Man U ponders R7,1bn BOND ISSUE

LONDON - Manchester United is considering a £600million (about R7,1billion) bond issue as part of the Premier League club's battle to bring its spiralling debts under control.

It is understood that the Glazer family, the American leisure tycoons who bought the club in 2005, have asked two investment banks to look at ways of lifting the debt burden.

JP Morgan, the US bank that engineered the Glazers' £790million (about R9,4billion) takeover, and Deutsche Bank have been working on options to improve the club's financial situation amid concerns that its debts could soon have serious repercussions.

In the past few weeks, advisers have begun sounding out potential investors. The cash would be used to pay back some of the club's existing debt. Manchester United is not the only big club to face debt issues. Last week Roman Abramovich, the owner of Chelsea, converted £340million (about R4billion) in interest-free loans into equity.

Manchester United, champions for the last three years, owe about £700million (about R8,3billion) to banks, financial institutions and hedge funds.

The club insists the debt is not a problem because the annual interest on the various loans is more than covered by its operating profit. In 2008, net interest on all its debts was £69million (about R826million) against £72million (about R862million) operating profit.

The main concern for the club's owners centres on £175,5million (about R2,1billion) of loans that the Americans are personally responsible for and "roll up" interest at an annual rate of 14,25percent.

The so-called payment in kind (Pik) notes borrowed from Perry Capital and Citadel, two US hedge funds, initially stood at £138million (about R1,6billion) in 2006, but has since accrued £40million (about R479million) of unpaid interest.

If the club's financial performance deteriorates below a certain level then the hedge funds have the right to appoint their own directors to the board.

Sources familiar with the situation say the amount that Manchester United will seek to raise depends on the appetite shown by investors. At present the figure is between £500million (about R5,9billion) and £600million (about R7,1billion). If demand is strong, the club could seek more.

It is unclear whether the proceeds of a bond issue would be used to repay the controversial Pik debt or the £520million (about R6,2billion) that is secured against the club.

The Glazers would prefer to pay back the more costly Pik debt, but experts said any attempt to prioritise the hedge funds that lent the money would be met with stiff opposition from the club's senior bank lenders.

Instead bankers said that the club might look to pay off the bank debt, which is likely to have higher interest rates than the cost of the annual coupon on the bond.

The club put in place a more long-term financing structure in 2006 and has since attempted to refinance on a number of occasions, but as many British companies have found, the credit crunch and resulting economic climate have scuppered their efforts.

lCopyright - The Sunday Times, London