Thursday, 16 September 2010

A smart trade by the Glazers but a massive PIK burden remains

Tariq Panja at Bloomberg has done some cracking, old fashioned investigative journalism and has discovered that the Glazer family themselves bought around 20% of Red Football Joint Venture's infamous Payment in Kind loans ("PIKs") in 2008.

During 2008, at the height of the financial crisis, hedge funds all over the world were faced with huge redemptions from clients trying to cash in their investments, in total estimated that $512bn was withdrawn from funds. The panic to get money out led to many funds becoming forced sellers of very illiquid assets which in turn threw up bargains for those who had cash to buy such assets. It appears that one of the funds holding the PIKs found itself in this situation and the Glazers took advantage, paying around a 50% discount for PIKs with a face value (at that point) of around £36m.

This was a smart trade by the Glazers by any standard, neutralising the risk of how to repay this slice of the debt at a very reasonable price. If left unpaid, by the time they reached maturity in 2017 this 20% element would represent a c. £130m liability for the Glazers on its own. But does this change things materially for Manchester United Football Club? In my view the answer is no.

The enduring mystery of the PIKs is why the Glazers have let them escalate to the extent they have over the last four years. At 14.25% (now 16.25%) interest rates, the PIKs represent some of the most expensive corporate debt imaginable. Replacing them with any other form of borrowing would make sense, using any available cash the family had would make sense, leaving them to build makes no sense at all. Why (other than this purchase of 20% in 2008) haven't the family repaid them? It seems logical to assume that they can't, that they haven't got the money available or assets they can borrow against. All the evidence from their other businesses points to this being the case.

So despite today's story, the situation seems to be this; the 80% of the PIKs still owned by various hedge funds (current value around £185m and growing at 16.25% per annum) have to be repaid or the Glazers lose the club. Other than spending £14m two years ago, no action has been taken to repay them and the only obvious source of the money to do so is Manchester United Football Club. Today's news is good for the club, but still leaves a huge sum to be repaid (see chart).

The club have to publish their accounts by 27th October. Strong indications are that none of the £95m that could have been paid out to Red Football Joint Venture had gone at the financial year end (30th June). The question is, has this money gone since that date? Companies are obliged to publish a note of significant "Post Balance Sheet Events" in their accounts. If this money has gone we can expect that note to tell us. Of course David Gill or Joel or Avram or somebody could just tell us the plan for the PIKs, but why would they want to talk to supporters?