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Venture

Robert Trigaux

In a world of low interest rates, why do Bucs owner Glazers pay 16.25% to borrow money?

20

August

manuforlovenotmoneyprotestAP.jpgWake up and good morning. While TV blackouts of Tampa Bay Buccaneer games at home reflect fan indifference and empty seats at Tampa's Raymond James Stadium, the Bucs owners may have more pressing challenges overseas. The 82-year-old billionaire Malcolm Glazer and family who own the Bucs are now paying a whopping 16.25 percent interest on a loan they took out to refinance their purchase of the 18-time English soccer champions Manchester United, company filings show. Bloomberg reported the loan story here. ManU fans, as th e AP photo shows, clearly don't like their team being used as a piggy bank.

Why do we care? Well, if we can go out and buy a house with a fixed 30-year mortgage well under 5 percent, given today's incredibly low interest rates, why are the Glazers paying 16.25 percent? Because the lenders view the deal as risky, and they view the deal as risky most likely because the Glazers are apparently highly leveraged. Plainly speaking, they are borrowing a lotta money relative to what they can back it up with. And if the Glazers are highly leveraged (and Malcolm Glazer disappeared from public view years ago following a stroke), it raises questions about how solid is their hold on the Bucs franchise.

As reported by Bloomberg, the Glazers will pay the sky  high interest rate on more than $312 million on so called "payment-in-kind" or PIK notes due 2017 that are typically used to hold down cash expenses in leveraged buyouts because they carry coupons that accumulate and are paid on maturity or when the debt is redeemed. The story quotes Jonathan Moore, a high-yield analyst at Evolution Securities Ltd. in London, who states: "PIKs can make sense at certain times but given the rate at which interest accumulates they can quickly wipe out equity. You’d expect owners to take them out as soon as they’re able to." 

The loan was agreed by a Glazer holding company called Red Football Joint Venture Ltd. and is the responsibility of the family rather than Manchester United. While the soccer club is liable for a 504 million-pound bond sale it completed earlier this year, the Glazers have an option to take 70 million pounds out of the club to pay down other debt.

-- Robert Trigaux, Times Business Columnist

 

[Last modified: Friday, August 20, 2010 8:50am]

    

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