Click to enlarge…
Not the standard 4-4-2 formation is it?
That’s the corporate and financing structure of Manchester United FC.
The diagram comes from the prospectus to the £500m senior secured notes offering launched on Monday morning.
The document provides a fascinating peek into the structure of the English Premier League champions, acquired by the Glazer family in a £790m leveraged buy-out in 2005, both in terms of its finances and the club’s recent performance on the pitch.
The proceeds of the offering — and £30m of spare cash — will be used to repay existing senior credit facilities (£507m), the partial repayment of interest rate hedging liabilities (£8m) and fees (£15m).
The issue is being underwritten by JPMorgan, Bank of America Merrill Lynch, Deutsche Bank, Goldman Sachs, RBS and KKR.
Here’s how the issue it will work in practice (you may need to refer to the diagram above) :
(1) On the closing date of the offering of the Notes, approximately £400 million of the proceeds of the offering will be loaned to Red Football Joint Venture Limited, the immediate parent company of Red Football Limited, on an interest-free basis from Manchester United Limited, which will then subsequently be passed to Red Football Limited by way of a capital contribution. This loan from Manchester United Limited to Red Football Joint Venture Limited will remain outstanding.
(2) In connection with the offering of the Notes and the repayment of our existing senior credit facilities, the terms of our existing interest rate hedging arrangements will be modified. The mark-to-market value of these hedging arrangements as at 6 January 2010 was a liability of approximately £35 million. In connection with the modifications to our existing hedging arrangements, we will crystallise the liability owed to our hedging counterparties as at the date of issue of the offering of Notes and we expect that we will make aggregate payments to such counterparties to reduce the liabilities by approximately £8 million. The amount of such liability and payments to our hedging counterparties will depend on changes in the mark-tomarket value between 6 January 2010 and the closing date of the offering of Notes. In the event we increase the payments to our hedging counterparties, we will use available cash to fund such payments.
Note that none of the cash is being used to directly repay the £200m of PIK notes that the Glazer family used to finance the buyout.
However, the refinancing will allow the Glazer’s to start repaying the PIKs, which have a coupon of 14.25% that rolls up annually and reside in the Red Football Joint Venture near the top of the tree.
This is because the new facilities are more flexible than the ones they are replacing.
Cash and liquid resources include cash at bank and in hand and deposits held at call with banks. Of our cash and liquid resources of £116.6 million as at 30 September 2009, as adjusted to give effect to the offering of the Notes and the application of proceeds therefrom, we may, without restriction, make a distribution or loan of up to £70.0 million to our immediate parent company, Red Football Joint Venture Limited, that may, in turn, use the proceeds of that loan for general corporate purposes, including repaying existing indebtedness. See ‘‘Description of the Notes—Certain Covenants—Restricted Payments
Post the refinancing, the club’s total of gross borrowings will stand at £512.7m — made up of £500m of notes and debts from other subsidiaries. However, that figure will rise if the £70m referred to above is up-streamed to Red Football Joint Venture. Pro-forma net debt post refinancing will be £466m.
And if the PIK notes are added in, total debt held by all of the various Man Utd vehicles would stand at over £700m.
The notes, issued by MU Finance, are due in 2017 but there is a call option that allows the borrower to buy it back in three years.
The notes are not rated.
As for the interest hedging arrangements, Man Utd has suffered a £35m hit. Ouch!
This looks to be due to swap arrangement: the club has been paying a fixed rate of just over 5% on £450m of debt in exchange for a floating rate.
In relation to our existing senior credit facilities, we entered into interest rate hedging agreements to hedge the interest costs on a notional amount of £450 million. Under these hedging arrangements, we receive floating rate LIBOR in exchange for paying a fixed rate of approximately 5.08%. In connection with the offering of the Notes and the repayment of our existing senior credit facilities, the terms of and the amounts outstanding under these hedging arrangements will be modified. The mark-to-market value of these hedging arrangements as at 6 January 2010 was a liability of approximately £35 million.
Man Utd has also entered into a new six year revolving credit facility to allow it to borrow an additional £75m, to be used for working capital and, we assume, for player transfers:
Although we have not historically drawn on our revolving credit facilities during the summer transfer window, if we seek to acquire players with values substantially in excess of the values of players we seek to sell, we may be required to draw from our revolving credit facilities to meet our cash needs.
That’s a quote from the 15 pages of risk factors in the document.
Here are the rates and covenants on that facility:
Loans under the new revolving credit facility bear interest at a rate per annum equal to LIBOR (or in relation to a loan in euro, EURIBOR) plus the applicable margin and any mandatory cost. The applicable margin means 3.5% per annum.
In addition to the general covenants described below, the new revolving credit facility contains financial covenants requiring the restricted Group to maintain a consolidated EBITDA of not less than £65,000,000. We will be able to claim certain dispensations from complying with the consolidated EBITDA floor up to twice (in non-consecutive years) during the life of the new revolving credit facility if we fail to qualify for the Champions League.
Which brings us to the results.
In the 12 months to September 30, 2009 (the most up to date figures available), Man Utd generated revenues of £288.9m and EBITDA of £98.7m.
But for the fiscal year ended 30 June 2009, revenues were £278.5m and EBITDA of £91.3m.
Click to enlarge:
So, in 2009 the club swung to a pretax profit of £48.2m from a loss of £21.4m, helped of course by the enormous profits made on the sale of Cristiano Ronaldo.
Match-day revenues accounted for 39.1 per cent of total revenues, media 35.8 per cent and commercial deals 25.1 per cent.
Net interest payments were almost £42m and operating profits before depreciation and amortisation of players’ registrations and goodwill were £91.2m. When amortisation and depreciation are included that figure drops to £9.35m
The prospectus also reveals that HM Revenue & Customers are investigating players’ image rights contracts.
HMRC’s initial investigation has focused on payments made in the financial years 2005/06, 2006/07 and 2007/08 but HMRC has reserved its rights in respect of earlier years. HMRC’s position is that payments in relation to image rights may be a form of remuneration and, as such, should be taxed as income. On 18 September 2009, we submitted a letter to HMRC, setting out our view that these payments are not taxable as income. We are currently waiting for a response from HMRC. There is a possibility that this matter may lead to litigation. Should HMRC succeed in any such litigation the club may be liable for, amongst other things, approximately £5.3 million (which relates to employer’s NIC contributions during the period 2000/01-2009/10).
Details on related party transactions can be found on Page 86 and show the following.
To kick things off there are £10m of loans which have been extended to the Glazer’s:
Manchester United Limited made loans to its directors on 19 December 2008 which have an aggregate value of £10 million. The agreement governing these loans was subsequently amended on 5 November 2009. The interest rate on the loans is 5.5%, stepping up to 7.5% after the fifth anniversary, payable in cash annually. The loans are repayable on demand from Manchester United Limited after the fifth anniversary, and prior to that upon the occurrence of certain events of default.
Some juicy management fees:
Management fees During the period from 1 July 2006 to the date of this offering memorandum, management and administration fees of approximately £0.6 million, £1.8 million, £1.4 million, £3.1 million and £3.1 million were paid to our affiliates. Under the Notes, we are permitted to pay up to £6 million per annum to one or more entities related to our ultimate shareholders for administration and management services. We expect to enter into a management services agreement.
Yep, that’s £6m per annum permitted under the new financing deal.
And there’s also a consultancy agreement:
On 30 June 2009, Manchester United Limited entered into a consultancy agreement with SLP Partners, LLC (SLP), a company related to certain of our ultimate shareholders. An annual fee is payable by Manchester United Limited to SLP, capped at £2.9 million per annum. This agreement will be terminated prior to the issuance of the Notes and no further payments will accrue thereafter.
The notes will be priced next week on completion of an international roadshow, which has kicked off in Hong Kong. Early indications are that the deal could be priced to yield around 8.5% to 9% and that demand is strong. Which raises the possibility of the issue being increased.
The full prospectus can, of course, be found in the usual place.