Monday, 1 February 2010

Responding to David Gill - the truth about Carrington

Yesterday I promised a comment on David Gill’s comments on the possible sale and leaseback of the Carrington training ground.  A definition of sale and leaseback is available here.

David Gill told the BBC:

“….the sale of Carrington, the sale and leaseback opportunity within the bond document is done for financial and tax planning, Manchester United Ltd will continue to have complete control over that asset, it’ll be a peppercorn rent [i.e. a nominal rent] if it happens…”

As with all Gill’s comments in the interview, there are legal facts (where he is careful to be correct) and conclusions and consequences, where he is more economical with the truth.

The phrase “financial and tax planning” makes it sound as if allowing Carrington to be transferred from the club and sold is just like putting a few quid aside for a rainy day.

[Technical bit: The "tax" bit refers to the higher price that can be achieved by selling a property inside a company rather than a stand alone asset because a) the base cost can be reduced reducing the capital gain and hence tax liability, b) the saving in Stamp Duty (0.5% vs. 4%) and d) it avoids balancing adjustments to capital allowances.]

It isn’t just sensible housekeeping at all, it is far more fundamental.

Transferring Carrington to the Glazer family from the club is a fundamental breach of Gill’s claimed division between the club’s asset and liabilities and the family’s. Now I don’t think there is any distinction, but this fiction is an important one for the Glazers to maintain, because it is the only way to claim the total £716m is not United’s problem.

Now to be fair to Gill (this is a very fair blog), I hadn’t read the details on Carrington’s rent in the prospectus (page 134).  This does indeed confirm that in any sale and leaseback United can’t be charged more than a nominal £1,000 per year not the £1.5-2.5m I’d estimated a commercial rent would cost.  The lease has to be for 10 years minimum and allowing the club full access and use.  So in the short term, although it loses ownership of Carrington, the club’s free use of it is protected.

But let’s be clear what the long term consequences of this arrangement would be:

1.                  Carrington would have been sold for a lower price than it’s worth.  This is because a property guaranteed to produce no income for the first ten years has to be sold at a discount to a property generating income immediately.  So the club is protected by the peppercorn rent, but only at the cost of losing an asset it built and seeing it sold at a discount.

2.                  These protections only last 10 years and would then fall away.  We’ve been a football club for 132 years, it’s more than 10 years since the treble and that only seems like the day before yesterday.  Nobody will buy Carrington if they don’t fully expect to charge a very full commercial rent as soon as they can.

I don’t know whether they’ll do a sale and leaseback.  They may just transfer it to a Glazer company and take a mortgage out on it (using the proceeds to pay some PIK debt).

But whatever course they take, the principle is the same.  Unlike almost every other owner in Premier League (well not the scousers’ owners but everyone else), the Glazers are taking money and assets out not putting them in.  When it was an independent company, Manchester United plc spent over £21m to build Carrington using no debt because it was a football club and it wanted world class training facilities.

The Glazers have built nothing for United except an ever bigger pile of debt.  And now they’re actually planning to take the things built over the years for their own benefit.

David Gill calls that “financial and tax planning”, I call it a tragedy.

Technical details on the ability to do a sale and leaseback of Carrington

For those of you interested in the small print, here is the full SP on the rights to dispose of Carrington in the bond prospectus:

The possible sale is called the “Carrington Transaction” in the bond prospectus.  It is defined on page 156 thus:

Carrington Transaction means the sale, lease, assignment, disposal or other transfer (including any sale and lease back transaction) of the Carrington Premises.

Carrington and the freight terminal are specifically not included as part of the security for the bond and new bank facility as described on pages 78/79 under “Real Property” (my emphasis):

In connection with the new revolving credit facility and the Notes, several of our owned properties, including Old Trafford will be encumbered with land charges as security for all obligations under those agreements, although: (a) Manchester International Freight Terminal will not be encumbered as it has already been given as security under the Alderley Facility; and (b) the Carrington Training Ground will not be encumbered and may in due course be transferred to a holding company or affiliate of the Parent. In the latter event, we will be granted a lease in respect of the Carrington Training Ground.

A holding company or affiliate of the parent includes the Glazer family or any of their companies (what defines an affiliate is on page 153).

The protections the club will enjoy in the first ten years are described on page 134 under “Use of facilities”:

Notwithstanding any other provision of the Indenture, none of the Parent or any of its Restricted Subsidiaries…..[will] …….enter into or consummate the Carrington Transaction unless the Parent and its Restricted Subsidiaries have entered into a lease with the transferee or purchaser in respect thereto that provides for the following: (i) a term ending on a date that is not earlier than the 10-year anniversary of the Issue Date, (ii) a lease, license and/or right for the Parent and its Restricted Subsidiaries to continue to have substantially the same access to the Specified Asset and the Carrington Premises during the term of the lease as it has on the Issue Date, (iii) for the necessary capital expenditures to be made during the term of the lease and (iv) in the case of the Carrington Premises, aggregate rental and other payments to the landlord in respect thereof not exceeding £1,000 per annum.

This means that the bond covenants place restrictions over how such a sale and leaseback of Carrington would work; namely the lease has to be for at least 10 years from the date of the bond issue, United have to have the same access and use of Carrington as before and finally that the rent cannot be above £1,000.