What do Cambridge University and Manchester United have in common? They are both proposing to issue bonds, in the case of Cambridge to raise funds for further investment, in the case of United as a more efficient and cost effective means of managing their debt. All sorts of companies and institutions are turning to the bond market to raise money because as banks rebuild their balance sheets they don’t have as much money to lend as they did before the financial crisis and they charge high rates of interest on what is available.
What do Cambridge University and Manchester United have in common? They are both proposing to issue bonds, in the case of Cambridge to raise funds for further investment, in the case of United as a more efficient and cost effective means of managing their debt. All sorts of companies and institutions are turning to the bond market to raise money because as banks rebuild their balance sheets they don’t have as much money to lend as they did before the financial crisis and they charge high rates of interest on what is available. Cambridge Uni are hoping for a triple A rating on their bonds as befits an institution that has been going for around 800 years. Although they are also a global brand, it remains to be seen whether United will do as well.
A typical purchaser of bonds would be a pension fund. Bonds are promises to pay a sum at a fixed interest rate, which has to be sufficiently high to attract purchasers. The bonds can be bought and sold like shares. Bond issues are used extensively in the US by state governments and local authorities to fund infrastructure projects. Manchester United are being advised by JP Morgan, the US bank that engineered the Glazers’ £790m takeover, and Deutsche Bank. One possible problem is that the Glazers would prefer to pay back the more costly PIK debt which we have written about recently. However, bankers would like to see bank debt paid off which is likely to have higher interest rates than those that would be paid on the bond. The club has been insistent that debt is not a problem because the annual interest on its various loans is covered by its operating profit, although that only left a margin of £3m (£72m against £69m) in 2008. If the cost of servicing the debt could be reduced, in principle more money would be available for the team.