New Rangers Mystery: Is a deal in the works?
05/06/2011 404 Comments
A reader of this blog, and a few other Scottish football websites, have in recent days let us know about a new filing from The Rangers Football Club plc on the Companies House website. The document filed is called an MG05s and, in this instance, it is being used to record the release of part of Rangers’ assets from the floating charge which Lloyds (through its subsidiary, The Bank of Scotland) holds over the club. This blog post will try to cut through the fog of terminology and legalese to explain what is going on. Finally, we shall discuss the questions raised by this new information. If we are lucky, the hand-picked journalists allowed to speak to Craig Whyte might be better prepared to ask him the relevant questions that would allow Rangers’ new owner to clear things up for the benefit of the club’s other shareholders and season ticket holders. (If you are new to this blog, the previous sentence is dripping with irony).
We have covered the assignment of Rangers’ debt to the new parent company on a few occasions, but it is clear that this subject continues to confuse. We will try to explain this again, and the new MG05s document provides additional information that might help clarify things. Let us start with the basics again, and we will build a common understanding of the facts. (Forgive the university lecture format of this post, but the standard newspaper format of presenting the conclusions first and leaving the details and explanations to the end would create more confusion in this case).
The clearest explanation we have received on the structure of Whyte’s takeover of Rangers came in the form of the statement released by Rangers’ “Independent Board Committee” (IBC) that represented the old board members who did not have a potential conflict of interest in reviewing Whyte’s offer. Clearly, the IBC had some concerns, but significantly said: “Wavetower is purchasing MHL’s 85% shareholding in the Club for £1 and the Club’s indebtedness with LBG is to be assigned to Wavetower“. Note that it did not say that Wavetower had paid off or cleared this debt. The word assigned, as a legal term, has very specific implications. It means that the benefits of an existing contract have been transferred to a new party. The existing contract remains unchanged. In Rangers’ case, this means that they are still obligated to pay £18m to Lloyds (i.e. The Bank of Scotland). Lloyds in turn are obligated to pass that money received from Rangers for this debt to the new parent company, “The Rangers FC Group Ltd” (previously known as Wavetower). How much the new parent company paid Lloyds for this assignation is not known. As others have pointed out, it is common in the distressed debt business that a motivated seller who does not want to be exposed to certain risks to sell debt contracts at a significant discount. On Rangers’ books, it will be Lloyds (i.e. The Bank of Scotland) who remain listed as the creditor for this liability. It is Lloyds that will continue to hold a security interest over Rangers’ assets. What has happened is that Lloyds have promised that all of the proceeds received on this debt are passed to The Rangers FC Group Ltd, Whyte’s vehicle for owning Rangers, the football club.
Why so complicated? As mentioned before, if the Lloyds debt was cleared and new debt issued (as might be normal) prior to Rangers filing for insolvency as a result of losing its appeal of the tax bills, HMRC and other unsecured creditors would be able to make a claim that the new secured debt was a sham transaction created to shield assets from creditors. Such a construct could open civil and criminal claims against Rangers’ new owners. Wisely, they have left the old obligations intact. By leaving the existing contracts in place, but selling the benefits of the contracts to Whyte & his partners, Lloyds’ priority remains in place and almost impossible to challenge.
So why am I explaining this again? The answer lies in the MG05s form released by Rangers. The full document can be viewed here. In the extract below we can see a few interesting things:
This document confirms that Rangers’ contractual obligations to Lloyds (The Bank of Scotland) remain intact- as we would expect from an assignation (or as it is known in English Law, an assignment). If the debt contract had been novated (the alternative method of bringing a 3rd party into the arrangement, the old contract would have been annulled and a new contract created. Companies House would have to post the details for any new security interest in favour of Whyte’s firm. No such filing has been posted.
This is as much proof as we will ever get, or that we need, for how the sale of Rangers was structured. Rangers’ debt has not been cleared as Craig Whyte was reported to have erroneously claimed on Rangers TV. It also reveals that all of Rangers’ assets had been pledged in support of the bank debt. This would mean that all assets would/could be sold in administration to repay the bank (now Whyte’s firm). HMRC would not be entitled to a penny until Whyte & his partners received the £18m in full.
This much we could (and did) make educated guesses about before the release of this document. What is both interesting and perplexing about this document is that it reports that a large part of Rangers’ revenue streams for the future have been removed from the floating charge. [A floating charge is a type of legal promise of priority of repayment. Unlike a fixed charge which would be applied to specific named assets- like a particular building, a floating charge is general in nature and just takes money from the sale of any of the pledged assets if a company has become insolvent].
Whyte & his partners have now excluded the money received from 23,154 – 27,017 season tickets for the next four seasons from the floating charge. Assuming an average ticket price of £500, this would amount to just over £50 million. (If someone can advise a better average season ticket price, let me know. This seems to be another of Rangers’ many secrets).
By removing this money from the floating charge, this money can be considered to have been “ring-fenced” for another purpose. The question is: which other purpose?
Is a deal on the tax case afoot? Giving up £50 million over the next four seasons would be an intense headwind for any football club to compete against.
There will doubtless be other possibilities, but at the moment I cannot think of them. In the face of a series of tax bills (including penalties) that currently total £54 million, and overwhelming evidence against Rangers, the floating charge is the parent company’s only protection against other creditors including HMRC. Promising this money to anyone else, for any other purpose this close to the tax assessments crystallising, carries a serious risk that it will just end up being divided up amongst the unsecured creditors. Any attempts to create a new security interest around this revenue stream could be challenged and reversed in court as a contrivance.
Given the efforts to which Whyte & his partners have gone to preserve the protection afforded by the security interest attached to the bank debt, it is certainly a surprising move that they would carve out more than half of the club’s season ticket revenues for the next four years out from that protection. I am very interested in hearing informed suggestions as to what else could explain this move.