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By Phil Gregory
My article on how the Emirates as financed, was put together as a result of researching for my report for the Commons Inquiry into football. What I was looking to do was compare the debt burdens of Manchester United and Arsenal to illustrate the idea that debt isn’t necessarily bad, but some of it is.
I’ve turned that section into an article here which sets out the main ideas, so feedback and comments are more than welcome. If you haven’t already, do try and find a moment to read the two articles in this series – there are links at the end of this piece.
Debt isn’t a bad thing. We use debt all the time, whether it’s paying in instalments for an expensive piece of furniture, a mortgage or a company buying on credit to pay later when cashflows come in. For a football club, as long as the debt is cheap (serviceable by the club’s cash-generating activities), long term, with a credible plan for repayment in place and stable (not excessively at the whim of base-rate movements or market conditions) it doesn’t pose a danger to a club, and can be used to strengthen the club, financially.
Arsenal are probably the most obvious example of using debt well, as we sought to use it to fund stadium expansion. That certainly produced the goods, as turnover increased by over 46% between the years 2006 and 2007 thanks to our new home. This allowed wages to rise sustainably so that the club could remain competitive on the field, the very purpose of the new stadium. Finance costs were such a low percentage of turnover that they didn’t restrict debt repayment in any way.
As we know, the initial bank debt was replaced by cheaper, longer-term bonds, while debt incurred as a result of the redevelopment of Highbury into apartments was cleared as a result of it’s own sales, eventually generating significant excess cash for the club. Given all that, it’s obvious that debt was cheap, stable and long-term, as well as clearly strengthening the club.
Now for the bad. The Glazers took control of Manchester United in 2005, with the majority of the takeover’s funding being provided by bank loans which were secured against the club’s assets (an LBO).
The remaining balance was contributed by the controversial “payment in kind” loans (PIKs) with a restrictive 14.25% rate of compound interest although these are secured against a parent company of Manchester United. In March 2010, Manchester United refinanced with a £500m, seven year bond issue which charged between 8.75% and 9% interest. Money has been leaking out of Manchester United ever since the Glazer’s takeover, through interest, ”management fees” and the one-off costs of financing their various refinancings. Needless to say, if it was happening to Arsenal I’d be livid.
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When you compare all this with Arsenal, Manchester United’s debt cannot be considered cheap which is unsurprising, given how high-risk leveraged buy-outs are, nor can it be said to be particularly long-term. Contrast their bank borrowings to Arsenal’s 6.6% bank loan, during tumultuous times in specifically the mortgage markets as well as generally significantly reduced lending during the credit crunch.
Indeed, United didn’t even manage to lower their interest bill via their bond issue, as it was actually more expensive than the bank debt it replaced. No doubt much of the difficulties to do with their bonds came as a result of the decreasing regulation of the club as a result of the removal of the bank debt (“covenants” were set by the banks as conditions of lending the money and restricted what the Glazers could do). By clearing the bank debt, the Glazers were free of the controls and had a much greater ability to take money out of the club via those “loans to directors” and “management fees”.
All that leaves to answer is whether the arrival of the debt strengthened Manchester United as Arsenal’s debt did (stop laughing). While LBOs bring a huge amount of debt, they do offer more alternatives to the previous management. If better owners are brought in then the debt burden’s cost may be outweighed by the benefit of the improved running on the club. Indeed anyone who has read Alex Ferguson’s autobiography “Managing my Life” will be aware of issues in regards to the slow decision-making process at Manchester United prior to the Glazer takeover, under the PLC.
Such arguments are intangibles really, unless you are Sir Alex you can’t place a value on this increased freedom. We can, however, take a nosy at the financials since the Glazers took over. Since 2005, Manchester United have had huge revenue growth, though much of that is down to growth in TV revenues, which are of course negotiated centrally by the Premier League. Significant commercial revenue growth is positive, though growth in match day takings is less so given the 47% rise in ticket prices between the start of Glazer ownership in 2005 and 2009. Such desire to maximise profits can only be as a result of the Glazers leveraged takeover, given their own financial statements from the bond issue revealed (as of the 5th of February) total costs to United of their ownership at £286m.
That leads me to think the Glazer contribution to United has been limited, and not in any way compensation for the huge costs of their ownership, paid for by the club. No value has been brought to the club, the cost of the debt has been high and it’s not particularly long-term in the grand scheme of things.
Thanks for reading. Feel free to drop a comment if you are that way inclined, feedback is always helpful!
As an aside, the Glazers will either sell up and take their profits before the bonds come due, or simply reissue new bonds to repay the old ones. Paying the bonds off more than a year early would incur some big penalties, such as having to pay more quite a bit more than face value to clear the debt earlier. The closer it gets to 2017 the cheaper it gets to pay them off early, but unless they get taken over by a Sheikh, I’d expect the bonds to stay where they are.
In the same series…