Good housekeeping at Manchester United – explaining the May 2015 refinancing

In the decade since the purchase of Manchester United by the Glazer family, the debt placed on the club has been “refinanced” four times. This week marked the latest of these refinancings.

A refinancing is where old debts are swapped for new debts. They are the corporate equivalent of switching mortgages or consolidating credit card debts into a single loan. The aim is usually to make the debt more affordable, sometimes by locking into a cheaper interest rate, sometimes by extending the life of the loan, sometimes both.

This post explains what United have done on this occasion. It is intended to explain what’s going on in layman’s terms.

The previous situation

Before this latest change, Manchester United plc (acting through two of its subsisidiary companies) had a $315.7m (£206m) “Secured Term Facility” (a bank loan) with Bank of America Merrill Lynch International Limited and $269.2m (£176m) of US dollar bonds called “8 3/8% Senior Secured Notes due 2017”. There was also a “Revolving Credit Facility” (essentially an overdraft) with a group of banks. The Revolving Credit Facility has never been used.

The Secured Term Facility paid an interest linked to LIBOR (a benchmark interest rate) plus a “margin” (markup) based on the level of United’s debt compared to its profits. The maximum margin was 2.75% if net debt was more than 4x EBITDA (cash profits) and the minimum margin was 1.5% if net debt was less than 2x EBITDA. This financial year net debt will be around 3x EBITDA meaning the total interest rate (using 3 month LIBOR of 0.29% and a margin of 2.25%) will be c. 2.54% per annum.  The interest cost is therefore c. $8.0m or £5.2m. The Term Facility is repayable in one amount in 2019.

The Senior Secured Notes are the remaining bonds that were originally issued in 2010. They pay a fixed interest rate of 8.375% per annum and therefore cost $22.5m or £14.7m. The notes are repayable in one amount in 2017.

The total debt today is $585m or £382m. The annual interest cost is c. $30m or £20m.

After the refinancing

United are changing both elements of the debt and increasing the size of the Revolving Credit Facility.

The Secured Term Facility, still with Bank of America Merrill Lynch, is being reduced from $315.7m to $225.0m. The repayment date is being extended from 2019 to 2025. The interest rate margin range is reduced from 1.5% - 2.75% to 1.25% - 1.75%.

The $269.2m of Senior Secured Notes are being redeemed (paid off) and $425m of new Secured Notes are being issued. The new notes are repayable in 2027 not 2017. Crucially, the interest rate on the new notes is 3.79% rather than 8.375%.

The total amount of debt is increasing from $585m (£382m) to $650m (£425m). The extra £43m will be available for the club to use.  None of this debt requires repayment or refinancing for another 10 -12 years. Following the refinancing, the interest bill will fall from around $30m/£20m per annum to around $20m/£13m.

Thoughts

This refinancing is an unequivocally good thing for Manchester United.

The amount of debt has increased slightly but the increase provides more cash for the club.

Crucially, the interest cost is now very low for a club of United’s profitablity. Even in this season of no Champions League football the club will make over £100m of EBITDA. An interest bill of £13m is therefore covered over 7x. Back in 2008 over 70% of EBITDA went on interest, next year it is unlikely to be 10%.

Around 75% of the interest is at a fixed rate for the next twelve years. Even if rates rise (as they must do at some point), United will be protected from much of the impact.

The financial story of Manchester United is no longer about the debt. It is about how effectively and wisely United spends its money.

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.

LUHG

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

Cost	2005-2010	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	£41m £9m £2m £13m £15m £80m	[i] [ii] [iii] [iv] [v]
Loss on interest rate swap	£35m	[vi]
Cash interest paid:             to 30 June 2009                                        Est year to 30 June 2010 Total cash interest paid	£171m £45m £216m	[vii] [viii]
Rolled up PIK interest:        to 30 June 2009                                       Est year to 30 June 2010 Total rolled up PIK interest	£62m £21m £83m	[ix]
Management and consultancy fees	£13m	[x]
Loans to Glazer family members	£10m	[xi]
Total costs	£437m

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.

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	Amount	“Margin” over LIBOR
A	£75.0m	2.125%
B	£150.0m	2.625%
C	£150.0m	3.000%
D	£150.0m	5.500%
Total	£525.0m	3.482%

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......

LUHG

Should we worry if the Red Knights took over and kept the bonds in place?

In the last week, the press has been full of speculation about the timing and structure of any offer from the “Red Knights”.  One often repeated idea is that the RKs might keep the recently issued bonds in place, at least for the time being.  Reading various United forums, it seems this possibility is worrying a lot of supporters.  Obviously the ideal thing for United would be to turn the financial clock back to May 2005, when we had no debt at all. But if the only way to get the Glazers out involves keeping the bonds for a few years at least, then I still believe this would produce a transformation of the club’s financial position.

The first key thing to bear in mind, is that if the Glazers sell United, they will repay the PIKs from the proceeds, removing this terrifying millstone from around our necks.  The PIKs are central to everything, because the Glazer family do not have the money to repay them and are therefore using the clubs money.  So any successful takeover would immediately reduce the debt that our football club is supporting from over £750m to the £534m of bonds.

In the event of the Glazer family selling United, the bondholders can demand that they are repaid at 101% of the bond’s face value.  The cost of this would be around £540m.  This would be money that any buyer would have to find on top of the amount they had to pay the Glazers and would therefore hugely increase the amount of equity (cash) that had to be found.  Theoretically, a buyer could raise new debt to repay the bonds, but this is a complex, difficult process in what remain tough credit markets.  The third option would therefore be to make an offer to the Glazers that was conditional on the bondholders waiving their right to be repaid.  Why would bondholders accept this?  There are two main reasons, firstly the price of the bonds has risen very sharply since speculation about a takeover began in March.  Prior to the RK announcement on 2^nd March, they traded at £92.5.  Today they trade at around £97. If the bondholders did not waive their rights, there would be no bid and the price would almost certainly fall back towards its February levels.  Secondly, new owners who (unlike the Glazers) were not seeking to take significant dividends out of the club would be far more attractive for bondholders.  The more of the club’s profits that are retained inside United, the safer bondholders are.

But wouldn’t keeping the bonds just leave the club in the same position as we are now?

The answer to this is a definite no.

In these successful times (which may not last, just ask a scouser about dominating the league), United is making cash profits (EBITDA) of around £90-100m a year.  From this has to be paid the cost of the bonds, around £45m pa, and then a whole host of payments to which the Glazers are entitled.  These include £6m a year in “management fees”, £3m a year in “parent company corporate expenses” and around £20-25m of permitted dividends.  That’s £30-35m of extra profit that can be saved by removing the Glazers, over £200m during the remaining life of the bonds. 

So an ownership structure that removed all the Glazers’s non-interest costs would be a huge improvement on the current situation.  Under the Glazers, in a season when United make around £95m of EBITDA, only around £26m is left after interest, fees and dividends are paid (and this actually overstates the cash flow).  Under the sort of structure the press say the Red Knights are looking at, this would rise to £60m a year. This extra money could go towards investing in the playing squad, reducing ticket prices and, over time, starting to pay down the bonds.

If the bonds were retained post any takeover, the rules relating to repaying them would still apply.  The bonds cannot start to be repaid until 2013 and early repayment in that year costs an additional 8.75%, falling to 4.375% in 2014, 2.1888% in 2015 and zero in 2016.   So any new owners would have around five years before it became economical to repay the bonds.  In addition to the cash that the club should have generated over this period, it is very likely that by this time lending markets will also be more benign than they are now.  If banks are more willing to lend, the club could repay a large chunk of the bonds and refinance the rest of the debt at far less punitive rates than it is currently paying.  Just to give an illustration, the bank debt the Glazers put in place in 2006 cost 3.5% above LIBOR (roughly similar to base rates), so around 4.5% at today’s LIBOR.  This compares to the 8.5%+ being paid on the bonds.  Similar terms to the 2006 deal would not be achievable today in the post credit crunch world, but in the next few years I would expect credit conditions to improve, allowing a refinancing of the bonds and significantly lower interest costs.

In an ideal world, a new owner would take over our club and sweep away all of the debt so pointlessly loaded onto it by the Glazers.  In the real world, the most we can hope for from a financial point of view is to staunch the flow of cash into the Glazers’ pockets and then gradually rebuild the club’s balance sheet.  It is natural for supporters, all too used to years of financially motivated owners, to be sceptical about the motivation of the Red Knights and people should of course wait and see what they propose. But if supporters can gain a substantial stake in Manchester United in a  structure that provides an extra £200m between now and 2017 to pay down debt, cut ticket prices for kids or to buy world class replacements for Giggs, Scholes and Neville then it sounds pretty good to me.

LUHG

Important: JP Morgan assume the Ronaldo money is going to pay the PIKs…...

One of the fans’ central accusations (from information in the bond prospectus) is that the vast majority of the proceeds United received from selling Cristiano Ronaldo to Real Madrid were going to be used to repay a chunk of the Glazer family’s toxic “Payment In Kind” (“PIK”) loans.  A research report published in the last few days shows this payment is the central assumption of no less than the Glazers’ own bankers, JP Morgan.

“We have £100m in the bank” says David Gill.  “It is available to the manager”.

People like me say that the bond prospectus is very clear that £70m will soon be sucked out of the club to pay the Glazers’ own debts (I strongly believe this take place after 31 March so it doesn’t appear in the accounts until August).  David Gill says the PIKs "are not the responsibility of Manchester United".

Now the credit (bond) research team at JP Morgan, the lead investment bank on the bond syndicate and the Glazers’ advisers, have published a research note on the bonds.  I’ll write more about this note next week, but one stark assumption stands out:

Under all three scenarios [of different performance on the pitch], we assume the £70m carve-out of the restricted payments basket leaves the bondholder group [i.e. is paid out of Red Football Ltd to the Glazers’ parent company]. (page 21)

And where is that £70m going?  They kindly tell us (my emphasis):

We have adjusted MUFC's balance sheet cash for the £70 (sic) RP carveout (Restricted cash). We have given this benefit to the Red Football Joint Venture PIK debt, and have assumed it accrues at 14.25% per annum. (footnote on pages 24, 25, 26)

So if there was any doubt, JP Morgan believe the bulk of the Ronaldo money will be used to pay the PIKs (although they point out, as I have, that the money is currently on United’s balance sheet).  I asked David Gill about this subject in my open letter.  He declined to reply of course.  It’s pretty sad we had to wait for JP Morgan to answer it for him……

Our club has received an incredible windfall from the Ronaldo sale.

Here’s what we could have done with this windfall; we could give Fergie £30m in cash to spend on new players, take the remaining £40m and fund a 20% cut in all ticket prices in the Stretty, scoreboard end, Family Stand and NT3 (annual cost £4m) and guarantee that these ticket price will only rise with inflation for 10 YEARS![i]

At a time when its core working class support is being priced out of going to the match by greedy owners and a recession, that’s the sort of thing a football club would do…..

Tell your mates, tell your family, tell everyone.  The Glazers are going to take the Ronnie money and you didn’t hear it from some mad bloke on the net, Manchester United’s bankers said so.

LUHG

---

[i] Total 2008/9 ticket revenue (30 home game season) £90.2m (source: Bond Prospectus).  My analysis (available on request) shows 21% of this is derived from non-exec tickets in the Stretford End (West Stand), Scoreboard End (East Stand ) and North Stand Tier 3.  These areas therefore contribute £18.9m per annum.  A 20% cut would cost c. £4m per annum, and £40m could guarantee these lower prices (increasing only by inflation thereafter) for ten years.  Alternatively a 10% cut could be guaranteed for 20 years.

Bond price update - investors making a profit!

The chart below shows the bond price from its first day of trading on 25th January to its closing price yesterday. I have added a line showing the issue price of the sterling bonds (98.089) and a line showing the closing price on 1st March 2010 (the day before the "Red Knights" announced that they were looking at putting together an offer for United).  The announcement came on the same day as United announced results for the three months to 31 December 2009.

The first thing to say is that having been the worse performing "high yield" bond issue of 2010, the MU Finance plc bonds are now trading above their issue price.  Investors are now showing a profit on their original investment (the same is true for the US$ bonds but I will stick to the sterling issue for ease).  Furthermore, this turnaround is emphatically not related to a rise in bonds generally, the "spread" on United's bonds has fallen to a post issue low of 578 basis points (i.e. a yield 5.78% above gilts).  The price move is United specific. 

You can see from the chart that the bonds started trading well below the issue price.  I argued at the time (as did other less biased commentators) that the bonds had been mis-priced and that the issue price did not reflect the inherent risks of the Glazers' business model, something I stand by.  As the chart shows, by late February, the price had stabilised and as I wrote at the time, the huge fall in mid-February looked excessive.

The interesting movement in the bond price has happened in March of course.  Sky News fisrt reported the existence of the Red Knights on the evening of 1st March, after the markets had closed.  The next morning the price rose from 93.75 to 95.00 with all this move occurring prior to United publishing its quarterly results that day.

If United is sold (or if other events mean the Glazer family lose control of the club), the bonds have to be redeemed at 101% of their face value.  This makes a probability of there being an offer for United a key influence on the bond price.

There is of course no way of knowing why the price has risen so sharply in March. It is possible that all of the appreciation is due to the bond market reappraising the club as a business.  For me, there was nothing of note in the Q4 2009 results statement.  Since then the club has announced three new sponsorship deals with Telekom Malaysia, Turkish Airlines (despite one senior manager from the airline being photographed wearing a green and gold scarf at a recent home game, if you don't believe me I know someone who has a photo) and most recently South Africa's MTN.

These sponsorship deals are all "nice to haves" for the club, but I doubt they generate more than £1m each per annum in profit.  Half of this extra profit has been wiped out in higher interest costs from the $ bonds.  The club has partially hedged the February 2011 coupon payment (at a cost of course), but the August 2010 and all other future payments are currently unhedged.  The annual $ coupon payment is fixed at $35.6m.  At the time of the bond issue, sterling was trading at $1.61.  As I write it is $1.515.  This has the effect of increasing the sterling cost of the $35.6m from £22.1m (at the time of the bond issue) to £23.5m today.  All that hard work from United's commercial department and most of it is needed just to stand still as the currency falls......  On the pitch of course things have been going very well, but this has little impact on United's long-term ability to pay its debts.

So I don't see what could have radically changed the bond market's view of United's bonds since the start of the month, except of course an increasing belief that the club will be sold and that the bondholders will get their payout at 101%.  As I said above, such a supposition cannot be proved, but the bond price move should make those who see a successful bid for United as pie in the sky at least pause for thought.

LUHG

One for the lawyers

Quizz time.

Question 1:       Which of the following events is MOST LIKELY to happen?

Question 2:       Which of the following events was NOT identified as a “Risk Factor” in MU Finance plc’s bond prospectus?

a)                  United being relegated from the Premier League in the next seven years

b)                  A terrorist attack on Old Trafford

c)                   A substantial organised boycott of season tickets and executive tickets by thousands of United fans this summer

I think the answer to both is c).  If a US court is asked the same questions and agrees with me, then things could potentially get very expensive for the Glazer family.

There are no less than fifteen pages of “Risk Factors” in the MU Finance bond prospectus.  Such is the norm with modern debt and equity issues in our (and particularly America’s) litigious culture.  The Risk Factors cover a huge range of potential pitfalls from player injuries, through the nature of English insolvency law to the terrorist attacks I mentioned above.

The purpose of the Risk Factor segment is both to alert potential bond holders to things than could go wrong, but also (and perhaps more importantly) to protect the issuer of the bonds (MU Finance plc and its parent company Red Football Ltd) from any potential litigation from bond holders in the event of something going materially wrong at United.  The reason that the list is so long (other than the fact that football is inherently a risky business) is that if any substantial risks are not disclosed and then come to pass, the issuer can be sued by people who bought the bonds.  In US courts, not only can investors sue for the amount invested, but also for punitive damages in cases where business risks were not adequately disclosed.  Such punitive damages can be several multiples of the original amount invested.

Investor litigation is rare in the UK, but in the United States is a well established practice (check out the Stanford Law School’s “Securities Class Action Clearing House” for many, many examples).  Although things have calmed down since the wave of post-dot.com bubble litigation and then the aftermath of the credit crunch in 2008, US investors in both bonds and equities frequently turn to the courts when they feel a company that has sold them securities has not shared all the relevant information it has with them.  Red Football of course chose to sell bonds into the US (to “qualified institutional buyers” under the 1933 Securities Act), making the identification of risks very important.  The bond prospectus not only lists numerous risk factors, it also makes the following statement:

“The risks and uncertainties we describe below [in the Risk Factors section] are not the only ones we face. Additional risks and uncertainties of which we are not aware or that we currently believe are immaterial may also adversely affect our business, financial condition or results of operations.” (page 28 of pdf version)

So the prospectus attempts to list all material risks Red Football is aware of but doesn’t mention supporter opposition to the club’s ownership.  This raises the question whether the risk of action by supporters was considered “immaterial” and was therefore deliberately not mentioned, or whether Red Football’s management aware of it.

Opposition to the Glazers runs deep and is long standing.  Years of ticket price rises, the lack of transfer activity last summer and news that total debt had passed the £700m mark had already increased supporters’ concerns by the end of 2009.  The publication of the prospectus itself was always going to anger supporters as it revealed for the first time all the cash extracted from the club by the Glazers and their intention to take much, much more in the future.

I am not suggesting that the famous Chatmaster’s “green and gold” idea should have been foreseeable, nor the formation of the Red Knights group, merely that when a sizeable proportion of your customer base is already very unhappy about the way things are, when you know you are about to reveal further the gory details and when you are failing to sell out the ground on a growing number of occasions, then a “customer” backlash is a material risk.

A red I know is friends with a (football ignorant) bond manager who had bought bonds in the issue.  When the red asked him if he was worried about a boycott, the bond manager was startled and asked him what he was talking about.  When he heard the answer he didn’t like it.  As the saying goes, I’m no lawyer, but I have seen hundreds of securities offering documents over the years and have a fair idea what constitutes a material risk and what doesn’t for United’s “business, financial condition or results of operations”.  If I was a bondholder and in the next few months supporters’ groups call a boycott with a significant number of season ticket and executive ticket holders taking part, I’d have a lot of questions to ask about why the risk of such an event was not disclosed.  Why even the existence of opposition to the owners was not disclosed.  But before I asked those questions I’d call my lawyers and I’d make sure they were in America.

Interesting times.

LUHG