At the start of the year, Abhay Bhaniramka wrote an article for RoM to clear up a few misconceptions about the debt and explain it a bit more detail.
Following the news of a our losses over the past financial year, he’s allowed us to pick his brain again.
Apparently some people are happy that we have posted a £83.4 million loss! (albeit with a few one-offs and non-cash items which I will explain later in the post)
There are of two types of exceptional losses, recurring and non-recurring.
1) The loss on the cancellation of swap is around £40m which is a one-time non recurring expense. So yes, even though it will not be here, it is still a CASH loss for this year, which would not be there if the Glazers had not put us in debt in the first place. This has not all been paid off. Only £12.7m has been paid yet and hence out of the £163m in the club’s bank account, £28m you can count out because that will go eventually to pay this balance.
2) The amortisation of goodwill is on the consolidated income statement, not on the income statement of United and hence will not save the club on tax either now or in the future. It may save tax for the Glazers, not the club (but even if it saves the Glazers some money, that’s a good thing because it means they potentially take less money from the clubs coffers in the future).
3) Amortisation of debt issue costs and discounts is a recurring item and will save the club taxes, but the cash hit on it was already taken when issuing the bonds. In fact, if I remember correctly, the amount of issue costs was around £40m which is being amortized over 6 years as around £6.7m every year. The cash hit has already been taken i.e when issuing bonds for £504m we only got cash worth £464m. That’s a straight £40m CASH LOSS (which would not have been there if not for the debt).
You can’t see these adjustments because the Glazers have not released the Cash flow statement.
4) Forex losses – although these are not cash losses today, they may become potential CASH losses in the future if the exchange rates do not turn favourable for United. As for saving tax, they may well do depending on the taxation rules of the UK. I’ll look at the taxation rules of UK in detail and clarify it later.
5) The amortization of player registrations saves the club on tax, but this has nothing to do with the Glazers. This item is there on every clubs books and will always be there. In fact, one of the ways big-spending clubs recoup their cash is by this item. Suppose Real Madrid buy Ronaldo for £80m on a five year contract, they can save on taxes worth £40m over a period of 5 years, assuming the tax rate to be 50%! So almost half the players worth is recouped by saving on tax itself in this way.
6) The way that the operating costs of the club have been brought down is indeed commendable. This shows an incredibly well run business in this respect. However, we must remember it came at what cost. The free snacks and food for non-playing staff were removed when that had been going on for many years, staff wages were frozen (only this year have they given a 6.5% raise to compensate) and so on. This has an effect on the morale of the staff at the club. Nevertheless, in financial terms, it is commendable without doubt.
7) The commercial turnover has risen, no doubt as a result of the Glazers efforts for which they must be lauded.
However, wouldn’t it be fair to assume that United by itself, without the Glazers, would have made some progress in increasing the commercial income? With Peter Kenyon before and David Gill now, it’s not as if the Glazers were necessary for these improved commercial deals to be made.
8 ) The debt can be serviced if we continue doing what we’re doing. But the income stream at the top is highly dependent on United continuing to be successful in winning leagues, going to latter stages of Champions League and winning trophies every year! What if we can’t sustain the success for a couple of years? With the massive amount of financial leverage, can you imagine the effect on the earnings if we don’t do well for a couple of seasons?
9) The interest on the PIK continues to roll up at 16.25% interest. Please tell me a risk-free investment that gives annual return of >16.25% in the world out there at this point of time. I guess the the financial money managers of the world would have figured it out by now if there was. Risky investments might give you such returns but what if those risky investments fail, and what kind of risky investments will continue to give >16.25% pa compounded for the next 6 years continuously? Not even the equity markets can give you that sort of return continuously for 5-6 years.
On a positive note, let me point out that we are NOT SKINT as the ABU media/MUST would have you believe. We still have funds for player purchases.
The fundamental point being that the debt was not productive debt. The £500m pounds wasn’t used to buy new productive assets (players), was not used to build a new stadium (as in the case of Arsenal and the Emirates) but merely to gain control of United and unproductive debt is obviously a bad thing.
Edited and altered in places by Scott.
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