Dispelling Timmy myths

[Bluedell 5,329]

It seems that they have had another go.

 

In the past few days there has been widespread media speculation as to the current status of Craig Whyteââ?¬â?¢s proposed takeover of Rangers Football Club (RFC) and the stance adopted by Lloyds Banking Group (LBG) in negotiations. Many of the media outlets, and in particular, the West of Scotland tabloid newspapers, have suggested that the takeover is being blocked by LBG who are allegedly demanding a Ã?£1million termination fee in addition to full repayment of their debt (currently believed to be c.Ã?£18 ââ?¬â?? Ã?£21 million).

 

As is often the case with poor quality journalism, the Ã?£1 million termination fee is simply a small element of a much bigger and more serious issue. Put bluntly, tabloid journalists (and to a lesser extent, some ââ?¬Å?qualityââ?¬Â writers) have identified an issue which fits with their agenda of ââ?¬Å?Bank bashingââ?¬Â and have lazily chosen to report this, missing out a number of crucial and significant facts. Facts which, if reported, would not make pleasant reading to fans of RFC.

 

It seems it's not only journalists who are lazy with their reporting as we shall see.

 

Before delving into the various components which are impacting the progress of the proposed takeover, it is important to set some context and background. To do that, we must consider LBG�s position not only in RFC, but in the wider Murray International Holdings Limited (MIH) Group.

 

In MIHâ��s most recent set of statutory accounts which were prepared to 30 June 2009, LBGâ��s indebtedness across the MIH Group was in excess of �£900 million. This means that RFC, whose debt was c.�£30 million at 30 June 2009, accounted for just over 3% of LBGâ��s total exposure to the Group. Astonishing then, that the focus of LBGâ��s concern and indeed, involvement in the Group would appear to be in RFC. Even more astonishing when you consider that at the same point, MIH was significantly balance sheet insolvent, with net liabilities of c.�£95 million, whereas RFC was comfortably balance sheet solvent, with a strong net assets position of c.�£67 million.

 

It's astonishing that anyone thinks that LBG's main focus and concern is Rangers when it's obvious that PPG has been their main issue. Is the author suggesting that LBG subscribed for an additional �£150m of MIH shares due to their concern about Rangers?

 

MIH�s next set of statutory accounts are due to be filed by 1 May 2011 and I fully anticipate the balance sheet insolvent position of the Group will have deteriorated further.

 

This poses the question ââ?¬â?? why would LBG jeopardise a deal which would see them exit a relationship which they apparently do not want to be in and recoup c.Ã?£20 million of indebtedness, for the sake of Ã?£1 million termination fee? The answer ââ?¬â?? they would not. The Ã?£1 million termination fee is a complete non-story. The sceptic in me suspects that the publishing of the story was nothing more than a headline created to sell newspapers.

 

I'd agree with that. It's so much of a non-story that it's hardly worthy of mention, but it seems to have provoked a reaction in the author for some strange reason.

 

If it is not, it is a case of complete incompetence on the part of the journalist(s) for not understanding the true financial position of RFC and the MIH Group, and the real reasons that a takeover deal has not been concluded.

 

So, what are the real reasons? Well, these can be broken down into two simple categories.

 

LBG�s unwillingness to conclude a deal.

The potential HMRC liability.

 

The first category is perhaps the most complex to understand and in truth, perhaps the most controversial. Put simply, a sale of RFC for the figures quoted (LBG repaid, plus c.�£6 million for shareholders) would actually leave LBG in a worse position than they are in at the moment. Let me illustrate through some very crude calculations, which I would caveat are indicative and by no means precise (the theory, however, is).

 

Based on RFCâ��s last published results to 30 June 2010, LBG was owed c.�£21 million. At the same reference date, RFCâ��s balance sheet showed a net assets position of c.�£71 million. This basically means that if a sale of RFC concluded, on a very high level basis, LBG would be getting c.�£21 million in cash, but would be losing c.�£71 million of security due to the fact RFCâ��s assets are subject to inter-company cross guarantees with other MIH companies.

 

Totally wrong. Rangers' assets are not subject to cross guarantees with other MIH companies.

 

Even on a very basic accounting basis, ignoring consolidation adjustments, MIHâ��s group balance sheet would be losing c.�£21 million of debt, but would also be losing c.�£71 million of assets (i.e. its balance sheet insolvent position would worsen by c.�£50 million).

 

A complicated concept for non-accountants, so let me simplify. Mr X borrows Ã?£1 million in total from LBG, which he uses to purchase two businesses ââ?¬â?? Company A for Ã?£200,000 and Company B for Ã?£800,000. As would be the case in such a transaction, LBG have a security (like a bank taking security over your house in a mortgage) over both companies, and also have unlimited inter-company cross guarantees across both companies. This effectively means that if one company defaults on their loan repayments, the bank could pursue the other company for repayment of the defaulting companyââ?¬â?¢s debt.

 

After a couple of years, Mr X decides he wants to sell Company A. He receives an offer for Ã?£750,000 which he accepts ââ?¬â?? Ã?£200,000 to repay LBG and Ã?£550,000 for him ââ?¬â?? a nice little earner. Before the sale can complete, he requires LBG to release their securities over Company A (again, like selling your house, where the bank needs to rescind title to your property). At the same time, Company B has not been performing as strongly and has accumulated debts to HMRC and other creditors. On paper Company B now only has assets totalling Ã?£400,000.

 

Now, why would LBG ever accept this situation? They would be receiving �£200,000 in cash, which is clearly a good thing, but they would be left with �£800,000 of debt in Company B which is only worth �£400,000. In releasing their cross guarantee, they would go from a combined loan to value ratio of c.87%, to a position following the sale of Company A of 200%. LBG would be foolish to allow the sale of Company A to complete. By keeping the the group (Company A and B) together, their indebtedness is far better protected than Company B as a standalone entity.

 

The situation at RFC is similar, although clearly, RFC is not quite so material to the MIH/LBG group as a whole. Nevertheless, LBG would need to have very good reason for the sale of RFC to complete at the purchase price suggested. Now this may or may not be a reason for Craig Whyte�s proposed takeover faltering, but is most certainly an issue which LBG will be aware of and will be considering.

 

A very nice explanation for an irrelevant situation. If only the author hadn't made that small incorrect assumption and wasted so much time proving a point that is totally irrelevant.

 

 

A further aspect of RFC�s position within the MIH Group as a whole, is that LBG may be holding out for a greater return to shareholders. Why would LBG care what the shareholders might receive? Simple, MIH is RFC�s majority shareholder. Based upon MIH�s last accounts, their shareholding in RFC was 62%.

 

MIH's holding in Rangers is currently around 85% but what's 23% between friends?

 

 

This would mean that, using the quoted takeover figure of c.�£6 million to shareholders, MIH would receive a payment of c.�£3.7 million.

 

No it doesn't actually. The MIH shares are what are being bought, so MIH would receive the whole �£6m.

 

When this cash flows into MIH, LBG would almost certainly insist that the funds be applied to debt reduction. In holding out for a greater premium to shareholders, LBG would receive 62% of every �£1 in excess of the �£6 million figure, and I can all but guarantee this would be applied to MIHâ��s indebtedness to LBG.

 

I think by now we can assume that your guarantees are worthless.

 

The second category, the potential threat of a massive HMRC liability for RFC, is possibly the most significant issue preventing the Craig Whyte or indeed, any deal from completing. Stories which surfaced in tabloid newspapers in February, claiming that LBG and MIH had agreed to meet the costs of any HMRC ruling as part of the takeover deal, were complete fabrications. The stories were without foundation and anyone with a degree of financial acumen should quickly realise this to be the case.

 

Nobody has any idea as to whether this is the case or not. Anyone with a degree of financial acumen would know that these guarantees are standard in any takeover sitution, and not in any way unusual.

 

There is absolutely no way that LBG would ever give an indemnity in respect of a liability which has the potential to run into tens of millions. No way whatsoever. As for MIH, the very notion that they could indemnify is absurd. MIH can barely service its debt as things stand at the moment. It has absolutely no free cash and even if it were to generate surplus cash from trading, this would be used for debt reduction, not to pay HMRC. The only way MIH could currently settle an HMRC debt, even a relatively small one of say �£5 million, would be through additional borrowing from LBG, which we know is highly unlikely to be forthcoming.

 

This may or may not be the case. I have no idea, but neither has the author. MIH are continuing trading and have been looking at new developments so LBG are hardly turning off the tap. Also, the contingency currently exists within MIH so are LBG really that worse off if Rangers are sold?

 

There has been little in the way of comment from RFC, LBG or Craig Whyte regarding the HMRC issue, and this is entirely deliberate. By publicly stating that there is an issue, HMRC could perceive this as an admission of guilt from RFC, which would almost certainly strengthen HMRC�s position when the case eventually goes to tribunal. By maintaining a wall of silence on the issue, RFC, LBG and Craig Whyte are protecting their position in this regard and we are unlikely to (publicly) discover just how serious an issue the potential HMRC liability is.

 

Standard stuff when dealing with any HMRC case.

 

It is highly unlikely that Craig Whyte will complete his acquisition of RFC while this matter remains in limbo. The risk to him that the HMRC debt crystallises at a future date is simply to high.

 

This is what I can't understand. Surely it's a fairly clear issue? Either the contingent liability stays within MIH then what is the problem, or it's stays within the club and it's unacceptable to Whyte and he walks away (which he presumably would have done months ago if that was the case), or he is (worryingly) happy to accept the exposure. Again we don't know the situation, but if the author's assertion is correct then why is Whyte still floating around?

 

In my next posting, I will outline why RFC being placed into administration or receivership could actually be a realistic and, potentially beneficial outcome for RFC, LBG and Craig Whyte.

 

Can't wait. :grin:

 

As will always be the case, I am happy to answer any questions on any of the above matters.

 

What school did you go to?

[Frankie 8,150]

As ever mate - a fantastic riposte!

[Guest thetruthwill0ut]

Ok, let me respond to Bluedell's comments - and let me just state at the outset, I have no agenda other than to report what I know. I am not looking to start arguements, derail the takeover etc, and I am not a CFC fan.

 

Ok, so each point in turn:

 

 

"It's astonishing that anyone thinks that LBG's main focus and concern is Rangers when it's obvious that PPG has been their main issue. Is the author suggesting that LBG subscribed for an additional �£150m of MIH shares due to their concern about Rangers?"

Agreed - I think I have maybe not articulated my point very well here. What I was alluding to was the fact the media portray LBG's main focus and concern to be RFC, when clearly, their real concern is MIH.

 

"I'd agree with that. It's so much of a non-story that it's hardly worthy of mention, but it seems to have provoked a reaction in the author for some strange reason."

 

Ok, so we agree again. I was simply pointing out that the media have created a frenzy about a complete non-event.

 

"Totally wrong. Rangers' assets are not subject to cross guarantees with other MIH companies."

 

Firstly, even if you are correct on the cross guarantee issue, the fact of the matter is RFC's result are consolidated into MIH in line with accounting standards. Selling RFC would therefore mean MIH losing net assets of c.�£71 million from its balance sheet overnight, making it even more balance sheet insolvent.

 

I have documentation to backup the cross guarantee point - if there's a way to attach it here, let me know and I'll upload it.

 

"A very nice explanation for an irrelevant situation. If only the author hadn't made that small incorrect assumption and wasted so much time proving a point that is totally irrelevant."

 

See my comments on the previous point.

"MIH's holding in Rangers is currently around 85% but what's 23% between friends?"

 

I'll need to take your word for that - Companies House still showing 62%, but not a massive issue in any case.

 

"No it doesn't actually. The MIH shares are what are being bought, so MIH would receive the whole �£6m."

 

Ok, fine - but my point is whatever is paid for the shares will be snaffled by the Bank for debt reduction. Therefore, LBG may be holding out for more money for the shares.

 

"Nobody has any idea as to whether this is the case or not. Anyone with a degree of financial acumen would know that these guarantees are standard in any takeover sitution, and not in any way unusual."

 

You are quite correct that in a normal takeover, guarantees and indemnities would be provided, but these would be given by the seller, not the bank. I am 100% certain that LBG have not and will not provide a guarantee in respect of the HMRC case.

 

As for MIH, they could provide guarantees, but they do not have the resources to back any guarantee up, so it would be worthless.

 

"This may or may not be the case. I have no idea, but neither has the author. MIH are continuing trading and have been looking at new developments so LBG are hardly turning off the tap. Also, the contingency currently exists within MIH so are LBG really that worse off if Rangers are sold?"

 

LBG would not fund such a payment to HMRC. There is absolutlely no benefit to them from paying an unsecured creditor, when there are ways round the bill.

 

"Standard stuff when dealing with any HMRC case. "

 

Agreed

 

"This is what I can't understand. Surely it's a fairly clear issue? Either the contingent liability stays within MIH then what is the problem, or it's stays within the club and it's unacceptable to Whyte and he walks away (which he presumably would have done months ago if that was the case), or he is (worryingly) happy to accept the exposure. Again we don't know the situation, but if the author's assertion is correct then why is Whyte still floating around?"

 

Agreed, however, my understanding is that LBG are quite clear that any liability to HMRC would remain with RFC, not MIH. As for why Whyte is still floating around - your guess is as good as mine. I do believe he still wishes to complete a deal though.

 

"Can't wait. "

 

Just bear with me on this one.... I promise you that it's not as far fetched as it would seem.

 

"What school did you go to? "

 

Claremont High in East Kilbride. not sure why that's relevant though

[rbr 1,247]

http://rangerstaxcase.wordpress.com/ ,,

 

 

When ever you get a few minutes Bluedell , looks like McGobblegiver has been busy again , in amongst bouts of depression , and the comments are pretty good too

[Bluedell 5,329]

Ok, let me respond to Bluedell's comments - and let me just state at the outset, I have no agenda other than to report what I know. I am not looking to start arguements, derail the takeover etc, and I am not a CFC fan.

 

Fair enough. There have been plenty who have commented that have an agenda, and it appeared that you also had one.

 

Ok, so each point in turn:

 

 

"It's astonishing that anyone thinks that LBG's main focus and concern is Rangers when it's obvious that PPG has been their main issue. Is the author suggesting that LBG subscribed for an additional �£150m of MIH shares due to their concern about Rangers?"

Agreed - I think I have maybe not articulated my point very well here. What I was alluding to was the fact the media portray LBG's main focus and concern to be RFC, when clearly, their real concern is MIH.

 

Not what you said, but OK.

 

"I'd agree with that. It's so much of a non-story that it's hardly worthy of mention, but it seems to have provoked a reaction in the author for some strange reason."

 

Ok, so we agree again. I was simply pointing out that the media have created a frenzy about a complete non-event.

 

Still seems strange that someone who doesn't support Celtic and doesn't have an agenda would go to the trouble of doing an article.

 

"Totally wrong. Rangers' assets are not subject to cross guarantees with other MIH companies."

 

Firstly, even if you are correct on the cross guarantee issue, the fact of the matter is RFC's result are consolidated into MIH in line with accounting standards. Selling RFC would therefore mean MIH losing net assets of c.�£71 million from its balance sheet overnight, making it even more balance sheet insolvent.

 

I have documentation to backup the cross guarantee point - if there's a way to attach it here, let me know and I'll upload it.

 

The only people who care about the �£71m on the balance sheet are LBG and I would assume that they have already heavily discounted it when analysing the group. I can't believe that they accept the valuation of the stadium, for example. Given that Rangers appear to be stand-alone then I don't see what there is to get excited about. It's just adding numbers together given the relationship between the club and the rest of MIH. I presume that they can also see the potential downside of no CL football over the next few seasons, so do they really want MIH to hold onto a company that is likely to make losses?

 

On the cross guarantee point, it would need to be disclosed in the accounts, which it is not, and AJ also stated that there was no guarantees with other parts of the Murray Group.

 

To attach something, you need to go to "advanced" when replying and then you should see an attachments option under "additional options".

 

As for your other points, they are largely based on your statement that the deal is being done based on the contingency remaining within the club. You obviously have or are trying to imply that you have inside information. If you do have some then you are in a better position than me, but I can't understand why the deal is not dead. I don't agree with all your assertions but there's no point debating them if a decision has already been made, as it makes any discussion on the reasons fairly meaningless.

 

As for the school question, it was a joke that obviously caused a woosh moment.

[Guest thetruthwill0ut]

Na, definitely no agenda. I'm just an accounting geek.

 

I think I'll hold fire on my next blog until this Sky Sports News story that the takeover has been approved develops..... fingers crossed.

[Frankie 8,150]

It is interesting that all these anonymous blogs have cropped up suddenly.

 

Someone or some group of people are up to something.

[Guest thetruthwill0ut]

"Someone or some group of people are up to something. "

 

Not me, i just had a small bit of inside knowledge that I thought would be worth sharing.

[Frankie 8,150]

"Someone or some group of people are up to something. "

 

Not me, i just had a small bit of inside knowledge that I thought would be worth sharing.

 

With respect you'll appreciate the coincidence is not one which can be automatically dismissed. However, I appreciate your contribution and we'll see where the debate takes us over the next few days which look to be crucial for everyone concerned.

[Guest thetruthwill0ut]

With respect you'll appreciate the coincidence is not one which can be automatically dismissed. However, I appreciate your contribution and we'll see where the debate takes us over the next few days which look to be crucial for everyone concerned.

 

Yup, I do appreciate the coincidence. It is just that though. Perhaps one of my future blogs about CFC well help dispell any suspicions. Meantime, lets hope we all get more info on the takeover in the coming days, and I will of course update the blog should any info come my way.