Thursday, 21 January 2010

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.