Monday 11 January 2010

The curse of Debt: Manchester United

In these past few months, the debt position of the UK has been a much discussed subject. But of course the UK national debt is but a part of the overall debt structure of the country which includes all the private company debt as well.

During the recession some companies have been doing better than others in managing through these difficult times.

One outlier appears in the press today with its results announcement. This is Manchester United, the most successful UK football club of recent years.

Man U has reported a profit today of £41 million, but this alone is less than half of the money they sold Cristiano Ronaldo to Real madrid for. On a like for like basis, their loss is actually £31 million, compared to £13 million last year.

Why is this? Well turnover is up so perhaps they have been investing in the club infrastrucutre? But no, the extension to Old Trafford has been finished for a couple of years.

The real story is one of leverage finance. The owners of Man U bought the club borrowed  a huge sum of money and then mortgaged the club to pay back their loan. As such they have put only a sliver of equity into the business. Now Man U is sitting on at least £600 million of debt, some of it apparently at rates of up to 14.25%; equivalent to borrwing on a credit card.

What is staggering really is that man U have been in the Champions League final twice in the past 2 years  and won the Premier League. They can be no more successful in any meaningful way. Therefore with alll the prize money collectedrecently, their revenues are not going to shoot up skyward from here. Indeed a bad year in the Cup (go Leeds!) and the Champions League and their revenue will fall. Plus they do not have a Cristiano Ronaldo to sell every year.

Now the club are going to try and re-finance by selling a bond that will allow them to re-pay the most expensive debt (with a ncie fee for early repayment no doubt). Good money for the banks involved too.

This is sensible, but having to do this shows how far the clubs finances have been stretched by the use of excess leverage finance by its owners. The need for the bond issue is actually quite urgent to fix the finances; Somehow I doubt Man U will be paying any £80 million transfer fees itself in the near future.

Even with a new interest rate at about half of the current one, the club will still be making debt payments of about £30+ million a year - over 10% of its revenues (which are themselves likely to fall).


roym said...


the worry for many fans must be how much debt their own less successful clubs are tottering under. As a liverpool fan i fear the worst. oh david moores, why didnt you choose DIC?!

getting mack to MUFC, i still dont see why the glazers did it? arent their hands full with the tampa bay buccs?

CityUnslicker said...

Roym - They did it because they were smart enough to realise they could buy one of thebest football clubs in the world for next to nothing of their own money.

Who knows now how much they take out...

lilith said...

Perhaps the Glazers are Man City fans.

Elby the Beserk said...

The Glazers problem is that whilst 500 million of the loan is "secured" on the club, the remaining 200 or so is what is so highly leveraged - 14.9%, I believe, and to be refinanced within two years.

The effect is that the grumpy bacon-faced twat is unable to buy anyone to replace the Gel boy; indeed, they recently had to turn down a £10 million pound Balkan player they had first option on. Club said he hadn't made the mark, but the belief is that the Glazers said - no.

Disclaimer. I am a lifelong Man City. Yea, I have walked in the Valley of the Shadow, and out the other end.

Your, ever so smugly...

Also - United have a major problem the exit of Ferguson whenever. It doesn't matter WHO replaces him, as his bad-tempered, graceless, foul-mouthed ghost will be stalking the corridors of Old Toilet for many a year yet. Losing Busby knocked them for six.

Demetrius said...

As an aside, on my blog I have commented that one effect is that the Icelanders, indirectly, are being expected to help bail out many of the Premiership Clubs along with a lot of other highly leveraged geezers. What a strange world we live in.

roym said...

"Who knows now how much they take out..."

i see, what will it take before the FA or UEFA insist upon full financial disclosure from these clubs?

David gold has just been on R5, apparently he and sullivan are sniffing around several clubs and according to him the situation in the prem and championship is "frightening". maybe he's trying to talk some prices down, but what if a major club goes?

Anonymous said...

Do Portsmouth count as a major club - as they seem to be unable to hide their troubles any more?

financial spread betting said...

I heard the interest rate is even higher than that now. Approaching 16%!