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Old 20th March 2010, 17:53   #1
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Default Man United debt problems

Man United debt problems
The alarming level of debt at Man United has already led to protests

* Financial Times
* Published: 00:00 March 19, 2010
* Gulf News

Debt has acted like a leech on the club, sucking money out of the football budget to feed the Glazers and their bankers- Paul Marshall

David Gill, Manchester United's chief executive, two weeks ago was reminded how, back in 2004, he had opposed the takeover of the club by the Glazer family because the plan was laden with debt.

"The level of debt they were proposing was too aggressive," Gill admitted at a football conference in the club's home city. But Gill, who became CEO seven years ago when the English Premier League's most decorated club was a PLC and debt free, explained that the Glazers had come back to the board with a revised and more acceptable debt structure. Of the club's debt today, he said: "We can live with it."

Gill has been a loyal defender of the American siblings' ownership since their 2005 takeover of one of the biggest global sporting brands.

But today the loyalty of millions of global supporters is being tested as a group of wealthy financiers called the Red Knights — fans themselves — appeal for their backing for an audacious bid to take the club off the hands of the Glazers, also owners of the Tampa Bay Buccaneers American football team. Fans have already taken to protesting against the family by shunning the club's official red colours in favour of the green and gold of the railway workers who founded it in the 19th century.

The financiers' campaign is spearheaded by Jim O'Neill, Goldman Sachs' chief economist and the man who coined the Brics acronym for fast-growing emerging economies. He is Manchester born and bred, a passionate fan and, as it happens, was a board member when the Glazers came knocking at the gates of Old Trafford, United's 76,000-seat stadium.

As Gill conceded — while reaffirming that the club is not for sale — the financiers are "credible people". People close to the Knights say their effort is credible enough to have attracted two, unnamed, offers of £500 million (Dh2.7 billion) each to support their plan.

This battle is not just about the wisdom of leveraged buy-outs and whether they can survive in this financial climate. As the finances of one of the world's richest clubs come under scrutiny from investors, it places the world of football, in which many players still enjoy unfeasibly high salaries and command huge transfer fees, under a harsh spotlight. But it also reveals why owners believe the long-term value of football clubs promises huge rewards.


What really motivates all sides is the longer term prospects of sports brands such as Manchester United. The club's valuation today is somewhere between £1 billion and £1.5 billion, according to some people associated with the Knights.

But in five to 10 years' time it may be worth much more as football, a product with global appeal, becomes better able to exploit the internet. It is unsurprising that owners such as the Glazers might want to hang on to their assets whatever the short-term costs.

The family is under no technical obligation to sell and has made clear it will not do so. However, among the Red Knights the view is that a substantial offer might tempt it to sell. One, that would represent a handsome return; two, it would remove the pressures of the club's debt.

In total, the debt stands at £709.5 million. The Knights' contention is that the family is depriving the club of money that should be spent on investing in players, not paying interest on debt.

"Debt has acted like a leech on the club," says one Red Knight, Paul Marshall, founder of hedge fund Marshall Wace, "sucking money out of the football budget to feed the Glazers and their bankers."

The Glazers bought United in a £790 million leveraged buy-out deal. They paid £272 million of cash, and borrowed the remainder in the form of a JPMorgan-led syndicated bank loan, as well as from hedge funds that lent money in the form of high interest-bearing payment-in-kind loans. Favoured by private equity groups in the mid-2000s, these are akin to credit cards on which repayments are de*ferred for several years. Interest is paid in kind (pik), meaning the loan grows as interest is paid on interest. Although the family restructured the debt in 2006, it was left with pik loans it could not start to pay off until the debts with the banks were settled.

In January this year it raised £507million by issuing bonds to clear the bank debt. These bonds provided longer term financing at a fixed rate without the tighter restrictions that come with bank loans, and would enable the family to start to deal with the pik loans.

The interest on these pik loans has been hurting the Glazers. Since the takeover, it has been accumulating at a rate of 14.25 per cent a year, reaching £202 million at the beginning of 2010. Under the terms of the loan, the rate will climb two percentage points from August if, as seems likely, the club exceeds a ratio of five times net debt to earnings before interest, tax, depreciation and amortisation.

But as the bond prospectus re*vealed, the family can now take £70 million off the balance sheet, and draw a 50 per cent dividend on net cash profits, to start paying down the pik debt.

Andrew Green, United fan and a blogger on the club's finances, wonders why the siblings have not used their personal funds to pay off the pik debt.

"Even if you could pay it from the club's cash flow, you would still pay it down yourself and pocket the cash flow as dividend because the interest ratchets up at 14.25 per cent," he says.

"It suggests they are financially under some strain."

According to the Red Knights the cost of servicing the club's debt up to this year has been more than £260 million — and it continues to cost about £45 million a year, not counting the interest on the outstanding pik loans.

The bond prospectus forced the secretive Glazers to expose more of the United financial structure to scrutiny than they would have liked. It revealed £23 million of management fees paid to them; a loss of £35 million, incurred as part of the refinancing by unwinding a hedge against rising interest rates; and £15 million in fees for the bond issue to financial advisers. It also raised the possibility of the club selling its Carrington training ground.

From the Glazers' perspective, the financial logic behind their ownership is a simple one — it assumes that United's players will be good enough, year in, year out, to generate from ticket sales, television rights and commercial deals the money needed to service the debts. Together these income streams provided turnover of £145 million in the last six months of 2009. To test the strength of that logic, investors approached for the bond were obliged metaphorically to poke their heads round the dressing room door and, for example, weigh up star striker Wayne Rooney's fitness and manager Sir Alex Ferguson's future.

David Newman, fund manager at Rogge Global Partners, says that all things being equal, United should continue to prosper in the Premier League and play in Europe's lucrative Champions League, thereby enabling the Glazers to pay their coupons and refinance their bonds in the future.

"But what if Alex Ferguson leaves, or Rooney breaks a leg — how would that affect team morale? Maybe they would not play as well, or simply have a run of bad luck. In this scenario their ability to repay their debt could be massively reduced," Newman says.

In the Glazers' defence, the club can point to earnings that have doubled under their ownership and enough cash to support investment in players. Even after the Glazers have stripped out earnings for debt repayment purposes, the surplus for player investment is about £50 million, club advisers say.


"There is a substantial amount of cash in the [profit and loss account], and Sir Alex has bought every player he has wanted," says the Glazer spokesman.

Commercial revenues are on the up as the family seeks to exploit the global brand. Income from the television rights deals negotiated by the Premier League and Uefa, the sport's European governing body, for its Champions League, was worth £53.4 million to United in the last six months of 2009, and is expected to grow.

Which leaves ticket sales, the one area that some fans, who have seen the Glazers hike up ticket prices, believe they could exploit. A fans' boycott would be not just bad publicity for the club but would also undermine the financial logic behind the ownership.

The price of tickets is an issue that motivates members of the Red Knights.

"To apply private equity principles to lower income levels of society is completely inappropriate. It is very harsh on these people," according to people close to the group.

One option discussed by Red Knights is to build a position in the bonds in the hope that should the company buckle under its debt burden they would wield greater influence.

The other, less palatable option is to encourage fans to boycott matches. While this would certainly stretch loyalties to the utmost, it is still something that concerns the Glazers acutely. O'Neill is a good friend of Sir Alex, the formidable Scot who has brought trophies aplenty to the Old Trafford boardroom but who will not take kindly to a campaign of destablisation on the terraces.

But on the streets of Manchester, where stickers proclaim "Love United, Hate Glazer", few believe the Americans have anything like the loyalty they or Sir Alex feel. "The club needs to be owned by somebody who runs it like a football club," says Green, "who is in it for the football."
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