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PIK-ing apart The Glazers Debt Situation

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When Hugh Culverhouse passed away in the mid-nineties, it revealed a club that was quite profitable yet riddled with debt. Hugh Culverhouse JR., son of then owner, forced the sale of the franchise down the windpipes of the shareholders. George Steinbrenner was one interested buyer, so was Baltimore Orioles owner Peter Angelos, who publicly announced if he purchased the team he would relocate them to his home area that lost the Colts to Indianapolis. Malcom Glazer swooped down and saved the Bucs when they paid the most amount of money for an NFL franchise; 192 million dollars.

They told the Tampa Bay community straight up, they needed to pass local tax referendums to build a new stadium, because they didn't pay only 16 million for the team like Culverhouse, they would need a far larger income base that comes from new stadiums with Club Seats, etc. Taxpayers and voters came together and approved the new stadium, and both sides benefited. The Glazers made money, and spent money and put together a team that competed year in and year out every since they bought the team.

Until now. Until  Manchester United.

The purchase of the premier sports franchise on the planet has caused many problems, and understanding these issues is at the heart of this post on

WHAT IS A PIK? It stands for Payment in Kind. Its a sort of Credit Card like personal finance tool, and the Glazers used these to help them purchase Man U. These are borrowed from  U S Hedge funds that have very high interest rates, 14.25% to be specific. The Glazers are desperate to refinance these, as the intention was always to pay these off within a few years of the take over in 2005. To show the devastation not paying these off can do, the £175 million  of debt is now at £275 million, and will be £518 million by 2017 if not paid down. This is where all of the Glazer's money goes, as Man U fans are quick to point out, £70 million has been taken out of the club to be put here.

How did this get out of control? The Glazers bought United in a £790 Million Pound leveraged Buy-out deal. They paid £272 million in cash, and borrowed  the remainder in the form of the JP Morgan-led syndicated bank loan, as well as from the hedge funds than lent money in the form of these high interest-bearing Payment In Kind loans.  Favored by private equity groups in the mid-2000s, which are akin to credit cards on which repayments are deferred for several years. Interest is paid 'In Kind' meaning the load grows as interest is paid on interest. Although the family restructured the debt in 2006, it was left with PIK loans it could not start to pay off until the debts with the banks were settled first.

In January of this year, it raised £507 Million by issuing bonds to clear the bank debt. These bonds provided longer term financing at a fixed rate without the tighter restrictions that come with bank loans, and would enable the family to start to deal with the PIK loans finally.  The 14% figure was agreed upon last time a refinance was accomplished, given the economic climate. 

It is in fact the interest on these PIK loans that has been hurting the Glazers. Since the take-over, it has been accumulating at a rate of 14.25% a year, reaching £202 MIllion at the beginning of 2010. Under terms of the loan, the rate will actually CLIMB two percentage points from August if, as seems likely, the club exceeds a ratio of five times net debt to earnings before interest, tax, depreciation and amortization.  

Financialy the club is doing well, as earnings have actually doubled under the Glazers  rule. David Newman, fund manager at Rogge Global Partners, says that all things being equal, United should continue to prosper in the Premier League and play in Europes lucrative Champions league, thereby enabling the Glazers to pay their coupons and refinance their bonds in the future. However, Perry Capital and Citadel, the two US Hedge funds that provided the Glazers with their PIK loans, have stipulations that if revenues plummet, they could even assume control of the club.