Friday 24 May 2013

The history of Manchester United's debt

Last night United announced to the New York Stock Exchange that it was repaying around half of its outstanding bonds using a new bank loan from Bank of America. This will reduce the club's interest bill from around £31m per year (pro-forma post the IPO) to around £21m per year.

This blog sets out how United's debt has risen and fallen since the 2005 takeover and how much it now costs.

The history
For completeness, the table below shows flow of borrowings and repayments from the original takeover up to the most recent (March 2013) accounts. Initially the debt sat in either a subsidiary of Red Football Limited or Red Football Joint Venture Limited. Following the pre-IPO reorganisation, MU Finance Limited holds the debt for the new parent, Manchester United plc.

The table above can be more easily summarised in this graph, which shows the total gross debt at each stage.

The story is one of rising debt after the takeover as the preference shares accumulated rolled up interest. These were repaid in the 2006 refinancing, adding to the debt on the club itself and bringing in the famous PIKs. By June 2010 after the bond issue, total debt including the PIKs had spiralled to a terrifying £753m. 

The story thereafter is well known. The PIKs were mysteriously repaid (at a cost of £249m) in late 2010. The club spent around £90m (the Ronaldo cash) buying back the bonds it had just issued. Last year another £63m of bonds were repaid from the element of the IPO proceeds that the Glazers didn't keep.

By the end of March this year, the debt (made up overwhelmingly of the remaining bonds plus a small MUTV loan and the mortgage on the freight terminal) was down to £367.6m. The figure oscillates with the movement between £ and $.

The costs
As I have frequently pointed out, the interest bill from all this debt has totalled c. £350m  since the takeover and the total cost (including fees, derivative losses and debt repayments) is almost £600m. Paying interest has taken far more of the club's cash than has been spent on transfers.

The annual  interest cost is falling however, both in absolute terms and as a proportion of profits. From over 80% of EBITDA (cash profits) going on interest in 2006, next year the figure will be around 12%.

The future
I have predicted before that the club would refinance as quickly as possible (there are penalties on repaying bonds early but these expire over time).

Over the next three to five years the club should generate enough cash to pay the remaining sum off. It is tax efficient to keep some debt, and future dividends may take priority over further repayment.

The reduction in the amount and cost of United's debts is an unequivocal good thing.

The question for supporters is who benefits? Will David Moyes be given significant funds? Will ticket prices continue to be frozen (or indeed will the club contemplate reversing some of the 50% plus hikes they implemented after the takeover)? Or will the extra cash from TV deals, commercial income and a lower interest bill flow out of the club in dividends.

Most major football clubs reinvest the bulk of their money back into fans and football. In England at clubs like Arsenal, Liverpool and United, profit still remains the focus. On the weekend the German model is on display at Wembley, that's too often the English way of football.