Manchester United's owners, the Glazer family, bought the club in a £790 million debt-financed takeover in May 2005. In addition to around £275 million put up by the Glazers themselves, the rest of the money was borrowed from banks and hedge funds. The first tranche of £275 million was borrowed from investment banks but the rest was borrowed from hedge funds in the form of more punitive PIK loans. The rates for borrowing money in this way is much higher and instead of repaying the interest annually, the money is 'rolled-up', or added to the total value of the debt to be repaid in 2017. This is the form of borrowing the Glazers are most anxious to repay as each year it increases significantly, placing a burden on the club's finances. In the summer of 2006, the club refinanced its debts with JP Morgan, arranging a new 'senior' debt facility of £500 million. At the same time, the Glazers used some of the money to repay a chunk of the PIK loans. This meant they came down to £175 million.
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The average repayment term is 5½ years but the vast majority is due between 2013 and 2016, meaning there is great urgency to refinance the club's borrowings.
How much does this cost the club each year?
According to accounts for the financial year 2009 made public yesterday for United's holding company, Red Football Ltd, United paid £41.9 million in interest. This greatly reduced United's profitability (£48.2 million before tax in 2009) and meant that without the sale of Cristiano Ronaldo to Real Madrid for £80 million, United would have made a significant loss. But this number does not include the 'rolled-up' interest on the PIK loans which was around £25 million last year, taking the total amount which must be repaid at the end of the term of that loan to £200 million.
How will the bond issue work?
Underwritten by leading banks such as JP Morgan, Bank of America Merrill Lynch, Deutsche Bank, Goldman Sachs, Royal Bank of Scotland and KKR, the US-based private equity fund, United are planning a roadshow to attract investors to back the bond issue which is seeking to raise £500 million. United have opted for a bond issue because the credit crunch means banks are either refusing to lend the sort of money United are looking to borrow or would only lend it at incredibly expensive rates.
Those who take up the bond offer will do so on the grounds that United will meet certain financial targets to ensure their money is secure over the seven year term of the bond. Like the Stock Exchange, investors will in turn be able to trade the bonds and the price of the bond will go up and down depending on the club's financial performance. Because the bonds are traded, United will have to be much more open about their financial position - which is good news for fans as well as potential investors.
Will the bond help reduce United's annual debt payments?
Not necessarily. But the club's owners hope it will give them greater financial security in the long term. At the moment the interest rate on United's senior debt facility is relatively low - about eight per cent. However, the rate they pay each year is directly linked to the Bank of England rate set for banks to lend money to each other, known as LIBOR. That means that if the Bank of England puts up that rate, United's repayments could become even more costly. With the bond, although it may even cost more in the short term - it is expected to carry a yield (the equivalent of the interest on a loan but a term used when talking about bonds) of 8.5 per cent - United hope it will allow them to plan with greater certainty for their future.
What happens to the expensive PIK loans if the bond issue is a success?
By using the bond to wipe out the 'senior' loan facility, it allows United to reorganise the order in which they repays their debts. Under the terms of its current deal, the senior debt arranged through JP Morgan must be paid off first before the PIK loans can be repaid. However, if the £500 million 'senior' debt is wiped out then United can divert their attention towards paying off the expensive PIK loans with any extra profits it generates in future years.