Friday 28 May 2010

Q3 Results - first thoughts and update post analysts' call

Edit post analysts call:
Not much new came out of United's call with analysts.  One point worth noting is that Edward Woodward reiterated the club's "guidance" (a term for a steer given to markets by a company on a particular subject) of net transfer spend of around £25m each financial year.

Up to 31st March this year, the reported net cash transfer spend is £32m.  Foster has since been sold (for around £4m) so the net number is now around £28m.  The "guidance" would suggest no more signings between now and the end of June.

From July, there is theoretically a lot of money available to Sir Alex, including the 2010/11 £25m budget and the Ronaldo money.  The club also has a further £75m credit facility available.  Add that lot up and you get firepower almost as massive as City's.

Of course moaning people like me think that a big chunk of that money will go off to pay some of the PIKS. Only time will tell.

The only other feature of the call was an unwillingness to be drawn on how renewals were going.  Quelle surprise.....

Links to Q3 results:

Figures here
Presentation here

New information from today's figures:

"Net finance charges for the three months ended 31 March 2010 were impacted by an exceptional £40.7 million loss on interest rate swaps related to our previous senior bank facilities. As disclosed in the bond Offering Memorandum, the swaps were linked to the previous bank facilities and the loss crystallised upon repayment of our bank loans."

So unwinding the swap cost £40.7m. The original estimate in the bond prospectus was £35m. The swap was only in place because of the bank debt the club previously had. Under the bank covenants, at least half the debt had to be "hedged". The club chose to hedge almost all of it, a bad mistake as rates fell sharply.

Other points:
Turnover up £3.7m (4.6%) in the nine months vs. last year, all due to playing two more league home games during the period (but one fewer domestic cup game). Obviously we played two fewer home league games compared to the year before in the final three months. So matchday income for the year will be flattish.

Turnover up £23.3m (26.7%) for the nine months. All due to the better CL deal that kicked in for the 2009/10 season.

Nine months turnover up £6.1m (11.8%). This is the impact of the new platinum sponsors the London commercial office have been securing.

So robust revenue on the media and commercial side, stagnating matchday income.

Staff costs up £6.7m (7.6%) for the nine months - all related to pay rises.
Other costs up £0.6m (1.4%). Good cost control.

I take it from these numbers that the Glazers have not yet taken the £6m management fees for the year to which they are "entitled".

The last quarters to include interest charges for the old bank loans saw a net finance charge of £29.2m for the nine months (before adding the swap unwind cost mentioned above). That's an annualised £38.9m per annum, below the annual cost bond interest cost of £45m the club will now be paying.

Q3 is a cash negative quarter for the club and there was a working capital outflow of £18.5m (£52.3m for the nine months).
Net cash spend on players for the nine months was £32.4m. This covers the net spend since 30 June 2009 remember, so that includes Valencia, Obertan, Diouf, Smalling and probably "Chicharito" but excludes the Ronaldo sale.
The club spent £3.3m on the stadium during the nine months.
The net impact of the bond issue/bank debt repayment was a cash outflow of £16m for the nine months - issue costs etc.
£12.7m of the £40.7m of swap cancellation costs were paid out in cash during the quarter, the rest is still to come.

Balance sheet
With the cash outflows, cash on the balance sheet fell from £122.1m at 31st December to £95.9m at 31st March. The Ronaldo money is still safely tucked away. I believe it will be used to partially repay the PIKS. You can make up your own minds.
The gross debt is £520.9m, primarily the bonds. This does not include the PIKS (in RFJV) which will currently total c. £220m.

Initial summary
A well run football club, benefiting from better TV deals and new sponsorship deals. No growth in matchday income. Wage costs are still rising well above inflation.

Below the football club sit some very nasty financials. A £45m annual interest bill soaks up half the EBITDA, the £41m swap closure costs is half the Ronaldo proceeds on it's own. A totally pointless waste of money. Lurking, unseen in these figures, are the PIKS rising at 14.25% pa.

More later.....

Thursday 27 May 2010

“Do not consider this to be a threat but a warning……”

A regular correspondent emails in to pass on some comments from ticket office staff on how renewals are going….

"[They] told me they had sold 6,000 in total including exec tickets. They said this compared badly with the same stage as last year and was down by at least 4/5,000. They also told me they had been selling STs to brand new customers."

Hearsay of course and completely inconsistent with David Gill's recent comments:

"Our season ticket sales, renewals, for this upcoming season are on track with previous years. Our executive ticket renewals are on track."

Well here's an email sent to an executive ticket holder today. It can be read two ways; that the source above is correct and sales are weak, or that sales are so strong there's a waiting list of people waiting to snap up executive tickets. Make up your own mind (my emphasis added):

Dear Executive Member,
I am writing to inform that if you do not renew your Old Trafford executive facility for the forthcoming 2010/11 season before the renewal deadline of 31 May, your facility will automatically be released to the seasonal hospitality waiting list.

Our records show that you have not renewed your seasonal hospitality facility and we are unclear of your intentions.

Please do not consider this notification to be a threat but a warning; we have an ever growing waiting list for seasonal hospitality, of which it is now Club policy to release all non-renewed amenities to the New Sales Waiting List as of Tuesday 1 June.

If you do wish to renew your facility for the 2010/11 season, please contact your Client Relationship Manager now or call the dedicated Client Relations Team line on 0161 868 8000 (option 2 then 4).

Alternatively, if your intentions are to retain seasonal facilities at Manchester United but move somewhere else within the stadium, the Client Relations team can assist you but only up to the renewal deadline of 31 May.
This is now a matter of urgency so if you have any queries or questions please contact your Client Relationship Manager.

Kind regards,
Head of Client Relations

Hard to know where to start in why that's no way to treat your must valuable customers…. Let's just say that I always work on the principle that if you need to say "this is not a threat" to a client something has gone wrong.

And where has this waiting list for seasonal hospitality suddenly come from? The January bond prospectus said:

"For the 2009/10 season, reduced demand for executive and box seats has resulted in approximately 16% of those facilities (by value) remaining unsold as at 30 September 2009, compared with just over 12% unsold at the same stage in the 2008/09 season."

The March Red Football Q2 results presentation called matchday hospitality sales "challenging". So we must commend the United sales team for turning around this difficult situation in a matter of weeks. The Head of Client Relations who wrote that email definitely deserves a bonus in my opinion.

Anyway, make up your own minds about how renewals are going!

Wednesday 26 May 2010

Happy Treble Day and Happy Birthday Sir Matt

So the 26th May rolls around again....

Can it really be 11 years since that magical day in Barcelona?

I arrived in Barca that morning, somewhat hungover, on a sleeper train from Paris to find the hotel we thought we'd booked had no record of us. Cue small panic and cheap and nasty hostel. But who needs accommodation when you can party all night?

So if Michael, Michael senior or John are reading this - what a day, what a night!

For every other red out there, have a great treble day, remember what Sir Matt did for our club and don't let anyone tell you the Glazers have brought us "unparalleled" success.

Do you think Joel and Avram were watching that night?

No. Me neither.


Tuesday 25 May 2010

Half “The Equalizer” and half “Josh Lyman”?

I hear on the grapevine that select print and broadcast journalists are being invited into 50 Pall Mall, Manchester United's London office, for off the record briefings by Edward Woodward. Woodward is United's brilliantly named but oddly titled "Chief of Staff". I've never had the pleasure of meeting him as he came on board from JP Morgan after the takeover, but I can't help imagining him as a cross between:


Anyway, the message from the Chief of Staff is that all is well with United's finances. On the thorny subject of the PIKS, let me quote the BBC's David Bond (who is clearly one of the chosen few invited to hear the gospel) in his latest blog (my emphasis):

"One of the reasons why the Glazers took out a £500m bond to refinance what they call their "senior debt" (a term which basically tells you it has priority over the PIKs) earlier this year was to free them from the restrictions which prevented them from taking cash out of the club to pay off the PIKs.
The bond has now liberated them and, with the club predicting cash reserves of £150m by June, the money is there to start paying them off.

And yet, they don't expect to start removing cash from United's hugely successful commercial operation in the near future - certainly not before the end of the current financial year which closes on 31 June [sic].
Why? Implausible as it may seem the Glazers are apparently comfortable with the loan. They view it as a tax deductible, benign security."

So that's OK then. A debt instrument ratcheting up at 16.25% per annum and heading towards £600m by the end of its life in 2017 is "benign". As for the tax deductible nature of the instrument, the c. £26m of interest added to the PIKS in the last financial year saves a whole £7.3m in corporation tax. Well worth the risk I'm sure you'll agree!

Anyway, it's nice to hear that all is well. How very reassuring during the period when the club is asking fans to renew their season tickets....

PS. Q3 results confirmed for Friday at 12.30pm.

PPS. Wouldn't it be nice if United's senior management would talk to the supporters customers for a change?


Monday 24 May 2010

United’s Q3 results to be published this week – some things to bear in mind

Edit: 28 May. Results now out.  Initial comments here.

One of the (few) positives of the bond issue, is that Red Football Ltd is now obliged to publish quarterly and annual accounts in a timely fashion. The requirement for quarterly accounts is set out in clause 2 on pages 144 and 145 of the pdf version of the bond prospectus (my emphasis):

"within 60 days following the end of each of the first three fiscal quarters in each fiscal year of the Parent, quarterly reports containing the following information: (a) an unaudited condensed consolidated balance sheet as of the end of such quarter and unaudited condensed statements of income and cash flow for the quarterly and year-to-date periods ending on the unaudited condensed balance sheet date, and the comparable prior year periods for the Parent, together with condensed footnote disclosure; (b) pro forma income statement and balance sheet information of the Parent, together with explanatory footnotes, for any material acquisitions, dispositions or recapitalisations (excluding acquisitions or dispositions of player registrations) that have occurred since the beginning of the most recently completed fiscal quarter as to which such quarterly report relates; and (c) an operating and financial review of the unaudited financial statements (including a discussion by business segment), including a discussion of the consolidated financial condition and results of operations of the Parent and any material change between the current quarterly period and the corresponding period of the prior year;"

The first results under these obligations, Red Football's 2nd financial quarter to 31st December 2009, were published on 2nd March 2010 on the Luxembourg Stock Exchange website ( and on the new MU Finance plc webite ( The results were somewhat overshadowed by the announcement of the existence of the Red Knights group the same day.

The Q3 results to 31st March 2010 are due within 60 days of that date. As the 60th day falls on Sunday 30th May when the Luxembourg Stock Exchange is closed, I expect the results will be published on Friday 28th May, or even one of the three days between now and then, early publication is at the company's discretion.

I don't believe much of interest will be revealed on Friday but ahead of the results, I thought I'd note a few points to bear in mind about the figures:
  • These figures relate to the period 1st January to 31st March.
  • These figures only relate to Red Football Ltd and its subsidiaries, and not to Red Football Joint Venture Ltd which holds the PIKS. The debt numbers shown will therefore exclude the PIKS. On 2nd March, the Daily Express and BBC website forgot this and published (for a short time in the BBC's case) articles saying "huge fall in Manchester United's debt" when in fact they were comparing the previous RFJV figures with the PIKS to RF's quarterly numbers without them.
  • In the last quarterly figures, the amount of bond debt shown (pro-forma) was £512m. That number was struck using an exchange rate of $1.62 to £ on 29th January. Sterling had fallen to $1.507 by 31st March, so expect the bond debt (in sterling) to be around £532m at the quarter end.
  • All the mood music from inside the club to journalists suggests that at 31st March, the £70m "restricted payment" to RFJV had not been made. If this is indeed the case, expect the club to push the line that "the Ronaldo money is still there". I stick by my prediction that this money will go to pay down some of the PIKS, I just don't know when. Nobody should be surprised that the club don't want this money to publically vanish in the middle of the season ticket renewal period. Those who believe I am scaremongering can go on believing that of course.
  • If the £70m dividend has been paid to RFJV Ltd since 31st March, line (b) in the paragraph from the prospectus shown above seems to suggest that it would not have to be disclosed as it would not fall into the categories of post balance sheet "acquisitions, dispositions and recapitalisations" that must be shown.
  • The club quite correctly warn bond investors not to pay too much attention to one quarter's figures compared to another. The timing of PL home games in particular can cause quite a swing year-on-year, as it did in Q2 when there were two more games compared to last season. A quick look at suggests that in Q3 there were the same number of home games this season and last, but there may be other timing issues which can skew the numbers.
  • The bond issue completed on 29th January, so the "interest charge" for the quarter will be a combination of one month of bank interest and two months of bond interest. It will be interesting (for the dweebs amongst us) to see when the interest rate swap was closed and at what cost. In cash terms, there was a semi annual bond coupon payment in February.
Other areas we may learn more about include:
  1. Are the Glazers already taking their entitlements to £6m pa in "management fees" and £3m pa in parent company expenses? There may not be enough detail to tell.
  2. Have any more of the future US$ coupon payments been hedged against sterling?
  3. Whilst these results don't cover season ticket, exec and box renewals, will there be more comment on hospitality sales (described as "challenging" in the last results)?
  4. How seasonal is United's cash flow? This will be a weak cash flow quarter and the pro-form cash balance at 31st December 2009 was £98m.
So all in all expect a fairly quiet and unremarkable set of numbers.

United remain a very profitable football club weighed down with a significant interest bill and with owners who have just signed up to a bond deal that actually increases the interest bill but introduces rights to take out a high proportion of the club's cash flow for themselves. No light is likely to be cast on the real issues of renewals, transfer spending and the stripping of cash out of the club until later this year and into 2011. And remember, we only get to see the state of RFJV and its PIKS once a year in January or February, six or seven months after its year end.


Tuesday 18 May 2010

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

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
Loss on interest rate swap
Cash interest paid:             to 30 June 2009
                                       Est year to 30 June 2010
Total cash interest paid
Rolled up PIK interest:        to 30 June 2009
                                      Est year to 30 June 2010
Total rolled up PIK interest

Management and consultancy fees
Loans to Glazer family members
Total costs

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.

Wednesday 5 May 2010

No David Gill, the bond issue is NOT "like remortgaging your house"

As David Gill hasn’t made many public statements about the club’s financial position since the bond issue, I always look out for his comments with interest.  On Sunday the News of the World and various other media outlets reported David’s comments in the latest edition of the Manchester United Disabled Supporters Association magazine “Rollin’ Reds”.  This is what he was quoted as saying about the debt:

"In essence, it changed third-party bank debt with various maturities into new debt, so it was like remortgaging your house with what we feel is a better instrument.
"There are no covenants if you meet interest payments every quarter - you are very much left to your own devices.
"So while debt is obviously on the minds of the supporters the simple answer is while we didn't reduce overall debt we now have more flexibility with what we believe is a better instrument and the bond issue attracted roughly double the target, so in that sense it was a success."

Doesn’t that sound reassuring?  It’s just like switching your mortgage to get a better deal....  Well here’s a question, how many people move their mortgage to a lender who charges them more interest than they were paying before?  Because that’s what Red Football has done by switching the bank debt for the bonds.

Let me explain....

The cheap bank debt
This is how the old bank loans were described in note 17 of Red Footballs accounts for the year to June 2009:

£501,707,000 of senior facilities drawn down by Red Football Limited, by way of four term loans that attract interest based on LlBOR plus a margin which ranges between 2.125% and 5.00%.
The senior facilities have terms between 7 and 10 years from the 16 August 2006, and the term loans have an average life of 5.6 years at the balance sheet date. Term loan A accrues interest at LIBOR + 2.125% and amortises over its term with a final re-payment in June 2013. Term loan B accrues interest at LIBOR + 2.5% and is repayable in two equal instalments in February 2014 and August 2014. Term loan C accrues interest at LIBOR + 2.75% and is repayable in two equal instalments in February 2015 and August 2015. Term loan D accrues interest at LIBOR + 5.0% and is repayable in one instalment in August 2016. The above loans are redeemable at par.
What’s missing from that description is how much each term loan was.  This document (the “term sheet” for the loans from 2006) tells us how much they each were in 2006, since when Term Loan A has been gradually paid down to bring the total to £501m:

Term loan
“Margin” over LIBOR

The “margin”, is the extra interest charged above “LIBOR” which is the “London Interbank Offered Rate”, a benchmark wholesale interest rate.  Because LIBOR goes up and down with market interest rates, the actual rates charged on these loans will fluctuate over time.  LIBOR today (6 month LIBOR) is 0.94%.  So the interest rate on these facilities if they were in place today would be 3.482% + 0.94% = 4.422%.  On £501.7m of debt, that would cost £22m a year in interest.

The expensive swap
At this point, regular followers of United’s financial affairs are probably thinking something like: “What the hell are you talking about Anders?  The interest charge shown in last year’s accounts was over £40m....” and they’d be right too.  The interest payable on bank loans and overdrafts in the Red Football accounts was £42.1m.  So what’s going on?  The answer is “the swap”.  An interest rate swap is a derivative contract that “swaps” one rate for another.  In the case of Red Football, the company entered into a contract to swap the variable LIBOR element of the bank interest rate for a fixed rate of 5.0775% on £450m of the bank loans.  So instead of paying 3.992% on this £450m, Red Football was paying 3.4282% + 5.0775% = 8.56%.  On the rest of the loans, Red Football paid the lower floating rate.  So half of the interest paid by the club last year was because of the losses on the swap contract.

With the bond in place, Red Football has ditched the swap at a very significant cost.  The swap ran until the end of 2013, and to close it and get rid of it now (as it is losing money) is going to cost £38.6m.  The cost represents the difference between current swap rates (around 2.2%) and the old swap rate of 5.0775% multiplied by the £450m value for three years.  The club is paying £11m of this up front and then around £5m each year for five years.

If the bank debt was still in place, Red Football could still close off the swap at the same cost, and could even lock in the 2.2% available now.  This would fix the annual interest cost at £28.5m per annum.
The very expensive bonds
Unlike the bank debt, the bonds pay a fixed interest rate (or “coupon”).  The coupon on the 425m US$ bonds is 8.375% and the coupon on the 250m £ bonds is 8.5%.  At the current exchange rate, the interest cost of the bonds is £44.8m.  That’s more than twice the interest cost of the bank debt at today’s interest rates.
The real reason for the bond issue
So what on earth is David Gill talking about when he says the bond is “a better instrument” than the bank debt?  United could have exited from the swap (at the same cost), entered into a new swap to lock in current low interest rates, and only have to pay £28.5m in interest a  year vs. £45m on the bonds. The club would also have saved the £15m cost of the bond issue and would only have £500m of bank loans outstanding rather than £534m of bonds outstanding.

So why could the Glazers possibly want to swap cheaper bank debt for more expensive bond debt?  David Gill gives us clues when he says “There are no covenants if you meet interest payments every quarter - you are very much left to your own devices........while we didn't reduce overall debt we now have more flexibility”.

Under the bank debt covenants, 40% of any cash over £1m had to be used to pay down debt and there were strict targets to meet to reduce the ratio of debt to profits each year.  It was very hard for the Glazers to pay themselves dividends under the bank covenants.  You can see all the details in the term sheet.

The bond sweeps away all these restrictions, and brings in all the rights to dividends that I have described elsewhere.  The bond unlocks the Ronaldo money and the early Aon payments.  This cash can now be paid to the Glazers.

So no David, the bond issue isn’t “like remortgaging your house”.  Unless when David Gill remortgages his house he signs up for a higher mortgage rate than he’s already paying and agrees to let a gang of burglars in to steal his silver......