Manchester United’s financial situation explained
With thanks to Tony Attwood from ‘Untold Arsenal’
For those who didn’t understand the news that Man United’s loans have been traded around the city, here is a simplistic view from an expert (who is unfortunately, an Arsenal fan!)
Manchester United was utterly debt free when the Glaziers came along. They did a leveraged buy out, which meant that the previous shareholders were given a huge sum for their shares, and so walked away with a massive profit.
The Glaziers funded this buy out by borrowing money from Manchester United once they had bought it – so effectively they bought the club for nothing, because all the funding came from within the club.
However the debts are so huge that although some of the debts are guaranteed by assets (the ground, the players, future season ticket sales) much of the debt has no guarantee, and because of this is at a very high rate of interest (17% or more).
The repayments on the debts are so high, that the club is unable to pay them, and so each year the debts get bigger, because they are the debt plus this interest from the previous year – and of course that growing debt requires more interest.
To fund this the club had two strategies – one is the increase in marketing sales (shirts etc) and the other is the increase in the cost of seats. The problem is that while the games are still selling out, some of the increase revenue schemes have come unstuck, which is why the club is being sued by its supporters over the ticketing scheme. Marketing has also come unstuck because of the recession – the number of new shirt sales to be got each year has now reached a level and won’t go up any more.
Worse, the problem with AIG means that some other money is being lost, and it is hard to find another sponsor who will pay as much as AIG.
The problem is: what next? The club is based on spending about £40 million a year in transfer fees, and getting about £10 million back – but it simply doesn’t have the money to do that any more, nor any way of increasing its income. This is why Arsenal feels so good about life – their system is based on a much smaller cost of transfer fees because each year they sell some top players who came in and cost nothing.
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That’s what comes when you listen to Arsenal fans (experts in nothing, by the way), you get a load of anti-United guff.
Here are some of the actual facts. What the Glazers did was use the assets of the company they were buying, United, as collateral for the loans that they need to complete the sale. I think this is morally wrong but it’s completely legal. This accounted for about 60% of the full purchase amount. The rest being some cash from the Glazers and unsecured loans.
It’s the unsecured loans that are being traded. The secured loans are very high quality and low risk for any bank. The unsecured loans are a symptom of the stupid state that banks got themselves into in their greed. They took unnecessary risks and scattered loans everywhere. They now have to prove their assets are worth what they say they are and many banks are writing down the value of unsecured loans and making provisions in their accounts. In other words they say a loan asset worth £100m might be only worth £40m. Once they’ve done that, the temptation is to offload the loans at whatever the market rate is. The bank gets maybe 70p in the pound on a loan they had already written off the books or at least downgraded in value as an asset.
None of this really relates to whether the loan will be repaid. It’s more to do with banks waking up to the fact they’ve been living in dreamland for years. They’ve made their figures look rubbish this year by writing off massive amounts of assets. They’ve taken all the pain of potential bad debts so that when those loans are actually repaid, it’s bonuses all round and golden porsches.
The suggestion that repayments on United’s loans weren’t met is plain wrong. The area of confusion for your Arsenal ‘expert’ is on one of the unsecured loans. No payment was made on those because it wasn’t due. The loans on a leveraged buyout (the debt being the leverage, not the amount paid to shareholders as your expert suggests) are made on the basis that once the buyout is complete the debt is refinanced and the loan sum plus a fixed amount of interest is repaid. That repayment is the same whether paid last year, now or at the full term which I think is summer of 2010. It makes no sense paying now unless you refinance. The Glazers didn’t think they were offered a good enough deal to refinance last year; they may wish that they had now.
The revenue streams are strong, with the TV deal having just been signed for more than before, ECL revenues fixed for years and the stadium full. United will announce record revenues very soon. The revenue streams look reasonably secure until 2012 at least.
A replacement will be found for AIG and the deal will have the same sort of total figure, bearing in mind that some of the sum AIG paid was to be the provider of financial services under the United brand. If the shirt sponsorship goes to a car or electronics firm, another financial outfit will pay to come in to replace AIG in the United finance branded area.
There really isn’t anything on the horizon that looks particularly problematic.
Next time you need advice on financial matters, ask someone who knows, eh?
Oh, and you might ask your Arsenal expert to explain his team’s parlous state. In the City, Arsenal are runaway favourites of Premiership clubs to go down the pan. They are in financial pain and their board will soon collapse and be forced to sell out to Kroenke or Usmanov. The future’s bleak for Arsenal. If the board try to tough it out, they’ll have to sell at least a couple of their stars (Fabregas is a certainty and one of Adebayor, Eduardo or van Persie). If they sell out, it beomes either a cash cow to milk or a plaything for an oligarch. Not good.
Well now, it looks like the Manchester United Trust is asking Fergie to step down in a show of solidarity.
Looks like those revenue streams dried up and your entire rant a few months ago is proven wrong.
Arsenal as well is closing in on finishing their real estate projects and have also created another superstar in Cesc Fabregas, a 500K purchase from Barca is now worth close to 50M+ and can play on any team in the world.
With all the debt, United better hope they stay healthy. If they drop more games this year, they’ll be in serious trouble this summer and then it will actually be appropriate to use the word “crisis”.
On the plus side, they bought the club for nothing
and it wouldn’t take that much for someone to buy it back.
This blog’s great!! Thanks
.
United,
I don’t know if MU is in financial turmoil or not, all I knot is that Ronaldo was sold for a fortune and not replaced. That should ring a bell hu?
Interesting discussion. With the value of hindsight,it looks as if the debt situation is going to have a significant effect on this club. If they have to sell top players to service matters and then start to drop down the table, it will be a disaster.
Well Arsenal 1 – 3 Man United, stuffed the last two times at the Emirates, with and without c ronaldo, who is a cracking player but not the complete player that Rooney is like ive always said. so not quite sure what you think of the ronaldo statement now mate when the men showed up the boys again at the emirates, both times with cesc, who mumoured again after the game about how he will end up at barca. one word springs to mind no matter when it happens, INEVITABLE, then yous are done…..no wc player any more…..arshavin….he wishes and wont be developing much more thru age,28?
First off – I confess I am a Gooner but don’t let that cloud your judgement. Fergie selling Ronaldo at that point was good, no, great business and he has been proved correct – Rooney is on FIRE and the team was always large enough to cope and Man Utd, in my opinion have the best chance of retaining the PL again this season – although I still hold out hope Arsenal can do it – I actually see Chelsea finishing 3rd.
As for the debt – it’s a tough one. Ownership is now in private hands (if you exclude the interests of the banks who can hold the club assets as security) and so you have to look at the owners wider business interests.
Tampa Bay Buccs are not on the same scale as MU but they have done a great job with them. The Glazers also have a huge and diverse financial portfolio that’s weathered the ecomonic storm. If they need some money to help keep up the interest payments on Man Utd they do have access to large funds – just because they chose to borrow money and leverage on Man Utd doesn’t mean they are broke – it is just another financial mechanism/tool often used these days to reduce your own risks. Smart practice.
As mentioned, the Tampa Buccs were close to bankruptcy when Glazer outbid everyone, $195 which was a record for the NFL at that time (no leverage buy out this time)- he also handed over the financial running of the club to his sons (sound familiar??) who helped turn the club around, made them competitive, taking them to, and winning, the SuperBowl in the 2002-03 season. All of that in just 5 years. They made huge investments in the club because that was what the Buccs needed to become competitive – you can’t say Man Utd need the same treatment..they are currently lying..erm.. top of the PL.
The Glazers aren’t just some dumb Americans, they are passionate about sport and about business, which is why they are very rich – they have taken these risks on the back of one of the most successful clubs in the World and who will continue to be so – you could say, it’s a safe bet, well, as safe as you can be. If this was all happening with Man City or Inter I would be more worried for the club.
The problem is that we, in Football, aren’t used to this practice, it’s scares us. But if Man Utd retain the title this year shouldn’t Fergie and the Glazers be held up as good business/football brains in deciding they didn’t need to spend any money in the transfer market – confident their team/business would still win the title all the while counting the 80 million from Ronaldo. That kind of management can only help the cause when it comes to refinancing.
Remember also, Malcolm has held shares in Man Utd since early 2003. 7 years is a long time in football.
Just one more quick note about Arsenal and being ‘stingy’. Lets not forget, Arsenal had been trying to improve seating capacity since 1999, they spent 3 years trying to get planning permission (itself costing more than some Championship side annual wage bills), then there was the huge cost, and loans, to build the Emirates. A lot of that debt was to be repaid by the sale of the appartments built on the Highbury ground but they were being completed as the housing market crash – I am not sure how many have been sold to date but it certainly is putting a dent in Arsenal’s spending.
The Board members (up until 2 years ago) where not uber rich but have been on the club’s board for well over 3 decades and have provided funds when they needed – to an extent. That extent was reached when Chelsea pushed up the transfer price of great players by 30%. Would it have been good business to spend that kind of money…? No. Look at Chelsea. Abramovich has been pumping money into that club for 7 years and what have they got to show for it? Two Premier League titles, two FA cups (not counting Carling Cup). For a total cost of…. who knows how many 100′s of millions. During Wenger’s first 7 years Arsenal achieved 3 Premier League titles, 4 FA cups. So you could say that Arsenal, rather than being stingy, have been over-achievers and Chelsea, Under-achievers – when compared to Man Utd who have gotten, and in my opinion still have, the balance right.
Even if Manchester United do get screwed financially, somebody will come and buy them. They’re just simply too big of a club to break down.
I agree why can’t these apparently intelligent bods follow in Arsenals wake. A system which is made up of smaller cost of transfer fees makes way more sense…why can’t they see this? They are like a big bank in that a bail out will always be there if they need it.