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Old 14th July 2006, 18:01   #1
J.D.
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Default MUST Statement on Refinancing - UNITED’S DEBT BURDEN DOUBLES

UNITED’S DEBT BURDEN DOUBLES

Refinancing of crippling PiK debt gets the Glazers out of a hole, but
hugely increases the risks for our football club



MUST statement 14 July 2006



  • United debt set to more than double to £575m
  • Interest rate bill set to almost double to £42m p.a.
  • Glazers shift their personal debt onto United, as they can't afford to pay it themselves
  • Stakes raised in Glazer debt gamble, banks to take tighter grip on Old Trafford

So we are back to where we were in October 2004, when Malcolm Glazer submitted his first takeover plan to the MU Board, which involved the club taking on over £500m of bank debt so Glazer could buy it. The then United Board rejected the plan as“not being in the best interests of the company” because of the level of debt.


In his next attempt in February 2005, Glazer was forced to reduce the amount of debt leveraged on the club from £500m to £265m. The remainder he proposed to borrow from hedge funds at a blended interest rate of 18%. The United Board still rejected his second proposal as being “aggressive” and “potentially damaging to the club”. Glazer eventually succeeded in his takeover by buying out the Irish – but only with the hugely expensive debt.


It is the spiralling cost of the hedge fund debt that is forcing the Glazers to refinance, which is why we are seeing the original debt plan back in play. And it is the club which will carry the huge burden – as Glazer originally intended. The Glazers clearly can’t afford to repay their own hedge fund debt, so Manchester United is expected to do it for them.


According to credible City sources, the new plan is to raise some £575m of senior debt, borrowed by (and secured against the assets of) Manchester United, the proceeds of which will go to pay down not only the existing JP Morgan senior secured debt currently standing at some £250m, but also the amount Glazer borrowed from the hedge funds - £275m. There will also be a revolving working capital credit facility of £50m – bringing the grand total of new debt loaded onto Manchester United to a staggering £575 million.


In addition, the Glazers will have to raise a further £130m from other hedge funds just to pay the accrued interest on the PiK debt for the two years commencing May 2005. They will consider this a more comfortable level of debt for their family, but will still have to pay interest on this debt at around 15% a year.


All this to get the Glazers out of their hedge fund debt “hole”, which in their desperation, they took on so they could win their ‘prize’. A massive gamble that they took with our club, and on which they have now upped the stakes. Using our club as the biggest gambling chip in the world.


The new debt to be carried by United now comfortably exceeds the amount which was so firmly rejected by the previous Board in October 2004. It will be interesting to see how David Gill now describes this debt – is it still “serviceable” and are you still “comfortable” with it, David? Do you now think it is the interests of the company?


Certainly the interest rates are lower than those applying to the current JP Morgan debt. The new rates range from 6.8% at the bottom end to 10.2% on the second tier loan of £150m. But since the total debt has more than doubled, the interest and repayment terms mean higher annual outgoings to the banks.


We don’t know the annual repayment terms yet, but the interest is calculated as follows:


First tier senior secured debt

  • A loan 7 year term £75m 2.125% over LIBOR = 6.825% p.a.
  • B loan 8 year term £150m 2.625% over LIBOR = 7.325% p.a.
  • C loan 9 year term £150m 3.00% over LIBOR = 7.7% p.a.
  • Working Cap - Revolver 7 year term £50m Undrawn, rate not known
  • Second tier ‘lien tranche’
    10 year term £150m 5.50% over LIBOR = 10.2% p.a.
  • Total loans £575m
Without the working capital revolving facility, the annual interest rate bill on the senior debt is £42m as of today. This will increase as interest rates rise all over the world. This compares with the current interest rate bill of £24m – almost double.


And this does not include the annual repayments of principal on this debt which the club will have to pay on top of the interest bill. This element could add at least £20m to the initial annual debt cost (and rising), depending on the terms of the loan agreements.


What has changed to allow the Glazers to tap the corporate debt markets with such an aggressive financing?


Well it isn’t the current financial performance that’s for sure – EBITDA (cash operating profit) to 30 June 2005 was down to only £46.5 million, not nearly enough to support this level of debt. And this year is not going to be much better, with the early exit from Europe amongst other things. We estimate EBITDA at around £50-55 million for y/e June 2006. These figures will be available when United’s accounts are filed at Companies House early next year.


So what is making the banks (JP Morgan is leading the refinancing efforts again) so bullish? They are basically ‘forward projecting’ to next financial year, 2007-8, when the new TV deal kicks in with another £14m or so, added to the additional £5m from AIG for shirt sponsorship. Then there is the new capacity at Old Trafford, which combined with the inexorable ticket price rises, give the Glazers the hope of adding a further £16m this year (and rising) if all seats and corporate facilities are sold out every game. But there are early signs that this will not happen, same as last year, as United struggle to sell all the executive ‘Super Suites’ at the new reduced price and the marketing techniques they are using to try and get rid of unsold season tickets grow ever more inventive and desperate.


Based on the leaked numbers, United are forecasting EBITDA of £80m for F/Y 2006-7 and £96m for F/Y 2007-8. Much of this, they will argue, is fixed income from contracted revenues. But it must be pointed out that the senior loans are for terms between 7 and 10 years – the contracts being relied on terminate well short of this. So the future of United and its finances are being mortgaged (again) on a promise of ever rising income streams which may not materialise. Our club is the ‘pot’ on the gambling table; the stakes have been raised; and the Glazers and the banks are about to roll the dice again.


Is this all sustainable? Can the TV revenue keep increasing? Will there be enough cash available long-term as well as short-term to build & maintain a competitive team? Whether they are aware of it or not, the pressure on the manager and the team to produce results and trophies is massively increased by the new level of debt on the club. Failure on the pitch will not find forgiveness from banks at this level of debt.


And of course the fans will continue to be expected to pay for the debts, through the turnstiles, at the catering outlets, for parking and for merchandise and programmes – all of which are slated to rise to unheard of levels over the coming years. Those who doubt the Glazers’ capacity to milk fans at sporting events should track what has happened (and continues to happen) at the Raymond James Stadium in Tampa Bay.


The Glazers are re-making the debt bed – and it is the club and the fans who will have to lie in it.
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