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Extra Time

The more that Manchester United’s £500m senior notes offering is picked over, the less appealing its looks, especially at the 9.25% interest rate implied by the pro-forma figures in the prospectus.

Here’s something we picked up from Covenant Review, which provides analysis of bond covenants by lawyers as opposed to securities analysts.

– The Asset Sales covenant is deficient in several ways: (1) This Covenant would allow the Parent to sell Old Trafford Stadium in a “Specified Asset Sale and Leaseback” and use the proceeds to repay the Revolving Credit Facility without requiring that the commitments to fund the Revolving Credit Facilities be terminated. Thus, the Parent could sell Old Trafford Stadium, repay the Revolving Credit Facility with the proceeds, and then re-borrow under that facility or other loans the next day. (2) The Parent could sell Collateral and reinvest the proceeds in assets that are not necessarily Collateral.

We think that means the Glazer family could in theory pay back £145m of its expensive PIK notes (H/T Taxloss) by selling Old Trafford and then using its revolving credit facility upstream cash to its parent company via a series of transactions.

Borrow, repay (with stadium proceeds), and borrow again.

That would, of course, leave the club with lease payments on Old Trafford and yet more debt.

So it is no surprise that analysts don’t think this issue will appeal to traditional high yield investors.

From Bloomberg last week.

Manchester United Plc may struggle to sell 500 million pounds ($806 million) of junk bonds because it isn’t rated and investors have other options, said Jonathan Moore, high-yield analyst at Evolution Securities Ltd.

The 18-time English soccer champions plan to issue seven-year bonds in pounds and dollars. Management is meeting potential investors in Asia and Europe this week, and in the U.S. next, in an effort to interest the widest possible circle of buyers, said Tatjana Greil Castro, who manages about $1 billion of high yield debt at Muzinich & Co. Ltd. in London.

“Most traditional high-yield investors won’t touch this,” said London-based Moore. “It’s unrated, so some investors can’t take it, and there’s a very busy new-issue calendar so there are plenty of alternatives. Most people just won’t focus on something with far too much leverage, limited free cash flow and lumpy earnings.

Analysts think the notes would need to have a “double-digit handle” to tempt any traditional high yield investors.

And it is difficult to disagree.

That does not mean Man Utd won’t get the offering away but it will probably have to target high net worth individuals and other non-mainstream investors.

And it helps that the club is selling the notes into a bull market for high yield debt.

From Reuters:

Global high yield debt volume for the week of January 11th totaled $11.7 billion, the biggest week for high yield debt on record. The previous record was set during the week of November 5, 2006 when $11.4 billion was raised. With $14.4 billion raised so far this month, it is the best all-time start for the high yield markets since records began in 1980.

Issuers from the telecommunications, materials and industrials sectors account for nearly 75% of high yield debt offerings so far this year. Companies in the United States and the United Kingdom have issued 88% of high yield offerings in 2010.

This week’s $2.4 billion offering from UK-based Virgin Media ranks as the second biggest UK high yield offering on record behind the $2.9 billion offering from petrochemical manufacturer Ineos Group in January 2006.

We await pricing of the Man Utd notes and details of the book (if they are ever forthcoming) with interest.

Related Links:
PIKing apart the Man Utd refinancing – FT Alphaville
Why the Glazers are doing it… – Long Room