be applied to keeping ticket prices down or giving free tickets to local kids or subsidising better pies.

Every penny of this money will pay down old debt.  This is new shiny bond debt for boring old bank debt.

This shiny debt lets the Glazer family suck cash and assets out of our club.

For the masochistic, here is a guide to what all the terms in the bond pricing notice from the bank syndicate means (all $/£ conversions are at $1.6124):

Issuer: MU Finance plc.
Issuing company (100% owned subsidiary of Red Football Ltd).

Sec Type: Senior Secured Notes (144A/RegS, no Reg Rights)
The bonds are the senior debt, are secured on certain assets and are not registered under US Securities Act 1933 as they are being sold to "qualified" (i.e. expert) investors only.
Maturity: February 1, 2017
The bonds are to be repaid in full on this date.

Face amount: £250,000,000 | $425,000,000
Number of bonds being sold: 250m £ bonds and 425m $ bonds.  So £250m and $425m will have to be repaid.  That's £513.6m in total.

Proceeds: £245,222,500 | $416,776,250
What Red Football get from selling 250m £ bonds (250m x £98.089) and 425m $ bonds (425m bonds x $98.065).
Total proceeds are £503.7m ($812.2m)

Coupon (s/a): 8.750% | 8.375%
The interest payment pa on each type of bond.  So interest is £21.875m on £ bonds (250 x 8.75%) and $35.594m on $ bonds (425 x 8.375%).  In £ that's £43.95m per year. The interest payments are every 6 months.

Reoffer price: 98.089 | 98.065
Actual price for each £/$ bond as set by the banks.

Yield: 9.125% | 8.750%
The yield is the return investors get if they buy at the issue price, receive coupons twice a year until Feb 2017 and receive "par" (£100 or $100) back, expressed as an annual return
Reoffer spread: UKT 4% Sep-16 +569bp | UST 3.25% Dec-16 +568bp
How the yield compare to UK and US government bonds that mature (get repaid) at a similar date.
The £ bonds yield 5.69% more than UK government bonds
The $ bonds yield 5.68% more than US government bonds

Call Schedule:
01-Feb-13: 108.750 | 108.375
01-Feb-14: 104.375 | 104.188
01-Feb-15: 102.188 | 102.094
01-Feb-16: 100.000 | 100.000
Prices at which MU Finance can redeem some or all or some of the bonds from 1 Feb 2013 onwards

Min Denom: £50k + £1k | $100k + $1k
The minimun you can buy is £50k worth of £ bonds or $100k of $ bonds, and then increments of £1k/$1k

CUSIP: | 144A: 553799 AA5
Reg S: G63262 AA0
ISIN code: XS0479707688 | USG63262AA01 (RegS)
XS0479707845 | US553799AA50 (144A)
Various codes to identify the bonds when they start trading.

Interest Pay Dates: February 1 and August 1
Bit obvious!

Ratings: None
The bonds are not rated by a recognised "rating agency"

Trade date: 22-Jan-10
Settlement date: 29-Jan-10 (T+5)
The bond issue takes place 22 Jan and investors have to pay in 5 business days on 29 Jan.
Underwriters: JPM (b&d), BAML, DB, GS, RBS // Co-Manager: KKR
The banks doing the deal


Friday 22 January 2010

More on Carrington

A good source tells me that the building work on United's Carrington Training Ground (including landscaping, access roads etc) came to over £5m (we're talking late 1990s, early 2000s). It made me wonder whether the value I estimated for a sale and leaseback of £15m in my debt analysis is too low.

I dug around a bit and found the Manchester United plc presentation to the City on 1 October 2001 (full year results for the year to July 2001) which you can download here for a trip to a more innocent time.

On page 31, the club show all the capital expenditure since the club floated. The cost of building and fitting out Carrington (which will include land purchased etc) was stated as £15.8m. On page 17, the club showed its estimate of the projected costs for the year to July 2002 (£5.7m). I assume that was the final year of work.

So that's a total spend of £21.5m on Carrington. This tallies quite well with a build cost £5.2m on the actual structures.

So my estimate of £15m was far too low. It seems likely that £30m+ would now (8 years on) be a more sensible figure, perhaps even more.

Why does this matter?

Because this is a new fixed cost being dumped onto the club. They'll be rent of £2-3m to pay every year (that's half a Serbian wunderkind). To which we have to add the £45m of bond interest. And the management fees. And the "expenses". And the dividends to the parent companies.

Final point: when someone says "oh the plc was just the same", remember this, the plc built Carrington. Yes I'm sure it made good financial sense to develop the training ground but fundamentally they did it for footballing reasons because the football club needed state of the art facilities. What have the Glazers ever built for our football club?


Thursday 21 January 2010

Politicians watch no.1

Following on from "Football authorities watch", it occurred to me that it would be useful to do the same monitoring with the key politicians who might be in a position to protect English club football.
On several occasions since 1997, the current labour government has considered a move away from the current system of "self-regulation" by the FA and Premier League to a system where a "Football Regulator" would be given statutory powers over the game.
Political regulation of football already happens in some areas (such as the legislation enforcing some of the recommendations of the Taylor Report, the ones about sitting down, not the ones about not letting all-seater stadiums be an excuse for higher ticket prices).
Even though there is already political input into some areas of the game and despite numerous reports and enquiries, the current government has always shied away from direct intervention. In my opinion, this stance is looking increasingly untenable. Self regulation has seen not only the problems at United develop over the last five years, but similar issues at Liverpool, Portsmouth, Leeds, Notts County and Chester City, to name five clubs where out of control owners have pushed their clubs close to or over the edge.
Would this government or a future one have the guts to regulate Britain's most popular sport for the good of supporters? Probably not at the moment, although something tells me that if United or Liverpool went bust the mood would change very quickly.

In the mean time, here are five politicians who should have a view on what is being done to our club:

Gerry Sutcliffe MP - Minister for Sport
John Whittingdale MP - Chairman, Culture, Media and Sport Select Committee
Jeremy Hunt MP - Conservative shadow Minister for Sport
Don Foster MP - Liberal Democrat shadow Minister for Sport
Alan Keen MP - Chairman, All Party Football Group

So once again using the power of Google, here is what they've been saying about the tragedy at United and debt in football since 11th January 2010:

Sutcliffe - nothing (although he did have time to tell the House of Commons that Bradford Council made a “big mistake” in excluding Ilkley Lido from its free swimming scheme for under-16s and over-60s. So well done him).

Hunt- nothing (not even anything funny).
Foster - nothing
Keen - nothing


Bond pricing update

From the FT:

"Investors are saying Tranche 1: (£300m) priced to yield 9% and tranche 2 : ($325m) priced to yield 8.75%."

Not a great yield given the amount of cash the Glazers can suck out of the club. Interesting too that the many are suggesting the bond issue is finding more favour with private clients than institutions. It's amazing how a free mini football can get in the way of common sense.


Football authorities watch no.1

So it's now ten days since the publication of Red Football's bond prospectus. Ten days of massive coverage in the media, of justified anger by supporters, of petitions and protest groups being established and ten days during which I can't recall seeing any comment at all from the people in charge of the national game; the FA and the Premier League.

Such silence is even more curious given the fact that these bodies are the ones who have allowed the pillaging of United to happen. Either organisation has the authority to introduce whatever rules they see fit to regulate the financial affairs of member clubs, neither has chosen to do anything to prevent the asset stripping of Manchester United.

So I thought I'd start a regular(ish) check on any public utterances by these "custodians" of the game on United's financial woes or the wider debt crisis threatening English football.

There are four key individuals in positions of power at the FA and Premier League (who are independent of member clubs). They are:

Lord Triesman - Chairman of the Football Association
Ian Watmore - Chief Executive of the Football Association

Sir David Richards - Chairman of the Premier League
Richard Scudamore - Chief Executive of the Premier League

Using the power of Google and the organisations' own websites, here is what they've been saying about the debt crisis afflicting the game since 11th January 2010:

Triesman- nothing
Whatmore - nothing
Richards - nothing
Scudamore - spoke to 5Live's Sportsweek programme (on Sunday 17th January) his club specific comments mainly related about the crisis at Portsmouth (download audio here). Highlights include:

'Given the amount of central income that is generated by the Premier League, it would be down to absolutely rank bad management if a club itself was actually to go into administration.'

[On intervening to set what clubs can and can't do financially] 'We can only go by our rule book. I don't think anyone wants the Premier League running football clubs, it's very much for the owners to run the football clubs.'

'In fairness to the people at Portsmouth and [Pompey chief executive] Peter Storrie and the people who are running that club, they are working very, very hard and have worked extremely hard to live the dream [oops] for Portsmouth.'

'They've had a succession of owners through there and the people there now are scrabbling very hard to make sure this football club stays alive.'

'There's only a certain point at which we can intervene. We changed our rules in September and now, when we see the financials [reports] that come in from clubs at the end of March, we will be able to take a stronger role to come in and make sure they are sustainable.'

'Do you want to just have a club that barely survives in the Premier League? Do you actually want to own a club that is safely mid-table? Do you want to own a club that pushes for Europe? Do you want to own a club that guarantees being in the Champions League?'
'Your attitude and answers to those questions give you an answer as to what sort of money might be required and we at the Premier League are never going to be intervening to the level where we decide how much it needs to run a club.'

'Debt per se is not bad. It's the amount of debt relative to your income that's the critical issue.'


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.


Monday 18 January 2010

Half a billion £s.....

This is a research paper on the detailed covenants contained in the Red Football bond prospectus which was published on 11th January 2010. The paper can be downloaded in pdf form here.



The small print of Red Football Ltd’s bond prospectus shows that the Glazers have structured the issue to allow them to take at least £20m of dividends out of the club every year. An additional, so far unnoticed, clause allows a further £25m to be paid out in dividends at any time. Add these payments to the £70m already known about, the Carrington deal and “management fees” and at least £220m of the club’s cash will flow directly to the Glazers between 2010 to 2017.

With interest on the bonds and the extra cost of leasing our training ground back, the total that will be sucked out of the club between now and 2017 will exceed half a billion pounds, to add to the huge cost already imposed by the Glazers.

Only £70m to pay off the PIKs[i]?

Since the bond issue details came out many analysts have been wondering how the family were going to deal with the rest of the PIKs.
The PIKs are held by Red Football Joint Venture Ltd and are secured on that company’s shares in Red Football Ltd (and thus the club). If they are not repaid by 2017, the Glazers will almost certainly lose all their shares in Red Football Ltd.
Paying off the PIKs is the top priority for the Glazers. The fact that the interest rolls up at 14.25% also makes it essential for them to try to repay them as early as possible (the PIKs will total around £207m by the end of March, will be over £300m by the summer of 2012 and almost £600m by 2017).
So taking £70m out of the club (which they couldn’t do under the old bank loan agreement) is a start, but it is never going to be enough. If they paid £70m off in March 2010, there would still be £332m to pay by August 2017[ii].
This cannot be the strategy for the PIKs. They NEED to pay off more or they will still lose the club to the hedge funds. There must be something else going on.

The small print in the prospectus

Other than paying off the PIKs with their own money (something they have shown no inclination to do for the last five years), their only solution is to get more money out of the club. Payments to parent companies and directors are restricted by the terms of the bond issue, so we need to examine the prospectus’s small print that covers the “covenants” Red Football Ltd has to adhere to.

There are two key covenants, relating to this area; Restricted Payments[iii] and Incurrence of Indebtedness and issuance of preferred stock[iv]. They are both very dense, almost unintelligible sets of rules about what Red Football Ltd can do whilst the bonds remain outstanding. The first one, Restricted Payments, puts limits on Red Football Ltd and its subsidiaries paying cash to the parent companies (like Red Football Joint Venture Ltd). The £70m we all know about is explicitly allowed in clause 13[v]. But it turns out there is a clause just below it that hasn’t got any publicity. Clause 14 says they can also pay up another £25m whenever they want[vi].

And that’s not all. On top of this £95m, there are rules in clauses i to vii about other dividends that the owners can take out of the club[vii]. To summarise, if the club’s interest is still covered twice by EBITDA (as described in the Incurrence of Indebtedness and issuance of preferred stock covenant referred to above[viii]), Red Football Ltd can pay dividends worth 50% of the net cash profits of the club (technically the Consolidated Net Income” or “CNI”[ix]). CNI excludes losses or profits on player transfers and the amortization of goodwill and player contracts.

To give you an idea of what we’re talking about, this is the calculation for Consolidated Net Income for the year to September 2009 and shows what would have been extractable in fees, dividends and interest if the bonds had been in place during the year.

Net Income year to 30 June 2009
Less profit on player trading
Less profit on sale of fixed assets
Add back exceptional
Add back non-cash tax
Add back amortisation of goodwill
Add back amortisation of player registrations
Less mgt fees in excess of consultancy fees[xi]
Add back higher EBITDA run rate*
Consolidated Net Income year to 30 Sep 2009
Permitted dividend**
Management fees***
General corporate overheads of parent entities****
Interest on bonds*****
EBITDA (adjusted year to Sep 2009)******
% diverted*******

* Additional £6.7m of EBITDA shown in most up to date accounts (year to Sept 2009) vs. year to June 2009
** permitted 50% distribution
*** See page 152 of Prospectus (166 of pdf)
**** See section below “Carrington, personal loans, “management fees” and expenses
***** Assuming coupon of 9.5% on £500m issue
****** From Prospectus page 12 (26 of pdf)
******* Note this is a proforma number as if the bond issue had been in place in year to Sep 2009

So in the latest twelve month period for which we have figures, the Glazers could have paid themselves 50% of Consolidated Net Income (about £22.6m) in dividends. No doubt they believe they can continue to push up profits from here (I’m more sceptical), but even if profits are only flat every year until the bonds are redeemed, that’s another c. £23m or so they can take out each year.

In fact, this bond issue is deliberately structured in such a way, that (assuming they can hold profits where they are) this is the minimum sum they can take each year. If there is any rise in profits from better TV deals or higher prices for supporters, half the extra money can be paid out in dividends.

Adding management fees, expenses and the interest on the bonds, every year 79% of the operating profits of the club will be taken out.

Or perhaps we should turn it around the other way and look at it from the fans’ point of view because this outflow is no less than 70% of all United’s matchday revenues. 70 pence from every pound spent by supporters on match tickets, food and drink, programmes, even car parking, and 70 pence from every pound spent on corporate boxes and executive facilities will go straight out of the door in dividends, fees and interest.

Carrington, personal loans, “management fees” and expenses

When thinking about how they plan to pay down the PIKs, we can’t forget Carrington and the direct payments to the family.

I don’t know exactly what Carrington is worth, but we can make an educated guess at £15-20m. All United’s property is valued at around £250m[xii], so estimating around £235m of this being Old Trafford and the balance basically Carrington (and the Cliff) sounds about right. Anyway, the Glazers get the asset free and get to sell it with the club leasing it back. So that’s c. £15m in the Glazers’ pockets and probably an additional cost of at least £1m per year to the club (assuming an 8% yield on Carrington).

We have no idea what the family have spent the £22.9m[xiii] they have taken out in loans and fees and have excluded them from my calculations. Under the terms of the bond issue they can however charge the club £6m pa for “management services”. This has been widely reported in the media.

There is however a final indignity hidden in the Restricted Payments covenant (clause (10)(b) of the section setting out payment which are allowed). This shows that Red Football Ltd is entitled to make up to £3m of payments to parent companies to cover their “general corporate overhead expenses” including “…..payments in respect of services provided by directors, officers or employees…..”.
You might imagine that such expenses should be covered by the £6m “management fees” already being charged, but no.

Adding it all up

The net result of all this is very depressing. The bond documents embed the rights of the Glazers (merely if they maintain current profits) to take over £30m in dividends, fees and expenses out of the club every year.

Adding in Carrington and the “hidden” £25m one off dividend, they can easily reduce what we have always been told are “their” PIKs down to around £84m this year (see table below).

Total permitted cash to RFJV
PIKs £m
End March 2010
add early redemption fees (3%)
From bonds
Carrington proceeds (estimated)
Extra allowed dividend
Total after refinancing

With the annual dividend and management fees, they will have paid off “their” PIKs including rolled up interest by 2015 (if they just hold profits flat) or even 2014 (if they manage to grow them 5% pa)[xiv].

Total possible cash to RFJV (annually)
2009 base 50% CNI
Management fees
General corporate overhead expenses
Total annual dividends on 09 profits
Assumed yield on bonds
PIK rate
PIKs repaid in

In total between the completion of the bond issue and 2017 (assuming the bonds yield 9.5%), this is the bill the club will have footed:

Cash outflow 2010-2017 post refinancing
Cumulative interest to 2017
Cumulative dividends to 2017
Cumulative fees and expenses to 2017
Extra cost of Carrington to 2017

By 2017, despite having pumped more than half a billion pounds out of Manchester United, the club will still be saddled with the £500m of debts it has today.

These figures are based on the club not having to draw down its £75m revolver or taken on any further borrowing on top of this (there is permission in the document for at least a further £50m[xv]), as the numbers defy all sense already……


Many supporters, commentators and people in the wider football world have been astonished by the revelations concerning the Glazers ownership of Manchester United that have come to light in the last week.

This paper demonstrates that the pillaging of the club over the last four years by the owners is set to continue and indeed accelerate in the years to come. Nobody can be in any doubt; not the fans, the Football Association, the Premier League, UEFA, the government or indeed the manager or players that what is being allowed to happen is nothing less than a violent assault on one of Britain’s best known sporting institutions. There can no longer be any excuses by the football authorities to not immediately and urgently intervene (through rule changes if necessary) to prevent people, who have no interest in football beyond their own greed, from acting in this way.
18 January 2009
About me
I am a season ticket holder at Old Trafford as well as having been a fund manager based in London with 15 years experience of company financial analysis.

[i] PIKs are “payment in kind securities”. These were issued by Red Football Joint Venture Ltd (“RFJV”), a parent company of Red Football Ltd in August 2006 and are secured on RFJV’s equity in Red Football Ltd. The PIKs accrue interest at 14.25% per annum which is rolled up into the capital of the securities (a process known as “reverse amortisation”).
Manchester United is not liable for the PIKs, but if the Glazers fail to repay them by August 2017 (by which time they would be worth almost £580m), control of Red Football Ltd would pass to the owners of the PIKs (widely thought to be Citadel Capital Group, Perry Capital and Och Ziff Capital Management Group.

Revised PIK capital outstanding is calculated using £175.479m total exposure declared in RFJV’s report and accounts to June 2008 less £2.811m of unamortised financing costs. Interest is added to this net amount for nine months to 31 March 2010 when it is assumed £70m is repaid (less an assumed 3% early redemption fee). The revised sum of £123.2m is then projected forward (reverse compounding at 14.25%) to August 2017.

[iii] See page 112 (page 126 of the pdf version), of the Preliminary offering memorandum of MU Finance plc”, published on 11 January 2010 (hereafter the “Prospectus”).

[iv] See page number 116 of the Prospectus (page 130 of the pdf version).

[v] See page number 116 of the Prospectus (page 130 of the pdf version).

[vi] The Restricted Payments covenant sets out what constitutes a Restricted Payment in clauses 1-5. It then describes circumstances (sub-clauses (a) to (c)) under which such payment can be made before setting out 14 exemptions from the rules governing Restricted Payments. The last of these covers the extra £25m allowed, the only restriction being that Red Football Ltd has not defaulted on the bonds.

[vii] Pages 113-114 of the Prospectus, (pages 127-128 of the pdf version). The other clauses in this section state that total Restricted Payments cannot exceed the sum of 50% of Consolidated Net Income plus 100% of new equity issued, cash proceeds from certain asset sales and certain sums reflecting any changes in the status of subsidiaries. None of these additional clauses are likely to materially affect the dividend paying capacity of Red Football Ltd. This test applies from the issue date of the bonds onwards and so is a rolling test over time. For the purposes of this paper, I have assumed that dividends are drawn annually under this clause, but they could be taken out over different periods (both shorter and longer).

[viii] Clause (b) on page 113 of the Prospectus (page 127 of the pdf version) makes passing the Fixed Charge Coverage Ratio test a condition of dividend payments. The Fixed Charge Coverage Ratio test amounts to an EBITDA / interest cover test of 2.0x (see pages 116 and 148 / 130 and 162 of pdf). The Fixed Charge Coverage Ratio can be seen to have been met on a proforma basis in the year to September 2009 on page 13 of the Prospectus (page 27 of the pdf). This is true even if adjusted EBITDA is reduced by £3.1m to reflect the higher management fees that will be charged in future vs. the consultancy fees charged on 30 June 2009.

[ix] See page 145 of the Prospectus (page 159 of pdf). Consolidated Net Income can also be calculated as adjusted EBITDA, less depreciation, less interest, less cash taxes.

[x] These numbers show the adjustments to arrive at Consolidated Net Income specified on page 145 of the Prospectus (159 of pdf).

[xi] To calculate the proforma permitted dividend in the year to September 2009, Consolidated Net Income needs to be reduced by the difference between future permitted management fees (£6m) and the actual “consultancy fees” paid during the year and already in the net income calculation (£2.9m).

[xii] See note 8 to financial statements of Red Football Ltd year to June 2009 (page F-12 of the Prospectus / 214 of pdf).

[xiii] See page 86 of the Prospectus (page 100 of pdf version).

[xiv] Methodology as set out in note ii, but £110m is applied to repay PIKs in March 2010 rather than £70m, and ongoing dividends equivalent to 50% of CNI and £6m of management fees are applied to redeem PIKs annually thereafter.

[xv] See clause 14 page 118 of the Prospectus (page 132 of pdf version)