Why does one of the most famous clubs in the world need to raise so much cash?
There's an old saying that if you owe the bank a thousand pounds and can't pay it back then it's your problem but if you owe them a million pounds it becomes their problem. In the corporate world whilst the numbers are much higher the principle remains the same. Excessive debt requires excessive interest payments so less money remains in the business for investment and protection against the proverbial rainy day. And it's been raining a lot in the financial world for the last eighteen months.
In 2005 the Glazer family bought arguably the most famous football club in the world, Manchester United, for £790 million. Unlike most football clubs, which pay most of their income to the players, United had been sensibly managed with players' wages being kept to roughly 50% of turnover and most importantly the club had minimal long-term debts.
Just over a week ago Manchester United issued a prospectus to raise £500 million by selling bonds, fixed-interest investments which are expected to pay investors around 8.5% per annum for seven years, so as to reschedule its debts of about £700 million. So what's the story behind this explosion in debt and why are so many fans concerned about it?
Football, A Licence To Lose Money
At the start of this season I wrote about how the football business was possibly the worst sectors for investors as 17 of the 20 Premier League clubs lost money last season despite their income reaching an all-time high. In the past few weeks it's become quite clear that some clubs are operating on the edge and Portsmouth FC are now staring into the abyss following the taxman's application to wind up the club.
In order to buy Manchester United the Glazers had to borrow heavily and then having bought the club promptly loaded this debt onto Manchester United's balance sheet. Doing so is tax efficient because the interest paid on the debt is offset against United's gross profits which will reduce the club's tax liability. But the sheer magnitude of the debt set off alarm bells with many of us fans for whom the example of Leeds United is fresh in the memory.
A decade ago Leeds, at the time a top flight club, had borrowed and spent heavily assuming that the income from future Champions League games would easily cover their interest payments. Unfortunately when Leeds failed to qualify the club imploded. They were forced into selling their best players to service their debts and soon after they were relegated. Some ten years later, having gone through administration and survived an attempt by the taxman to shut down the club, Leeds remain in the third tier of English football although their supporters must have taken great heart when they knocked Manchester United's second-string out of the third round of this year's FA Cup!
The Burden Of Debt
Today a formerly debt-free United finds itself in hock to the tune of £700 million and is currently haemorrhaging over £41 million a year in interest payments. That's £41 million which isn't available for the team and the need to service the debt is now imposing many restrictions upon the club's operations.
By raising £500 million the Glazers can pay off the senior debt which was taken on to buy the club. Having done this they can start paying off the remaining £200 million worth of "payment in kind" loans (PIKs) which are currently rolling up interest at a massive 14.25% per annum (the rolled-up interest is in addition to the interest on the senior debt). The refinancing won't make much of difference to United's interest payments in the short-term, but attacking the PIKs is essential for the long-term survival of the club.
The somewhat surprising news to those wearing rose-tinted spectacles is that United would have made a loss last year were it not for the world record transfer fee of £80 million which they received for Cristiano Ronaldo. As the song goes, "there's only one Ronaldo", so he can't be sold again and fans rightly fear that players may now be transferred out primarily to service United's debts and thus affecting the performance on the pitch.
Cutting Costs And Pinching Pennies
Unfortunately United aren't financially in the same league as a club like Real Madrid, whose debts are all but backstopped by the Spanish authorities (several years ago Real's debts were cleared when their training ground just happened to be rezoned for office redevelopment) who also give special tax advantages to overseas players. And no-one in football can compete with the owner of bitter rivals Manchester City who recently won the trophy for making the biggest ever loss in football of over £92 million.
Still, United has shown the desire to tackle some of its costs and have cracked down on its non-playing employees by making them pay for their previously free breakfasts at the Carrington training ground. That's going to save a little bit of cash and will no doubt be good for morale (not!). Then there's the increasing likelihood that the name of the stadium, Old Trafford, will be changed to "[INSERT NAME OF CORPORATE SPONSOR] Arena", or even sold, either of which will antagonise many fans.
The Future Is Always Uncertain
UEFA, the body which governs European football, has been talking about preventing clubs with large debts from entering their competitions (Real Madrid will no doubt be exempted). Exclusion would torpedo United's finances, along with many other top clubs, but such an act would probably herald the formation of the much-touted European Super League to compensate.
A side effect of football's fluctuating finances is that this season's Premier League has become much less predictable as the likes as Birmingham City and Fulham seem more than capable of despatching one of the "big four" as well as the emergence of Aston Villa and Tottenham as genuine contenders for the top four places which guarantee entry to the phenomenally lucrative Champions League.
In case you're interested in buying some of the Manchester United bonds it's likely that you'll need a minimum of £50,000 to invest. These bonds aren't aimed at the average investor or fan unlike the original Manchester United share issue which let genuine fans buy a piece of their club. When you apply you have to state what interest rate you want to receive and the bonds will be allotted at the one price (interest rate) to the successful bidders in what is effectively a Multiple-Unit Vickrey auction.
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