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The depths of ManU 's problems - Robt Peston BEEB

Rob W

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Can Man Utd spend?


Robert Peston | 11:15 UK time, Tuesday, 5 January 2010


This week's epistle to fans from Arsene Wenger muses on whether Manchester Utd will derive advantage from being knocked out of the FA Cup by Leeds Utd.  Man U's Wayne Rooney and Dimitar BerbatovThe always counter-intuitive Arsenal supremo points out that FA Cup matches tend to be hard on the heels of Champions League games - which implies that Man Utd's players will be fresher for the matches that really matter.


Bankers however take a different view of Man U's humiliation by a team two divisions below.  They point out that debt-laden Man U needs posteriors on seats in as many games as possible to service the interest charge - and that the 3rd round exit from the cup deprives the club of important revenue.


One banker with a close knowledge of the club put it like this to me: Manchester Utd as a business is a delicately balanced financial machine, which works when the team is winning and revenues are pouring in, but where there is not much of a financial cushion to absorb the inevitable occasional flop.  He said that the huge debt that was taken on when the Glazer family bought the club was predicated on the basis that Man Utd would have decent runs in the Champions League and FA Cup in most years - which of course is typically what has happened.


The important numbers are these, as of 30 June 2008, the date of the last published accounts for Man Utd's holding company, Red Football Joint Venture Ltd.


Red Football JV had £519m of secured bank loans, on which it paid £45.4m.  And it had £175.5m of so-called payment-in-kind notes, where the interest is rolled up into the principal rather than paid in cash. The interest rate on these is 14.25%.  So the total annual interest bill was just under £70m (including rolled-up interest).


That compares with a net cash inflow from operating activities (largely profit before interest and taxation) of £88m.


So in that year, if Man Utd did not want to increase its overall level of debt, it had less than £20m to spend on players and other investments.  In fact, it spent £43m - so its indebtedness increased, by just under £33m to £699m gross in total.


Now Man Utd fans would presumably say that was money well spent, since the club won the Premier League for the umpteenth time last year.


But the big question is whether the current level of indebtedness is excessive for this point in both the footballing cycle and in the economic cycle.  To state the obvious, post-Ronaldo Man Utd does not look as invincible as last year's team. And a weak British economy deprives all clubs of incremental revenues.


Which is why Man Utd is looking at ways to reinforce itself in a financial sense.  As has been widely reported, Man Utd is considering taking on new debt to pay off some of the old debt.  According to bankers, it would like to raise around £600m through a bond issue.


The reason is that - in theory at least - the interest payable on the bond would be significantly less than the interest on the payment-in-kind notes (PIKs): Man Utd would probably have to pay around 8% interest on a bond, which looks very attractive compared with the 14.25% interest on the PIKs.  But here's the funny thing. The interest on the much bigger bank loan of £519m is very competitive. It ranges between 2.125% and 5% over Libor. So right now it should be paying no more than 5.5% - which is cheap money.


It does not seem to make sense to pay off that low-interest debt with the proceeds of a bond paying a higher interest rate.  But that's to ignore the problem that the burden of the PIK is growing exponentially, because the 14.25% interest rate applies to the original principal plus the rolled up interest.  In other words, Red Football JV is this year probably paying 14.25% on PIKs with a value of £200m - or more than £28m in interest.


Which would imply that next year it will be paying 14.25% on almost £230m, and so on, to financial ruin.


The point is that Man Utd's banks are the so-called senior creditors and have first claim on any money deployed to repay loans, so they would probably not allow the PIKs to be redeemed unless some or all of their loans were also repaid.  So there is a logic to a comprehensive refinancing via a bond issue.  This is a long-winded way of saying that the UK's most formidable football team is not without its financial issues.


Which is also to say that the relative immunity of top-flight football from the impact of credit crunch and recession has been delayed, not avoided.  The simplest way for Man Utd to alleviate the immediate financial pressure would be to spend very little in the January transfer window.  And it certainly would not be the only club to sit on its hands rather than buy new players.


With clubs like Portsmouth and Crystal Palace in serious difficulties, right now there are arguably more forced sellers of players than buyers with deep pockets.


Man City may have a bottomless purse. But the noises from Chelsea suggest even it isn't likely to spend like it once did.  Perhaps this is the moment when the transfer market will crack and player prices fall significantly. Which - of course - would further weaken the finances of clubs where the value of players represents a significant proportion of balance-sheet assets.


The finances of the Premier League are probably as perilously poised as the finances of the British government.

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Their aura of a 'super-team' is now starting to slip I think, even if it's caused by a temporary injury crisis it might turn out to harm them in the longer term as well.


Teams now aren't as scared of facing Man Utd, and that might have long lasting consequences.

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Guest palnese

One long-term injury for Rooney, and they are fucked.


Imagine Man Utd ending up outside the top 4. Won't happen though.. In many years.

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One long-term injury for Rooney, and they are fucked.


Imagine Man Utd ending up outside the top 4. Won't happen though.. In many years.


Without Rooney it probably would happen, luckily he's a robust fucker.


Also, Valencia looks to be a very astute signing.

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We did something a couple of years ago about Man United in business and my business teacher reckoned in 10 years they will be screwed if they continue to spend how they do and just "service" their debt not repay it!

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Tony Cascarino reckons that both Manchester United and Arsenal will be screwed anyway by the end of the next decade as they'll fall to pieces without Fergie and Wenger at the helm. Arsenal still have a huge debt to pay off as well but seem to cope with it better than Manure. With the red scouse also in a huge mess behind the scenes it looks like City (providing the arabs don't get bored) and Chelsea could well be fighting it out for honours for a while.


Cas also reckons that Spurs, Everton, Leeds andour very own NUFC will be the teams chasing for the title in the latter half of the next decade. Mind you he also thinks every club in the EPL will be owned by foreign billionaires and that only clubs with 40,000 seats will be allowed in the Premier League.

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I think the problem is that teams don't fear United anymore, i certainly don't!

They have one of the weakest teams that i can remember them having!

If they win the Premiership i will be astounded!

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the funny thing is that their operating profit is probably second to none (and the numbers quoted doesn't even include the ronaldo sale), yet they're crippled bc they're paying back loans they've never needed in the first place. 

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the funny thing is that their operating profit is probably second to none (and the numbers quoted doesn't even include the ronaldo sale), yet they're crippled bc they're paying back loans they've never needed in the first place. 

yup had the glazers never taken over man u would be in a far stronger position both financially (they would easily have been the best placed club to easily survive the credit crunch which is starting to hit teams as seen with pompeys woes crystal palace watford liverpool and west ham) and player wise as they'd have been free to spend the ronaldo money on someone like ribery villa etc. And to pay for those debts its the average fan who has to cough up extra each year for tickets.

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From reading the following articles Man U sound like they're screwed some time in the next 10 years: -





United’s bond issue: a primer


By Ed. Wed, Jan 6, 2010


Manchester United’s owners are seeking to issue a £600 million bond in a bid to ease the club’s mounting debt burden, as Rant reported on Sunday. The bond, which in practice effectively swaps one kind of debt for another, will theoretically cut the overwhelming annual interest burden on the club – now at more than £70 million and rising.


But what does it really mean? Rant explains…


What does United owe?

When the Glazer family bought the club in 2005 they did so using two forms of debt in what City insiders call a leveraged buyout. Firstly, the family borrowed a touch over £130 million from various New York-based hedge funds. These so-called Payment-In-Kind (PIK) loans, which the family is ultimately responsible for meeting, roll-up interest annually. Secondly, the Glazers borrowed hundreds of millions more in principle cash debt from banks, including JP Morgan. In 2006 the family refinanced this debt placed it on the club’s books, securitised against the shares and club assets.


It is the PIK loans, which roll-up interest annually until the debt matures at a future date, that are causing greatest concern. In this case the interest charged is widely reported as an eye watering 14.35 per cent annually, with the maturation date in 2017. By then the initial £130 million loan will have reached £580 million.


The principal cash debt now stands at £519 million, according to the last published accounts, which are more than 18 months old. These loans are relatively inexpensive, attracting interest at between two and five per cent annually. Cheap money in times of extreme illiquidity in the commercial lending market.


Together – and with an assumption of interest added over the past 18 months – United owes more than £700 million.


What is a bond issue?

The Glazer family has asked US bank JP Morgan to explore a bond issue in which the club will effectively write IOU notes to potential investors who buy debt. On these IOUs the club promises to pay investors their money invested plus interest at a fixed date in the future. The success of the issue depends on how many investors buy United’s bonds: a factor of risk (default) versus potential rewards (interest payable). The risk to investors is diluted by spreading the debt among many parties.


Why refinance now?

The Glazer family has sought to refinance the PIK loans on many occasions over the past two years but the global recession has reduced to almost nothing the amount of money available on the commercial debt market. Unless the family can refinance it will be liable to pay the huge PIK loans in full on maturation. A firesale of the club – stripped of all its assets – is the inevitable outcome.


What are the advantages of the bond issue?

A successful bond issue will swap one kind of debt for another kind of debt but at a far cheaper interest rate. For the Glazer family this makes complete sense by removing the burden of the punishing PIK loans. The club’s books would actually be laden with more debt, although this point is moot: the Glazer’s debt, is effectively the club’s debt anyway.


What are the catches?

The principal bank lenders have a say in the running of the club under the terms of the £500 million cash loan but only if United does not meet certain financial targets. The club is meeting those targets but as preferential lenders JP Morgan and others expect the club to pay down some cash debt in addition to the PIK loans. This is why a full-scale £600 million bond issue is now mooted. This may have the effect of increasing interest payments on some parts of the club’s cash debt.


What do the fans’ groups say?

Manchester United’s Supporters’ Trust (MUST) questions why “any potential bond investor [would] be prepared to take on this risk if the return is going to be less than the current lenders receive and now in an environment where the risk is clearly much higher than the time at which these loans were first negotiated?”


“Is the financial situation for the Glazers as bad as recent speculation has suggested?” asks the group.


“Despite the extra income from TV and the huge ticket price rises they have been clawing back expenditure both at Manchester United as well as at the Tampa Bay Buccaneers where fan discontent is starting to mirror that at Old Trafford.”


“Whether they do manage to shift the debt onto other lenders the situation for United fans and our club will be little changed – weighed down by the millstone of the Glazers debt and with the supporters having to foot the bill through ever increasing ticket prices and reduced expenditure on players,” the group said in a statement.


“The Glazers have taken us from being a club that were the richest in the sporting world to now the most indebted. In the four years before the Glazers’ takeover Manchester United invested over £80 million in the form of players like Rooney and Ronaldo. In the four years since the Glazer takeover the turnover has doubled but, despite protestations to the contrary, independently published figures suggest the net transfer spend is now negative.”


“This is surely the time for the Glazers to exit and make way for a new investor interested in working with the supporters to build a stronger football club and business together,” it concludes.


What about transfer spending?

Simple arithmetic says that to pay down cash debt and account for rolled-up interest on the PIK loans United cannot spend more than £20 million per season. Even that figure is optimistic. Money from the sale of Cristiano Ronaldo remains unspent. The question is whether the Glazer family pays down debt more quickly than in the past or reinvests in the squad.


Will a white knight save United?

This is highly unlikely. While United is heavily indebted the club is as the leading sports franchise by the influential US-based Forbes magazine, ahead of Dallas Cowboys and Washington Redskins. With a market value reaching more than £1.3 billion, any investor in the club will need seriously deeps pockets. In comparison Roman Abramovic has invested a total of around £400 million in Chelsea, including buying the club, paying off debt and bringing in new players. Meanwhile, Sheik Mansour’s investment in Manchester City totals just £304 million.


So what does the future hold?

United must refinance or the club’s indebtedness will continue to climb sharply in the coming years. While the club can meet cash debts through revenues, the looming maturation of PIK loans is wiping out almost 100 per cent of the club’s annual profits. Despite making a pre-tax profit of £88 million, debt repayments, transfer spending and rolled-up interest meant United’s holding company – Red Football Joint Venture Limited – increased its indebtedness by £33 million in the last published accounts.


The catch: there is little incentive for current investors to swap cash debt for a bond and the financial market is still deeply frozen to commercial borrowers.


The club has doubled turnover in the past four years through strong growth in TV, commercial and match-day revenues. It may need to do so again in the next four years simply to stand still. The alternative is a frozen transfer budget and inevitable player sales.

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Ultimately, this will be a good things for them- paying out the PIKs (which are a bit like a large-scale credit card) is absolutely critical.


How come Peston is quoting 'bankers' as his sources- he has spent the last two years explaining why each and every one of them is totally useless. Anything to fill that column, eh?

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Guest optimistic nit

what are chelseas figures like? i'm sure i read somewhere that they were in effect un sellable due to their debt and massive losses each year.

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