Tuesday, November 16, 2010

Yes, But Can Gianluigi Buffon Save 16.5% Debt?

photo by taberandrewvia PhotoRee

Two stories out of Manchester tonight, either of which could potentially impact the Red Devils. The first, related to the early payoff of £220 million of Manchester United's ultra high interest debt, combines tantalizing news with little detail; the second, related to the potential move of a world class goalkeeper to Old Trafford as the long-term replacement for Edwin Van der Sar, offers only the barest hint of hard news but is long on conjecture and speculation. 

Both stories make for compelling news and analysis, and I promise you -- even if you keep cash stashed under your mattress and don't know an asset from a liability, you'll be able to follow my easy-to-understand analysis of the United debt story -- so keep reading!

First off, the Debt: Tariq Panja of Bloomberg broke news last night that a company controlled by the Glazer family has informed lenders of its intention to prepay a loan currently worth £220 million and carrying an annual interest rate of 16.25%.  This loan is held by group of approximately ten hedge funds, the bloodsuckers of the financial world, which to date have been only too happy to take a credit risk on Manchester United in return for an interest rate that approaches credit card levels (it's as if the Glazers charged £220 million of the United purchase price to their personal American Express Cards).  

The note (banker-speak for loan) being repaid is a Paid-in-Kind (PIK) debt instrument, which in plain english means that instead of the lenders receiving their annual 16.25% interest payments in cash, they are being paid in the form of additional debt issuance (i.e., the loan keeps increasing in value until it "matures," which is a fancy way of stating the time when the loan has to be finally paid off).  

Although the original amount of the PIK note was £138 million when the money was first borrowed, it has steadily increased over the past four years -- through PIK payments -- to its current £220 million amount.  If the note was held to maturity (in 2017), it would require almost £600 million to pay it off, which explains the Glazer's desire to get rid of this sucker sooner rather than later.  That the note exists at all is in itself an admission that no traditional bank would have made the loan at the time it was made, with the hedge funds' high interest money being the only debt available.

Crucially, the Glazers (through the company they control) have come out and proactively stated that the monies used to pay off the PIK loan will not come from the club -- i.e., the Cristiano Ronaldo transfer money is safe and still in the bank at Old Trafford (or nearby).  

So where is the money coming from?   There's basically only three sources of capital (money) for any business, including Manchester United, and it must therefore be coming from one of the following places: 
  1. The Glazers' Own Money: Either from their bank accounts (unlikely), or through cash generated by the sale of some of their other assets, such as shopping malls or the NFL's Tampa Bay Buccaneers (again, unlikely); 
  2. Other People's Money -- Equity: The Glazers could have sold a partial interest in Manchester United to another investor and be using the money generated through the sale to pay down the PIK debt (certainly possible); or 
  3. Other People's Money -- Debt: The Glazers have replaced the high cost PIK debt with much cheaper debt (likely), also known as a refinancing.  It's still debt, but the annual interest cost will be considerably less.
The pre-payment, which is scheduled to occur on November 22 of this year, follows another United re-financing earlier in the year, in which the Glazers converted a bank loan secured by the team into a £526 million bond.  This fact in and of itself gives us insight as to where the funds are likely coming from: scenario 3, a refinancing.  Although many United fans will be hopeful that the Glazers have sold a partial stake in the club, which is indeed possible, the most likely answer is that they have found a new lender to replace the high-priced hedge fund lenders. 

We can't rule out a partial sale entirely, though, as it would certainly be one explanation (and a good one, at that) for Rooney's recent about face, as well as the club's more aggressive posturing regarding the transfer market.  Because there have been absolutely NO rumors of a new investor, though, and news of deals at this level often tend to leak before they are officially announced, I still believe a refinancing is the most likely scenario -- and here's why:

Although credit is still hard to come by in the U.S. and the U.K. to the average consumer, banks around the globe have become much more willing over the past several months to lend money to credit-worthy corporations.  They're doing this for selfish reasons: because it's good business.  Banks need to lend money in order to make money, and after a year and a half of making few if any loans, banks are now attempting to get back to their core business, but only with the best corporate credit risks.

And make no mistake: United is a worthy borrower, whatever you may think of their current financial state.  The team has dramatically increased its sources of revenue, generating more than £200 million in new funds from more than twenty corporate sponsors -- think Turkish Airlines, and Concha y Toro --  sold by their commercial arm over the past two years.  The club has aggressively gone after new corporate sponsors, and are well ahead of the football pack on a global basis in exploiting this market.  No other club, including Barca or Real, and certainly not Chelsea or Arsenal, has tapped into this huge source of global revenue to the extent United has.

So combine a growing, semi-predictable revenue stream with a bank market once again looking to lend to corporations, and it's a recipe for borrowing at cheaper rates.  Whatever you may think of the Glazers, the move likely signals their intent to stay on as owners for the forseeable future, and to grow United's revenue to the point where the interest payments are a comfortable obligation.  They may get there yet.

Which leads us to our second item; if there's still £90 million-plus at the club, who are they going to spend it on, and when?  Here's a potential piece of the puzzle:

News Reports out of Italy Tonight suggest that Manchester United's signing of goalkeeper Gianluigi Buffon is a fait accompli, with only the "small matter" of the Italian proving his fitness standing in the way of a surefire move.  Small matter is in quotations because the Italian has been injured throughout his career, and has noticeably not played a game since this past June in South Africa, when he injured his back in Italy's first World Cup game and was never seen again.

Supposedly -- and this should be viewed with a jaundiced eye as it comes from an Italian source who may or may not be credible -- the transfer has been agreed to with Juve in principle, and Sir Alex is now waiting to see if Buffon can return to La Vecchia Signora's lineup and prove his worth between now and the end of the season.  

Buffon, now 32 years old, would indeed appear to be a worthwhile successor to Vandy.  He's proved his worth on the world stage at the highest level, winning the World Cup in 2006, and has been one of the world's top goaltenders for some time now.  His signing would also make sense given Sir Alex's somewhat mixed track record at signing goalies -- remember Fabien Barthez anyone?  If not, take a look at the hilarious video below:

And from Buffon's point of view, the move would seem to make sense.  United gives him a better shot at winning the Champions League than does Juve, and Buffon has proved about all he can prove in Italy.  In addition, he seems to have been ably replaced during his absence by backup Marco Storari, and Juve appears unlikely to re-sign him.  So a move seems likely, and combined with United's need to replace the 40 year-old VdS, United would seem a likely destination.

In any event, if Buffon does come to Old Trafford, it would be purely because Sir Alex has chosen age and experience over youth and promise, as several of the other goaltenders who've been linked with United this past year -- including one very exciting David De Gea -- are noticeably younger but much more unproven commodities.  Although Sir Alex has invested in potential many times before (even recently, with Smalling, Hernandez and most notably Bebe), perhaps goalie is just a position in which he's simply unwilling to gamble.  

In the end, it could come down to Sir Alex's past bad experiences with goalkeeping experiments, coupled with his first hand knowledge of how good a world-class goalie such as Schmeichel or Van der Sar can make the rest of the team.  We'll have to wait and see, but in the meantime I'm going to start reading Gazzetta Dello Sport just to be sure.

This is farlieonfootie for November 17. 

1 comment:

  1. What are you, an investment banker or something? That was most clear explanation of a transaction from a sporting blog/newspaper/televisions show that I've ever witnessed. Unlike virtually every other reporter I've ever read, it seems like you understood the transaction and were able to explain it. Wow.