Tuesday 29 June 2010

Get your United season ticket at.... errrr.... White Hart Lane?

The club's attempts to sell season tickets have moved on to an email shot to all "One United" members....

This is the email that members received today:

Note the lack of green and gold (so before January), in fact note the t-shirts (so not a photo from the harsh winter months)....

Note the.... errrr..... blue chair.... note Anderson on the pitch (and relatively up with play too).....

And suddenly you realise that the razor sharp Glazer marketing machine is trying to offload season tickets at Old Trafford with photos of..... errrr...... United away at White Hart Lane on September 12th 2009 (the third goal by Rooney in case you wondered).....

Thanks goodness these brilliant people are in charge of our club.


Thursday 24 June 2010

How long do you have to wait on the “waiting list”?

The wait for a bespoke new Ferrari is over two years, for a Hermรจs “Birkin” handbag you have to wait nine months, and in some parts of the country the Daily Telegraph claims the waiting list for an allotment is up to 40 years.

So what about that other valuable commodity, the Manchester United Football Club Season Ticket? If you join the waiting list, how long do you have to wait?

You only have to wait 4 hours.

That’s how long it took one red to receive the following email, having registered himself, as an experiment, on the waiting list earlier the same day:

The following day, he received another email with a link to United’s (new this season) “Season Ticket waiting list booklet”.  As IMUSA have pointed out, this shows season tickets available everywhere with “limited availability” in the Family Stand (understandably) and North Stand Tier 3, the perennially unpopular “little Oslo” where fans find out what top flight football looks like when viewed through a distant letter box.  Limited availability in NT3? Or perhaps the only part of the ground not visible on TV?

The prize for the most amusingly desperate attempt of this renewals season (and a sad reflection on the club’s fabled CRM database) is won by this (from a Red Issue Sanctuary contributor):

A few years ago my daughter (then 13) registered on MUFC.com [sic] in order to download photos of Ronaldo. This morning they have written to her asking if she would like a season ticket.

The club remain tight lipped about renewals of course, and financially it is the widely reported collapse in executive/hospitality sales that will have the biggest impact.  I’m sure that bond investors will be keen to quiz the club on all this on the next quarterly results call on 27th August.


Tuesday 22 June 2010

First Allied watch - no. 1 in an occasional series

Even the World Cup won't stop this blog from keeping an eye on what's happening in the Glazer family "empire" (more Brittas than Roman).  This is the first of an occasional series of updates about First Allied Corporation using the company's own published vacancy information and the relevant CMBS trustee reports (which are published monthly). Those readers who don't see the relevance of any of this to Manchester United can look away now.

For those who can't be bothered with the detail, the key points from this update are a) another centre has gone "delinquent" (i.e. has stopped paying its mortgage) and b) the First Allied Corp portfolio continues to weaken.

Market trends
Industry data across First Allied's major markets (Texas, greater DC, Georgia and North Carolina) remains quite weak, with property values still declining and only small signs of retail rental rates stabilising.  The charts below (source: Loopnet.com) show some of the trends, First Allied's properties tend to be in "metro" (i.e. suburban) areas:
Atlanta retail real estate prices remain weak
Dallas retail real estate - City recovers, suburbs in decline

Greenbelt MD (greater DC), rents stagnant
Charlotte prices declining....
but rents stabilising
June occupancy data
Occupancy rates across the business are inherently volatile, a single letting or tenant departure can have a material impact on a centre's occupancy.  In the last month, twenty centres have seen their occupancy rise and sixteen have seen their occupancy fall.  Occupancy in six centres has fallen by more than 5% percentage points, and another six centres have seen occupancy rise by more than 5% percentage points.  The large  falls are significantly greater than the large rises:

You can see how these changes knock on to run-rate debt service coverage ratios below (all figures are post interest only periods where these expire in 2010).

New letting activity has helped push run-rate DSCR back above 1x for Frisco Gate and Gleneagles Plaza, with Smoky Hill almost back to this level.  On the downside, River Plaza will no longer be able to cover its mortgage at current occupancy and Stonecrest Park is now at risk.

Trustee reports
The main news from the June trustee reports relate to Ulster Terrace (Denver, Colorado) which has now gone delinquent (last mortgage payment was 11th May 2010) and Lakeview Crossing (Dallas, Texas) where the "Special Servicer" reports "Imminent default due to cash flow problems."  Schoolhouse Plaza (Ohio) remains delinquent for a second month.

There is nothing in the latest data from First Allied or the mortgage trustees to change my original view on the company.  The coming months will see more and more centres run into severe financial problems as interest only periods end and tenant demand and rents remain weak, and the Glazers will have to decide whether to support them financially or let them fail.  There's more chance of the United States winning the World Cup than First Allied generating any significant cash flow for it's owners in 2010.


Thursday 17 June 2010

David Gill sticks to his guns - so where's the money coming from?

David Gill has replied to my open letter of 8th June.  This is his reply:

So on the subject of repaying the PIKS, he is sticking to what he said on BBC Radio 5Live back in January:
“We [the senior executives of Manchester United] don’t wake up worrying about the PIK interest,we don’t worry about the PIK repayment. That is something that the family, the owners, have put in place and they will ensure is repaid or is part of their overall financial planning in due course, but that is nothing to do with the club. You’d have to speak to the owners and get their views as to their plans etc in respect to that. This notion that Manchester United is £716m in debt is just a total misconception frankly.”

I'm not surprised that David is maintaining his stance on this issue, although I'd have liked the scoop if he'd written to say "fair cop Anders".

But this official denial that the repayment of the PIKS (currently around £220m and rising) is "nothing to do with the club" raises the question of how on earth they CAN be repaid.  Let's consider the options:

Borrow against Glazer family assets
In the aftermath of the revelations about First Allied, the Bucs spokesman confirmed (by saying "Companies they [the Glazers] own generate revenues in excess of $800 million each year.") that the family only own three major businesses, United, the Bucs and First Allied.  All three are already borrowed up to the maximum possible.  So the option of borrowing to repay the PIKS can be ruled out.

Sell assets
My work on First Allied shows that there is not sufficient value in that business to repay the PIKS.  If the family did sell United, this would of course eliminate the issue, but they have publicly denied they will.  The option of selling the Bucs is always there of course.  Forbes magazine thinks the value of the franchise is falling, but even at a price of $900m and deducting debt, the sale of the Bucs would easily provide enough to repay the PIKS.  A Tampa Bay journalist told me he thought such a sale unthinkable as NFL franchises are long-term licences to print money, but the option is definitely there. 

Use United's cash anyway
Could it be that David Gill believes that his comments are consistent with using the club's cash to pay the PIKS? He talks about not "worrying about the PIK interest" and that management don't "worry about the PIK repayment", but "worry" is not the issue here.  When he says "That [the PIKS]...is nothing to do with the club." does he just mean the fact that they are not secured on the club's assets but rather its equity?  I think someone who thought such apparently reassuring statements were consistent with taking a quarter of a billion pounds out of Manchester United to repay the Glazers' debt would be guilty of dissembling. 

So I can't think of any other viable way to repay the PIKS and I know that senior United staff have given non-attributable briefings to journalists in which they concede it is the probable course of action.

How has it come to this? Why are we left trying to deconstruct 88 words spoken in January?  Why won't the club engage with concerned supporters? If people like me are scaremongering, why not explain why?  Instead we have the pathetic spectacle of a football club anonymously claiming "victory" over its own supporters in the pages of the Daily Mail.

This is the sad state of Manchester United Football Club in 2010; silent, aggressive and resentful of its own supporters.  And that is a great, great shame.


Friday 11 June 2010

My advice – don’t renew

There are just two full days until the season ticket renewal deadline.  Judging by articles in the media and my own sources in the ticket office, tens of thousands of season ticket holders have not yet renewed and there is panic at the club.

For what it's worth, this is my advice for those considering what to do. It is my personal view only:

Any reduction in income will increase the chances of the Glazers selling our club.  They can only take out dividends if certain profit targets are met.  This makes them vulnerable to lower income.

The most effective action supporters can take to shorten the Glazers' ownership of our club is to not renew their season tickets for 2010/11.

I understand that giving up going to Old Trafford is an incredibly hard thing for fans to do, not renewing my own ticket has been very difficult. It was difficult too for the many fans who stopped going in 2005. Sacrifices are sometimes needed to achieve important change.

Many supporters will want to continue to go on an occasional basis and switching to "match-by-match" and reducing the money you pay the Glazers in this way is also helpful to the cause, although obviously has less impact.

I really believe that supporter action can accelerate the process of changing the ownership of our football club. It is not just tokenism. Ridding our club of the Glazers requires both an offer for the club and a willingness on the family's part to sell at a reasonable price. Non-renewal introduces risk to their business model and increases the chance of them selling.

Finally of course, all supporters should reach their own decisions and remain United in respecting the choices of others.


Tuesday 8 June 2010

An(other) open letter to David Gill

In the aftermath of the new research showing the parlous state of the Glazers' US property business that I and others have published in the last few days (not to mention this timely piece from Forbes today), I have written another open letter to David Gill.  This time there is no need for ten questions, one will suffice:

"In light of these revelations, can you assure United supporters that none of the club’s current or future cash will be used to repay the Glazer family’s PIKS?"

This is the full letter (downloadable here):


Is Malcolm Glazer a better boss than Tom DeLay?

Edit: 8th June 2010.  If you think I'm being harsh, check out these two comments on this statement from NFL commentators including one of the main sports writers on the Tampa local paper, The St Petersburg Times:

St Petersburg Times
Adam Schein

I couldn't help but laugh at the swift statement issued by the Tampa Bay Buccaneers spokesman Jonathan Grella today. The man used to be press spokesman for disgraced House Speaker Tom DeLay. Plus ca change.....

This is what he said:

"Buccaneers fans should know that the Glazer family is as financially well-positioned as ever before.

"Companies they own generate revenues in excess of $800 million each year.

"Sophisticated real estate experts know that the family's refinancing of their commercial real estate before the global meltdown has proven to be the wise move.

"While First Allied represents only a small portion of their asset portfolio, it continues to generate significant profits, enjoys over 90-percent occupancy, and has long term non-recourse financing.

"This franchise remains committed to bringing the resources to build its next championship team.''

Let's do the paragraphs one by one.
1. On my calculations, the three companies generated revenue of c. $780m (it depends on the exchange rate you use for United), so no missing gems. As someone once said, “Turnover is vanity, profit is sanity, cash flow is king”. Revenues are not profits and First Allied proves it. Old friend of United, AIG, had revenues of $96bn the year it went bust. Anyway, it's interesting that he chose to quote a revenue figure.

2. As these details have never been published before, we must wonder who these "sophisticated real estate experts" are. Maybe the commercial property lending department of Lehmans? Anyway, how wise is it to remortgage in 2005, 2006 and even worse in 2007? Of the 35 remortgaged properties, nine already can't cover their "wise" loans and eleven more will join them when interest free periods end. 

3. I have looked at every shopping centre they own (bar one that had 2008 cash flow of $0.5m) and "significant profit" is not possible. The $9.7m I have quoted is cash flow before income taxes (be they personal to the Glazers or corporate taxes) and before any head office costs (First Allied operates out of three offices and employs such cheap staff as Edward Glazer). The cash flow will fall to just over $7m per annum as interest only periods end, if occupancy rates don't pick up.

The 90% occupancy doesn't tally with actual data. On their website, First Allied like to include buildings they don't actually own, but are on the site. You can see a "142,438 sq ft" centre here (including Walmart). The 90,000 sq ft Walmart isn't owned by First Allied (I checked the county records), so occupancy is 88.3% not 96.5%.

I calculate occupancy to be 86%, but frankly it doesn't matter. The centres in trouble (DSCR below 1x) have occupancy that averages 79%, the one with DSCR above 1x average 94%.

Non-recourse just means that the bancruptcy of a centre doesn't knock on to other companies.  Brilliant.

4. Does being "committed to bringing the resources" actually mean anything?  If you've got resources, why not bring them?


Monday 7 June 2010

Debt Junkies: The true story of First Allied Corporation

Today, in conjunction with BBC Panorama and The Guardian, this blog is publishing full financial information on state of the Glazer family's real estate business First Allied Corporation. Although all information is from verifiable public sources primarily Commercial Mortgaged Backed Security ("CMBS") filings, First Allied's own website and US county and state records, it has never been made public before today.

Analysis of mortgage filings for 63 of First Allied's 64 shopping centres shows the portfolio is hugely overleveraged and that without major improvements in financial performance in the next few months, half the centres will not be able to generate sufficient income to pay their mortgages and therefore risk going bust. I can for the first time reveal that four centres have already gone into foreclosure. The majority of First Allied's properties are currently in negative equity leaving the family little or no room for manoeuvre. Although the US recession and property crash have proved the triggers for this crisis, the root causes are the disastrous decisions made by the Glazers in the mid-2000s as the US property boom neared its height, shattering their self professed reputation as savvy business people.

After years of speculation about the state of the Glazer family's businesses, the evidence I am publishing today explains the real reason behind the Glazer family's underinvestment in the Buccaneers and at United and shines new light on the family's inability to pay off "their" PIKs without using Manchester United's cash.

Given the amount of data I have discovered and analysed, I have created dedicated pages and links on my blog covering various areas:

Having sold all their other substantial business assets (nursing homes, trailer parks, radio stations and controlling stakes in listed companies) in the last ten years, First Allied is the third major leg of the Glazer family's empire alongside the two famous sports clubs. When I wrote about the company before on 9th March, I stated that as a private US corporation, it would never be possible to obtain any detailed financial information on the business. I am glad to say that I was wrong about this.

In February, First Allied's Crosswoods Commons shopping centre entered the foreclosure process (which was completed in March) and I was able to review the centre's mortgage document which had been filed in the Federal District Court for Southern Ohio as part of the foreclosure process. The case documents showed that the mortgage the centre had defaulted on, although issued by Lehman Brothers in 2005, had been "securitized" and placed into a Collateralised Mortgage Backed Security. Because CMBS are freely traded, mortgage holders whose loans are in such vehicles must report regularly on the financial performance of the property on which the mortgage is secured. When I started to look at which other First Allied shopping centres had mortgages in CMBS, I was amazed to find that loans on 63 of the 64 properties listed on the company's website had been securitized (the final property was remortgaged in January 2008, but the credit crunch caused the market for new CMBS to dry up shortly afterwards and the new mortgage was not securitised).

Using the prospectuses of the twenty four CMBS vehicles which contain the traceable 63 First Allied mortgages, the CMBS' most recent investor reports, information on the company's own website (http://www.firstalliedcorp.com/), county and state records (where available) and First Allied's listings of vacant property (conveniently the company lists all its available space on http://www.loopnet.com/) gives a greater insight into the financial performance of the portfolio than one would expect to obtain from a quoted real estate company.

Summary of key financial findings 

1. Today, First Allied has total mortgage liabilities of c. $570m, secured on properties with a total estimated value of only c. $556m. This debt has barely changed from the $581m originally borrowed, whilst the value of the shopping centres has fallen sharply from their total appraised value of $744m when the loans were taken out. I estimate that 31 properties, virtually half the portfolio, are in negative equity.

2. Despite generating rental income of over $76m and cash flow before interest of c. $47m the debt burden of interest and repayments is so severe that the whole portfolio is currently only producing $9.7m of surplus cash per annum before tax. This is a tiny sum for what is supposed to be a large and successful real estate business and totally inadequate to even cover the interest accruing on Red Football Joint Ventures Payment in Kind notes or to invest in the Bucs playing squad.

3. Whilst the foreclosure of First Allied's small (10,000 sq ft) Crosswoods Commons centre in Ohio in February 2010 was reported by the US and international media, this blog is today publishing previously unseen documents which show that an additional three centres have already gone bust. First Allied paid $30m, including almost $5m of equity, for these properties in 2003, 2004 and 2005. With such a huge amount of capital already tied up in the centres and with the property cycle nearing its trough, the only explanation for the Glazers' failure to inject further equity into the businesses in order to them is obvious. The family do not have the money.

4. The great majority of First Allied's mortgages (58 of 63) were taken out with Lehman Brothers, perhaps the greatest symbol of the excesses of the credit boom in the United States.

5. The crisis at First Allied is only partly due to the recession in the United States and is mainly caused by the excessive debt the Glazers have loaded onto the portfolio. Having put almost half the portfolio on the market in 2004 (presumably to raise funds for the bid for United), the Glazers made a disastrous change of strategy later that year and started a binge of remortgaging which continued in 2005, 2006 and 2007. During this period, the Glazers extracted more than $115m in equity through remortgaging, less than 20% of which was used to buy new properties. Although the family realised significant profits during the 2005-7 period, because they both bought and remortgaged properties at inflated valuations, the Glazers piled unsustainable amounts of debt on many of their assets and it is this that is now causing such a severe strain on the business.

6. The total estimated net equity value of the current portfolio (valuing centres in negative equity at zero) is only $59m compared to $162m when the mortgages were originally taken out and an estimated $400m+ at the peak of the commercial real estate market in late 2007.

7. An incredible 44% (28) of First Allied's shopping centres have already been placed on "watchlist" by the trustee banks of the relevant CMBS, indicating they believe there is a significant risk of default on their loans.

8. More than one in four properties (17) already has a "debt service coverage ratio" ("DSCR") below 1x (i.e. income does not cover mortgage payments). Unless occupancy rates pick up sharply, these centres are likely to go into foreclosure in the next few months as reserves are depleted.

9. The mortgages on 48% of the portfolio (31 centres) were taken out in 2004 and 2005 and have five year "interest only" periods which expire this year. At current levels of occupancy, 16 of these properties will see their DSCR fall below 1x when their interest only period ends and repayments kick in, meaning more than half the portfolio will be at very high risk of being seized by the mortgage trustees in the near future. Many of the assets remortgaged in 2005 are so over leveraged that they would be unable to pay their mortgages when repayments begin even if they were fully let at current market rents. Looking beyond the current year, a further 9 centres have interest only periods that end in 2011 or 2012.

10. When First Allied took out the mortgages on the thirty three centres either currently unable to make their mortgage payments or which will be in this position as interest only periods end, they had a total appraised value of over $394m and a net equity value of $80m, all of which is at risk of being wiped out.

Thoughts and conclusions

There are some obvious conclusions to draw from this research and also a lot of unanswered questions:

1. Unless someone can point to other assets acquired at the time, the £272m of "equity" the Glazers contributed to the acquisition of Manchester United was at least in part really debt secured on First Allied's shopping centres. First Allied itself was actually a party to the original preference share agreements with the hedge funds. As there is strong anecdotal evidence that loans secured on shares in Zapata (the quoted company they controlled at the time) were also part of this "equity" element, we are left wondering how much, if any, true equity the Glazers ever put in....

2. Although in Manchester United and the Tampa Bay Buccaneers, the Glazer family own two very valuable assets, they themselves clearly have very little cash. Until the United bond issue, they were unable to take more than a few million pounds in fees from the club and actually resorted to borrowing from it, something that makes more sense now we can see the state of their US business. Forbes estimate that the Bucs have $143m of debt, only $7m below the limit imposed by the NFL and in recessionary times a franchise experiencing TV blackouts and having to cut ticket prices (an anathema to the Glazers) seems unlikely to be able to pay the family any significant dividends.

3. With First Allied contributing so little income, the argument that the United bond issue was undertaken entirely for the purpose of using the club's cash and profits to repay the PIKs is indisputable. There just is no other source of cash flow or assets to borrow against that the Glazers can use. If anyone can suggest a credible alternative view, I am very happy to investigate it.
4. The argument of many fans that the family is under investing in the Buccaneers because of their financial problems (which the Glazers dismiss, claiming they are undertaking a canny but prudent "rebuilding" strategy) is certainly lent greater weight by this research. There seem to be few ways the Glazers could conduct any other "strategy" at Raymond James Stadium as again there is no obvious source of cash for investment.
5. The Glazers are not business geniuses. Malcolm's long term track record is better of course, but since he became incapacitated, the whole structure has begun to creak at the foundations. Adding United's debt (including the PIKs) to Forbes' estimate of the Bucs' borrowing, the mortgages described above, and estimates for the family's residential mortgages, we arrive at a figure of at least $1.8bn of total Glazer family debt. This is supported by $225-250m of EBITDA (depending on how far the Bucs' EBITDA fell last season from the $69m earned the year before), a terrifying debt to income ratio of almost 8x.
6. I can only assume that David Gill and Sir Alex Ferguson have no idea about the true state of the Glazers' finances and believe they really are wealthy and successful. I will be writing (again) to David Gill to ask whether he feels United supporters should worry about the family's ability to repay "their" PIKs in the light of this research.
7. As with United's management, I assume NFL commissioner Roger Goodell's defence of the Glazers during his annual address is February when he said: "I talk to the Glazers on a regular basis. I will tell you that they are sound owners. They are terrific for the NFL and we have not seen that there is any stress that would affect the way they operate any of their professional teams, much less the Tampa Bay Buccaneers." was a product of not knowing the truth about the situation. Perhaps the NFL Finance Committee should look into the situation.

For those of us who have watched as ever more debt is piled upon Manchester United, the story of First Allied revealed in this research has some chilling parallels. First Allied Corp is not a property development company, it is a property speculator, using high levels of debt to try to ride the real estate cycle and enrich its owners. In the same way the Glazers have brought nothing but debt, risk and huge costs to United, they have added nothing to their portfolio of shopping centres, built nothing, created nothing. This would be of less concern if the management of First Allied had proved themselves adept at timing the market, but sadly the opposite is true. Not only did the Glazers borrow too much, but they did so at precisely the wrong time and at unsustainable, inflated valuations.

The more I discover about the Glazer family, the more they seem to be an unappetising morality tale for our times. Their story is one that takes in financial "innovation" by out of control banks like Lehman Brothers, which in turn allows pointless real estate speculation and creates the mirage of wealth creation, before the whole facade starts to crumble. Now we know that we can monitor the performance of First Allied on a monthly basis (and I will be doing just that you can rest assured) as well as the sports clubs, the facade is well and truly down.


Wednesday 2 June 2010

Aon's down payment - an enduring mystery

The razzamatazz surrounding the start of Aon's sponsorship of United was somewhat overshadowed by the spectacle of David Gill somewhat grumpily rowing back on his rather aggressive anti-green and gold comments in the Independent. Perhaps the Aon guys had been explaining risk to him?

For most supporters, changes in sponsor are events of total disinterest. Personally I'm glad to lose the name of one of history's greatest corporate disasters from our shirts, despite the karma of the linking of the world's worse experiment in financial engineering with the Glazers. Aon (a company I had dealings with in a previous job) is a far more normal service business and actually has a decent sized office in Manchester.

The c. £80m four year deal is a good one for United, although not quite as good as that achieved by Bayern Munich (€25m pa from Deutsche Telekom) and is apparently in line with Standard Chartered's deal with Liverpool (the existence of which surely goes to show that the largely Asia based but UK listed Standard Chartered must employ expats in its marketing department who haven't been back to the UK since the 1980s).

The enduring mystery of the Aon deal is the early payment of £35.9m by Aon to United between the deal being signed on 24th May 2009 and Red Football's year end on 30th June that year. Why ask for such a huge prepayment a year before the deal started? It is worth remembering that the prepayment will have the impact of creating a four year negative working capital swing of £8.6m pa starting next season (in layman's terms, United will report £20m of income each year but only get £11.4m in cash - less than the annual AIG payments).

It does seem unlikely that United maximised value by asking for 45% of the four year deal to be paid upfront in this way. No explanation has been given by the club or by Aon as to the rationale behind this strange arrangement.

Rather bizarrely, Aon have chosen to add me to their corporate mailing list ahead of today's launch "in case you and your blog followers are interested in learning more about our firm and why we are so excited about this opportunity", perhaps misunderstanding my motivation in such matters. Anyway, I emailed back in reply to ask the helpful David P. Prosperi (Vice President, Global Public Relations for Aon in Chicago) what the down payment was all about. Here's the email exchange:

Me: "I had one query you may be able to help me on. Why was your sponsorship deal with United structured to include such a large (c. 45%) up front payment more than a year before the sponsorship actually began? I can only imagine the club could have gained more in total by not asking for such a huge prepayment. This is a very non-standard structure and I and many other supporters are somewhat baffled by it!"

David: "Thanks for the feedback. Unfortunately, the finances of the sponsorship are one of the subjects we or Man Utd are not commenting. Let's just say that Aon had a strong balance sheet that allowed us to make the offer that we did."

Me: "Thanks David. Funnily enough it isn't Aon's balance sheet that worries me."

David: "What does worry you about Aon? Or is it something related to the club?"

At that point I decided David probably had more important things to consider than whether United were desperately trying to scrape together enough cash at the last year end to avoid breaching a PIK net debt covenant, so I didn't follow up.

Until my unreliable source delivers on his promise of a PIK document (yes that's you mate) and we can see such covenants, Aon's down payment will sadly remain an enduring mystery.