Manchester Utd debt — Our bond is our word?

The only positive coming from Manchester United’s bond sale prospectus is that the fans finally have some real visibility of the club’s financial situation.

Unfortunately, there is little in the way of positives amongst the details in the 322-page document.

At present, there is £509m secured against the club itself, which must be repaid in annual instalments between 2013 and 2016. This is at the heart of why the Glazer family need this bond issue; at present they are struggling to even repay the interest on this debt, let alone the debt itself. As the latest set of accounts showed, the club would have made a significant loss last year, if not for the money made from the sale of Cristiano Ronaldo.

By issuing these bonds, the Glazers will be able to pay off the current loans now, and avoid having to make those large repayments. However, other than allowing them greater flexibility — the £500m debt from the bonds will not have to be repaid until 2017 – it does nothing to reduce the level of debt. Indeed, depending on how financial institutions react to the roadshow to market these bonds, they may end up paying even more in interest than they do currently.

In addition to the £509m in loans, there is another £218m in PIK (payment in kind) debt. This is very important to the Glazers, because this is the only debt which they are personally responsible for. Whereas the loans are secured against the assets of the club, the PIK debt is secured against the Glazer family’s shares in Red Football Ltd, the ultimate holding company of Manchester United FC.

Since the takeover of the club in 2005, United fans have been assured that the PIK debt is the personal responsibility of the family, and not the club. The bond prospectus reveals that the Glazers are now taking £70m from the club’s cash reserves — currently just over £140m — to pay down some of the crippling PIK debt, which has an eye-watering interest rate of 14.25% a year.

That means, despite the claims from David Gill and Alex Ferguson that it is there to be spent on players, much of the Ronaldo money is being used to pay off debt which the Glazer family is responsible for. The majority of the money for any new transfers will be funded by yet more debt, in the form of a £75m overdraft facility. The net result of these moves is that the club will become even more leveraged than it is at present.

The prospectus also goes into detail about which assets are used as security for the bonds. Old Trafford is, meaning the Glazers are unable to sell it, or otherwise try and use it as security. The Carrington training ground, however, is not. As has already been reported, it now seems highly likely that the Glazers will now transfer Carrington to another of their companies, before selling it to an outside party, and using that money to further pay down their PIK debt obligations. Manchester United would then have to pay a lease to continue using the training facility.

There were vocal anti-Glazer protests at Old Trafford during Saturday’s match against Burnley, and the fans are right to be worried. Everything in the document seems to point to the Glazers having to try and attempt another refinance, at some point down the line, building more debt upon debt.

In an interesting example of the of the financial planning acumen of the Glazers, the prospectus also revealed that they made a £35m loss when trying to hedge interest rates on the club’s loans in 2007 and 2008.

Sadly for United fans, this loss — more than they paid for club record transfer Dimitar Berbatov — will also have to be met by the club.