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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.
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…
The Commons Inquiry into Football Governance
Elsewhere…
As far as I understand, Arsenal have cleared all their debt apart from the mortgage which I think is about 20 years @ 6.6%. I think we have cash reserves covering half this debt. My question is, can we repay this early or do we incur substantial penalties? It would be wonderful to be totally debt free.
Good article, quite informative.
From what I understand our current debt is £135 million now and in just a few years to come down from £420 million debt is quite impressive! (Imagine we did that with our mortgages…) We need to appeciate the board a little more and sometimes see the bigger picture that Arsene not spending is having a positive effect on our future!
I am not totally sure but I read that there are still quite a few Highbury flats to be sold and this will help decrease the loan value as well as every year Arsenal do pay £35 Million a year towards the debt so it is only a few years before we will be financially out of debt.
There are also all the flats to be built and sold in the Queensland Road development, so if anything Arsenal as a club will be financially sound and secure and having a magnificent paid off stadium as well.
Personally, I believe the next step is to increase the capacity of the Emirates. 60,000 is not a big stadium, at least 85,000 is decent and the increased revenue will only help our club long term too (The waiting list is at least 45,000 at the moment)
From a design point of view that is easily achieved as the stadium was built to be expanded via an upper tier for future use but hopefully we will see that in the next few years.
If you look at other clubs who wanted to build a stadium and have not, we need to appreciate what we have and be happy with it!
The way Arsenal’s borrowing and debt handling has been dealt with to date, only emphasises a warning about Club take-overs.
These incoming investors are not there for the good of the Club, but rather for a series of financial transactions to suit their own ends.
Arsenal……an example to others.
Stone Roses
If we were completely debt free, wouldnt it mean we are even more attractive to be bought out and the incoming owner leverage some of the resultant funds needed against the club meaning we were in a worse position?
Enfield Gooner – the planning permission restricted us to 60k capacity I really doubt they would accept it being raised to 85k with the resultant additional travel chaos with the tube and parking etc…
Enfield Gooner
A waiting list of 45,000 is mind-boggling! And what a juicy prospect of a 85,000 seater stadium (by extension). I wonder whether the original plans of the Emirates envisage a future
extension.
Stone Roses
Also don`t forget that some debt is not that bad. It reduces the profits and therefore reduces taxes.
Most of the questions on the Emirates are covered in the “financing the emirates” article which is linked at the bottom of the article.
The debt is paid off £5m/ a year which, when interest is considered makes the mortgage around £20m/year. Debt and reduced tax isn’t that big a deal – we’d be better off if we didn’t have the debt at all, even taking into account the extra tax we’d pay.
i would want arsenal to lower the pitch which would also move the crowd closer to the pitch, i wonder if that is possible though
What you haven’t factored in Phil is the financial position of the Glazers. By all accounts many of their other businesses are struggling, I did hear 6 – 12 months ago that ManU were effectively their only source of income at the time. If true this just means they will siphon off even more cash.
An interesting article but surely if Man U can live with their debt it’s not a problem how much it costs them?
You’re right Marc, however in the interests of time and fairness (do I do a similar analysis for Arsenal too?) I stuck to the clubs themselves. While the Glazers’ other businesses may be struggling, we don’t know exactly what effect that will have on United. Indeed, you could srgue against the fact that they’re in bad shape by how they’ve managed to clear the PIKs recently.
In short, it’s all as clear as mud so I stayed away
Wilshere’s Dad – money pouring out of the club is not a good thing, they could feasibly spend a lot of it on wages and the like to strengthen the playing squad if they didn’t have the interest bill
Lets be honest though, If United were debt free they would be making frightening profits, between 80-100m I would say.
That’s every season too.
Exactly, their commercial machine is frightening. They could up their wage bill 20% without any problems arising from it if they were debt free. They’d be a much stronger proposition for a solid squad signing and a quality central midfielder, two things they would have if they weren’t so indebted
Many Arsenal fans think United are £504.6m in debt because of over spending, this is not the case, the Glazers borrowed £500m+ to buy United then lumbered the debt onto United. United were debt free. Since the Glazers paid off the £250m PIKs on November 22nd the debt doesn’t look that bad at all.
sorry, i got to – debt isnt a bad thing then thought…….really?
equalmoney.org 🙂
A question for Phil – I was told by a United fan that they have the option to extend their Bond scheme by a further four years, is that true? Also with the economy clearing up in America I wouldn’t imagine it would take the Glazers long to secure a £500m bank loan at a very good yield, somewhere in the region of 5% perhaps?
What do you think?
Phil
Has the PIK’s actually been paid off by the Glaziers and if so does anyone know were the money came from was this just another re finance???
John: They have been but nobody knows how. Check out Andersred blog for details
Mike: I’ve not heard anything about the extension, if it existed it would have been mentioned by Andersred. By all means, if you have a reliable link then post it here, but I don’t think there is such an arrangement. It’s not a big deal – they can just reissue more bonds to repay the old ones (which is pretty much what every world government is doing at the moment).
As for yield on a future bond… I’m not sure. A lot of analysts thought the United bonds were low yielding for what they were, considering the high amount of leverage, uncertainities involved in sport and the amount of scope there is for the Glazers to suck United dry. I wouldn’t be so sure about the American economy, their quanititve easing policy is going to cause inflation soon enough, whether domestically from the crazy money supply growth or imported from China. The last place you want to be in a high-inflation climate is bonds, as inflation eats at your yields at the same time rates should be rising (unless you are the geniuses at the Bank of England…). This may all have blown over by 2017, or the bond market may still be running scared with soveriegn defaults and high inflation.
Personally, I wouldn’t want to be relying on the bond market if I was United.
Thanks for you reply Phil but when I said United would get a bank loan at 5%, I meant a regular bank loan, not more bonds. Also if they were to do this they will avoid having to pay any fees for cutting the bond scheme early, they will also not have to pay any ‘One off’ payments.
Surely just a regular, run of the mill £500m bank loan would have a low interest rate?
Bonds would almost certainly be cheaper than a bank loan, indeed they repalced their bank debt with bond debt. £500m is a lot for a bank loan, the Glazers had to top up their takeover funds with the infamous PIKs from hedge funds when the traditional borrowing avenues dried up.
Any bank loan would still involve fees but really what matters is the interest bill. They’ll take whatever debt is the cheapest in terms of the interest bill, which makes me think they’ll just reissue more bonds. They’d have pretty hefty penalties to pay if they wanted to redeem the bonds early (if i remember correctly they have to pay quite a bit over face value if they want to redeem before 2016, when it gets much cheaper).
Of course, they could do what they did with the PIKS and magic up some cash out of nowhere. Or they could sell up at a big profit and be shot of the whole conundrum. The latter is most likely before 2010 IMO
Of course, everything I said about inflation still applies. If we see rate rises, that’ll obviously impact on the cost of any refinancing, whether it be bank or bond debt.
Asenal fc balance of payments, money management, business acumen call it what you will is the envy of the football world….indeed it has been stated as the model to which clubs should aspire to.
i DO GET THE DISTINCT FEELING THAT ITS AN OBSESSION NOW AND THAT THE 15-20 MILLION REQUIRED TO PURCHASE AN ARSENAL-QUALITY PLAYER IS NOT EVEN GOING TO BE CONSIDERED. shame as the fans would dearly like to win a trophy for a change.
Hello, fellow Arsenal supporters, this is my very first post, and I think that this was a good article. Here is why. I live in the united states, and I have a debt obligation to my education. That is all.
Cheers.
Cheers for that contribution.
Hmmm… I think everyone has something to bring to the debate ‘realistic’ Tony – but I think, and this is just a suggestion, the best thing that you can bring to the debate is silence.
Hmmm….if I am an investor, I will do the same thing as Glazer family as I am sitting on a cashcow.
The late Jimmy Goldsmith said: ‘Use other people money to make money”.
And I believe that Glazer Family may only forked out less than £300m of their own cash to “buy” ManLeeds; the rest of the £790m sales price are self-financing via profits generated since 2003.
Now that ManLeeds selling had been boosted from £1,000m to £1,500m…guess who is laughing all the way to the bank?
WC2022 is a godsend chance for Glazer Family to sell away ManLeeds, especially Qatar needs to buy a marquee club, to link-up and nurtured their national team to qualify for 2nd round, instead of being knocked out during 1st ROund like South Africa.
With oil prices predicted to stay above US$100 per barrel this year, Middle East are awashed with petrodollars chaisng “investments”……and premiership clubs are quite a lucrative investment as proven by ManLeeds..and Arsenal…certainly not “20 to 30 year long-term” investments at CITEH and Chelski.
Yes, Chelski and CITEH can be another “Red Devil”, “Real” or “Barca” with global appeal when they start to win silverwares regularly and goes on tour to Asia and America regularly.
Be careful…Arsenal FC can be left trailing quite a distance behind CITEH and Chelski in the global stake of being a global marquee name to generate revenues to sustain a marquee team.
And that isw ehre Gazadis comes in to transform Arsenal FC into a global brand name equal to that of Real or Barca…and perhaps overtaking “Red Devils” as the “most profitably”t club in the world.
Well Phil, in terms of economcis term as at http://www.mises.org, I can’t help giving a simplistic comparison of:
Arsenal FC = Austrian Business Cycle Theory
ManLeeds = Keynesian Economics.
WHich Economics model will win by WC2022?
hey phil… I clearly remember the payment schedule of manu was 75 million in 2012 and 150 million thereafter for 3 or 4 years.. Is it the same loans which have been converted to bonds or do they also exist.
It cannot be argued that United are not constrained by their debt- they would have bought Dzecko and would not have let Tevez go if they weren’t. It also cannot be argued that the underlying Arsenal financial model for running the club avoids excesses. The club runs at a profit- healthily managing its debt- but charging very high entry prices and failing to make the most of commercial opportunities- which hopefully will change over time. We are still a club who sold players to a rival and used a sizeable chunk of the revenue to pay off a capital loan.
Its too simplistic to wallow in the glory of a club which is not wracked with debt.
the club clearly has no intention in translating that profit into strength in the squad.
What is not being faced on this site is that Arsenal’s spending on players is completely unrelated to what profit the club makes. We spend very little when we have no money, we also spend very little when we do irrespective of what we need- and you get what you pay for in football.. There is a bit more in the salaries budget- but we are playing more players moderate salaries by top EPL standards. Either way we have not used our supposedly stronger economic position to strengthen the squad when it is needed.
Frankly judging by our player transactions- or lack of them if I did not know of our financial position, I would assume that we had a far worse financial position than we do.
It wasn,t the Glazers who okayed a spending frenzy by old red nose for Rooney,Cristiano Ronaldo,Berbatov ,the fault lies with the manager Ferguson who spent money he didn,t actually have in the bank rather the Glazer,s own money was used as collateral to buy these overpaid players,so put the blame where it lies at Alex Ferguson,s office in old Trafford ?
Samuel ~ Are you stupid? United are 509.6m in debt due to the Glazers borrowing 500m to buy United and then laying the debt onto the club, United are not in debt due to overspending.
Why comment if you are clueless about the subject.