Reds need success to balance the books
Losing to Leeds United in the FA Cup hardly constitutes an on-field crisis for Manchester United (though it certainly counts as humiliation), but early exits from any competition are not what the club's owners and bondholders want to hear.
Last week it emerged that United had appointed two investment banks to organise the refinancing of £600m of its near £700m debts -- a debt burden that has climbed substantially since Malcolm Glazer bought the club in 2005. The £700m comes from United's last published accounts for the year ending in June 2008, so the current figure is likely to be higher despite last year's sale of Cristiano Ronaldo.
The majority of those debts come on reasonably favourable terms, but there is an irritating £175m that was borrowed on different, and more costly, terms. The interest rate is punitively high at more than 14 per cent and instead of being paid out of cash each year, the interest bill is rolled up and swells the debt -- doubling it every five years. Swapping that high-cost debt for a lower-cost bond issue makes sound financial sense, but life is rarely that simple.
The banks who are owed the bulk of the money -- more than £500m -- have first call on United's funds, so the refinancing will have to include a large chunk of their money as well. Much of the saving on the £175m, therefore, will probably be washed out by higher payments on the rest of its debts, but the result will be a simpler, cleaner loan structure -- if it can persuade banks and investors to cough up the new money.
United's debt is not a problem as long as it generates enough cash to meet the interest payments, but it does mean that the club walks a thin line between continued success and financial crisis.
An early exit from the FA Cup does not help, but the important targets are the Premier League (to guarantee Champions League football) and a decent run in the knock-out stage of the Champions League itself. Given the recent run of injuries and erratic form, the prospect of no FA Cup matches during the Champions League campaign may turn out to be a blessing, but failure against Milan next month would be a serious blow, particularly if it coincided with the attempted refinancing.
The pressure on United has been intensified by the on-field performances of Aston Villa and to a lesser extent Tottenham, while Manchester City's new-found millions pose the more serious long-term threat.
A top-four finish in the Premier League is essential for United's financial well-being and the emergence of some serious contenders will make the second half of this season more nerve-wracking than normal.
United are not alone, of course. Liverpool's finances are more precarious, with only Chelsea and Manchester City apparently impervious to recession or normal business constraints, while at the other end of the table, Portsmouth flirt with disaster on a daily basis.
Alex Ferguson (pictured) says he is unperturbed by the financial issues. "The bond issue is a good thing for the club; I think anything that helps with repayment of debt is a good thing," he said last week.
"There is debt there but it has never interrupted my plans for the team at any stage. I don't have any concerns about the financial situation. I have absolutely no issue at all with the club's finances and I am really confident about that. Believe me, there is no impact. I have all the money I need; the money is available. If I wanted to buy someone, I could get the money. The concerns are down to the fact that I have not moved in the transfer market but that is nothing to do with the Glazers, it is simply because I am not going to pay £50m for a striker who is not worth it."
That may be so (though Ferguson had no problem paying £33m for a striker who was not worth it) but the failure to build his squad after last year's Champions League defeat has played a part in opening the door to his new challengers.
He may choose inactivity in the January transfer window while his rivals splash some cash, but he cannot choose to ignore the financial pressures indefinitely. Everything he has created over the past 20 years will unravel -- rapidly -- if he fails to stay on the treadmill that delivers European football each season.
United still have enormous advantages over most other clubs -- their stadium capacity, international fan base and hugely lucrative merchandising -- but the business model demands that the recent pattern of staggering success is maintained into the future.
The margin for error is small and the room for manoeuvre limited. Despite Ferguson's protestations to the contrary, United's transfer policy will be dictated by the profit and loss account and he is clearly operating on reduced rations.
As long as he keeps winning, the finances will stay balanced, but if he loses they tip precariously into the red.