Whyte gets ever more mysterious

Yesterday, Darrell King published his much “Heralded” interview with Rangers’ owner, Craig Whyte. Strangely devoid of quotes, King appears to be paraphrasing Whyte’s words. Quite what Whyte is afraid of is not clear, but that does not matter much. What did strike me as important is following paragraph:
“Contrary to a report elsewhere this week, no form has been signed that would allow season-ticket money to be used as a guarantee against any future loans; indeed, the form lodged at Companies House by RFCG last month does the opposite: it prevents season-ticket money from being used for that purpose.”

(Darrell: if you are reading this, you made a mistake.  The MG05s was actually filed by The Rangers Football Club plc, the football club, and not its parent company, The Rangers FC Group Ltd). Readers of this blog will recall the MG05s filed by Rangers at Companies House on the 26th of May.  This document created no small measure of debate and confusion.  Taken literally, this document said that all of Rangers assets had been released from the protection of the floating-charge except the “Released Assets”.  The “Released Assets” were defined as the proceeds from 100,339 season ticket sales over the next four years (averaging 25,000 per season).  The bizarre wording of the document struck readers of this blog at the time and we debated this subject at length: what did it mean?  Everything is released from the charge except the Released Assets?  It sounds illogical.

Of course, it is not illogical in law if you provide a definition of “Released Assets”.  Everything is released except (whatever we say is not released, even if we call the items not to be released “Released Assets”!)  It starts to make sense if you think about it.  However, this interpretation seemed a bit contorted.  Why would Whyte release all of Rangers’ assets except a very specific number of tickets from the protection of the floating charge?

A recap on floating charges and insolvency law:
When a bank (or other lender) provides a loan to a business, it will secure its own interests by attaching either a fixed-charge or a floating-charge on the assets of the business.  In a fixed-charge, specific assets are named and the bank could just take possession of these assets in the event of a failure to repay the loan or interest on schedule.  With a floating-charge, assets covered by the “charge” would be sold until it has been repaid in full.  In Scotland, holders of floating-charges that pre-date 15th September 2003, have some additional rights in insolvency of great relevance to Rangers and the tax case.  Holders of such floating-charges are able to call for the appointment of a Receiver, responsible only to themselves who can sell off the secured assets to a new company.  Rangers’ debt to Lloyds Banking Group  (Bank of Scotland) was secured by a floating charge dating back to 1999, and therefore covered by the old receivership laws. 

By purchasing this debt from Lloyds, all of the contractual privileges survive.  Whyte had the option of simply telling HMRC where to go if Rangers lost the tax case and buying all of Rangers’ assets worth keeping.  This would be a really clever use of law.  (I will leave others to pontificate over the ethics and morality of such actions, but I was impressed by the ‘checkmate’ nature of the manouvre).

The apparent release of all of the assets (except the proceeds from 100,339 season ticket sales) made no sense.  So, we speculated that what in fact was intended was the opposite: that the MG05s was just a mangled document that would be corrected.  That all of the assets remained protected by the floating-charge and that the tickets had been released from the floating charge for some other reason- presumably to finance a loan?  That the same Bristol-based firm that filed previous MG05s for Ticketus had prepared this document for Rangers does seem to add weight to this argument.  (The Daily Record seems to have read this blog and decided that this was in fact the case.  At least they did for a couple of hours until Whyte’s PR goons had the article pulled).

However, if Darrell King’s article accurately portrays Whyte’s words and understanding of the MG05s filing, he appears to have given up his greatest defence in the event of losing the tax case.  So the mysteries surrounding Mr. Whyte continue.

Scenarios that could explain this situation:

A) Screw-up:  Has a lawyer simply made a “balls-up”?  It does happen more than many would believe.  Are Rangers assets no longer protected from the tax man?

B) More deception:  The absence of quotes from King’s article on Saturday could be significant: to make the article deniable later?

C) Other:  I will be interested to hear other hypotheses for this strange set of facts.

Mr. Whyte’s thoughts on this blog:

In his interview with Scotland on Sunday published today, Whyte is asked about this blog:

“I’m aware of a website that has dedicated itself to talking about our tax
case,” said Whyte of a site that claims to be in the know about Rangers’
financial affairs and regularly predicts a new kind of Armageddon for the club.
“I’ve looked at it. What they’re saying is 99 per cent crap”

Care to comment on the 1% truth Mr. Whyte?  If 99% is so “crap”, it should be easy to pick examples?

Then there was this quote: “The tribunal only starts in November so it will likely be concluded around  March-time. Of course, there will probably be a series of appeals after that.  This could go on for years yet.”  
Dear oh dear, Mr. Whyte!  You have a mountain of correspondence on your desk that tells you that this is not true.  The First Tier Tribunal (Rangers’ appeal against tax assessments received months earlier) started in October 2010.  It adjourned after two weeks.  It restarted in April 2011 and after three more weeks, it still could not be concluded.  So, Rangers outstanding tax issues have been scheduled for November 2011.

Perhaps Mr. Whyte could do better by the supporters of his club by making full disclosures that actually make sense.  Nothing would remove the cloud of suspicion and innuendo from his period as Rangers’ owner faster than coherent statements that tell us how he will deal with an adverse outcome from the tax case.  I would think that anyone who can say so much but avoid making any sensible comment on the single biggest threat affecting his club is the one who is uttering “99 per cent crap”. 

Rangers’ Circular Released

Craig Whyte has released the long awaited shareholder circular providing an explanation of his company’s takeover of the club.  The original document can be found here:

http://www.rangers.co.uk/staticFiles/4d/76/0,,5~161357,00.pdf

Some initial points:

The club’s debt has NOT been cleared:
As was reported on this blog, the statements made previously about clearing the club’s debt were misleading. What has transpired is that The Rangers FC Group Ltd (TRFCG Ltd), Rangers’ owners, have promised to waive the debt purchased from Lloyds if Rangers have managed to avoid insolvency in a period of 90 days after the tax case has concluded. In plain English, if Rangers win the tax case, Whyte will write off the debt (converting it to shares). If Rangers lose their ‘appeal’, then TRFCG Ltd will be protected by its guarantees over Rangers’ fixed assets. Note Whyte’s word ‘appeal’– so much for the claims that it is just an investigation and that there are no tax bills!

Fixed assets not intended to be sold:
“nor is it the intention of The Rangers FC Group to redeploy any of the fixed assets of the Club;”  However, as we have been discussing, this does not include season ticket sales.  This seems to be a confirmation of our interpretation of the MG05s filing last week.  Rangers’ future  season tickets revenues can be sold for cash now.

No schedule for promises of investment:
While the document is very specific about the timeline for when the debt would have to be written off, it is conspicuously vague about the timeline for any investment in the team & in repairs to Ibrox. Such additional investments, should they be made prior to the conditions for writing off the debt (i.e. before the tax case is resolved), will be added to Rangers’ debt and would be protected by the floating charge on Rangers’ remaining assets. (i.e. everything except a large chunk of season ticket revenues over the next four years).

Unequivocal declaration of ownership and 3rd party interests:
The document says that TRFCG Ltd is wholly owned by Liberty Capital, which is in turn wholly owned by Craig Whyte. It amounts to a denial that there are any mysterious backers – either as shareholders or as holders of formal loan notes or guarantees. (However, speculation can be expected over whether any 3rd parties need such formalities to make an agreement).

This is a quick summary of what struck me immediately. Without doubt, we will parse this document and find more to discuss and debate.

Reflections on Craig Whyte’s Obsessive Secrecy

Let me just say thank you to the contributors to this board.

The work by readers of this blog on the previous thread (New Rangers Mystery) has been fantastic.  A complex problem involving contradictory data was posed and I am increasingly confident that through our discussions, we have gone a long way towards figuring out what is happening regarding Rangers’ financial structure. (See below).

In particular, Don Dionisio & JohnBhoy deserve special mentions for their finds and their contributions to the analysis.  [Great work is also being done on some messageboards as well.  We all stand on the shoulders of giants when trying to tackle a problem like this.]  As always, our resident Rangers supporters keep us grounded by challenging every assumption and providing alternative hypotheses that fit the data.  Their patience in dealing with what can be a pretty overt desire to see their club fall into a quagmire is commendable.  Their reward in co-operating on here is that we all get a clearer picture of what is happening than if this board was an exclusively Celtic fan operation.  What might be mere schadenfreude for Celtic fans will be a source of considerable discomfort to those who want the best for Rangers.  To be able to acknowledge that there are real concerns and questions takes no small measure of character- even on a blog. Lest our friends in Edinburgh accuse us of Glaswegian myopia, easyJambo is also providing high quality informed opinion and analysis.  Thank you to every one.  There are so many others who deserve mentions, but I will spread my gratitude over a number of posts.  This blog is certainly exceeding my wildest hopes for what might be achieved.  The ‘wisdom of a crowd’ is certainly at work in this case.  Our collective output is of a higher standard than any one person can produce working in isolation.

In the information vacuum, I see a role for this blog in uncovering the facts.  It does not matter if the truth is favourable or damning for Rangers (or Celtic for that matter).  We should not be afraid to follow the data to its logical conclusion.  Given the heavy media manipulation operation of recent months and the spineless, brainless reporting of the Scottish media, it is left to interested hobbyists to uncover what is being deliberately obscured.

Follow up to the MG05s Document released:

Despite a poorly (or deceptively) written MG05s document that disclosed the release of assets from a floating-charge, it looks like Rangers are preparing the ground for a credit facility worth about £30-35m .  Such a credit line would be secured by a large percentage of Rangers’ season ticket revenues over the next four seasons.  My personal suspicion is that the credit line would be in place to cover an adverse finding in the current First Tier Tribunal process (with the possibility of using some of it for squad enhancements).  While such an approach would saddle Rangers with a very large debt burden, and would drain much of the blood supply that sustains any football club, such a strategy at least allows Rangers to live and to fight another day.  At a club that would likely have gone bankrupt had it not managed to play in the Champions’ League group stages three years in a row, who is to say that they cannot continue this streak?  Few would have given short odds on Rangers winning the SPL thrice in succession three years ago.  Yet, no discussion of Rangers just now would be complete without mentioning probability and gambling.  Unless one of Craig Whyte’s backers antes up cash to make borrowing unnecessary, the club’s viability depends upon many random variables.  Two more Champions’ League group rounds in a row and the club will have traded itself into a safe position pretty much regardless of what else happens.  However, if Rangers lose their appeal against the tax bills in their possession, and if Rangers fail to qualify for the Champions’ League in the next two seasons, it is hard to see how the club can operate at its current scale if it has surrendered close to 70% of the revenue from its season ticket sales for the next four years.  Of course, if the club wins its tax appeal, then there would be no need to draw so heavily on debt.

It is hard to understand Craig Whyte’s motivations for obsessive secrecy and determination to avoid admitting to the serious risks facing Rangers.  This story could be spun in his favour easily.  OK- so some ‘whyte lies’ were leaked during the takeover to the media.  Even an admission that some tough decisions had to be made to ensure that the ownership transfer took place would be understood by most.  By playing the role of “Honest Craig” now and levelling with the fans, a store of goodwill and trust could be built up.  This would be essential in the event that a public share offering is part of the plan to deal with such a debt burden.  Every day that goes by where Whyte fails to make good on apparent promises and continues to prefer nuanced wordplay over plain speaking, he undermines the trust that will be required if fans are to be asked to dig deep in the future.  The failure of Sir David Murray’s last share issue can be largely attributed to the suspicion of Murray that had developed among the club’s better heeled supporters in the years following Y2K.  The flim-flam and absurd PR placements might temporarily assuage the ordinary FollowFollower, but real confidence in the club’s ownership will be built on the opinions of the accountants, lawyers, and other professionals within the fan base.  Until those who are able to understand a credible business plan are convinced that Whyte is being open, word of mouth will ensure that a cloud will remain over his stewardship.

New Rangers Mystery: Is a deal in the works?

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:

Bank of Scotland (Lloyds) still holds floating charge against Rangers

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.

Rangers’ tax case: outcomes and scenarios

My thanks again to the many great contributors to this board. It is said that politics makes for strange bedfellows and it appears that this blog has brought an unusual array of interests together. Information sharing, fact checking, and the inevitable rumour mongering is going into high-gear while as diverse a cast of characters as could be imagined collaborate on piecing together the mysteries surrounding Craig Whyte’s ownership of Rangers FC. If the enemy of my enemy is my friend, someone has managed to make a lot of enemies in a very short time.

In today’s post, I will try to stimulate some discussion on likely end-games to the tax case and what that would mean for Rangers. By definition, this cannot be anything more than informed speculation, so I welcome alternative views and scenarios from all readers.

There are three broad types of outcome from Rangers’ appeal of the assessments from HMRC:

1. Complete win for Rangers: no payments on the assessments
2. Complete win for HMRC: Rangers face bills of £36m immediately with £18-24m in penalties to follow
3. Some midway point where tax is due but Rangers have managed to get the amounts reduced- let us suggest to £18m

For simplicity of analysis we will ignore possibility 3. that there would be some intermediate level bill. It would take a book to go through all of the permutations for this, but until we know more about how the tribunal has gone, we will not know how applicable this might be.

Option 1: Rangers get a complete win

Obviously, this would be great news for everyone attached to Rangers FC. Craig Whyte’s company could sell its shares which it acquired for £1 for a price anywhere between £5 and £10m. Even if the reported £700k in legal and PR costs during the takeover process are true, this would still be a tremendous return. With UK gilts yielding about 2.5% this year, any investment that could provide an APR return of over 1000% would be worth having a small stake flutter. Whyte would have the option of retaining the £18m bank debt on his own books and charging a commercial interest rate. Or it could be sold to another banker for par value (£18m). Rangers would still have to deal with the fundamental problems that lead them to the nadir in the first place: the ‘benefactor’ model for football club ownership is not sustainable. Everyone will eventually tire of pumping cash in without any prospect of a payoff. However, if Rangers were to end up with an owner who at least balances revenue and outgoings, the club would be stable and in a relatively healthy position compared with many others in Scotland and around Europe.

Option 2: HMRC have their bills for underpayment and interest of £36m confirmed, with £12-18m in penalties to follow.
I am going to discount the possibility that Craig Whyte and his partners are really so naive or so stupid that they really believe that there is no risk of this happening. (It is the perception that the new owners are trying to mislead Rangers fans that is at the heart of the growing disquiet among the club’s more sentient supporters.) Whyte’s team will have gone into this venture with their eyes open and will have a strategy for dealing with this outcome. Whether it is a smart strategy will remain to be seen, but I believe that they will have one. We can look at a few of these possible approaches to dealing with such a monumental problem:

a) Fathomless Wealth:

If Whyte and his backers are men of fathomless wealth who are willing to pay any price for the personal honour of being custodians of their beloved club, then simply paying the bills would be an option. Nothing in the available public records indicates that Whyte would have even a fraction of the wealth required to do this. If the rumours of James Mortimer’s involvement are true, does he have that kind of wealth? He will have accumulated a considerable fortune over a career at the top of the nightlife business in the West of Scotland that has spanned about 25 years. However, does he have the kind of wealth that would allow you to spend about £80m before you have even bought a single player? Are there other mystery backers? We do not know, but it seems unlikely that any group would be willing to have this amount of cash tied up to just retain control of their beloved football club. Certainly, it would not be a business decision to bail Rangers out of trouble as such an amount could never be recovered.

b) Liquidation:

As we have presented on here several times, by being assigned Rangers’ debt to the Bank of Scotland/Lloyds, Whyte’s group will have retained Lloyds’ security interest (floating charge) in Rangers’ assets. If HMRC decide to be difficult, Whyte’s only way to enforce these rights would be via liquidation of Rangers FC. Could a group of lifelong Rangers fans really do this to their club? If forced to liquidate, a receiver would sell Rangers assets to the highest bidder and pay Whyte & partners off with the proceeds. Whyte & partners would likely recover all of their £18m debt from Rangers.

c) Make A Deal:

It is known that the previous Rangers’ board made two offers to HMRC to settle the tax case. These were rejected. If Rangers are hit with bills totalling £54-60m, and no one is fronting the cash to pay them, insolvency becomes inevitable. Yet, given its unsecured creditor status, HMRC is unlikely to receive much, if anything, from the liquidation of Rangers FC. From a narrow financial perspective, HMRC should accept a settlement offer of almost anything. Whyte & partners cannot (rationally) offer much as they would find their investment marooned by having over-invested in a business that would never be able to produce a sensible return on invested capital. Balancing this impetus to settle is HMRC’s need to ‘save face’.

HMRC has in recent years faced considerable public criticism for perceived weakness in the face of large corporations disputing massive tax bills. In particular, Dave Hartnett, the Permanent Secretary for Tax, has faced public ridicule and media innuendo over claims that he “caved in” on the £6 billion tax dispute with Vodaphone and agreed a sweetheart deal for investment banking giant, Goldman Sachs. Famously labelled “Whitehall’s most wined and dined mandarin” by The Daily Telegraph last year, Hartnett was also in the firing line over the PAYE fiasco that saw many millions of tax payers face claw-backs from HMRC. These public disasters have captured a greater public mindshare than the larger number of enforcement successes.

In the face of early hints of tax troubles ahead for Rangers, the conventional wisdom amongst radio talking-heads and the man in the street was that “they will just do a deal for pennies on the pound. They always do in the end.” The widespread perception that “taxes are for little people” and previous public disasters may limit HMRC’s room for manoeuvre. In a time of fiscal difficulty for the country, anything that provides an encouragement to businessmen to engage in (yet to be declared illegal) tax avoidance schemes or conscious tax fraud in the belief that they can agree to pay a smaller amount in a decade’s time will not be good for revenue collection. Certainly within Scotland, HMRC’s credibility could be said to depend upon how the Rangers case is handled.

Assuming that Rangers’ lose their appeal of the tax assessments in their possession, Rangers’ future appears to be in the hands of Whitehall mandarins. The continuity of the football club incorporated in 1873 would depend on whether HMRC looks at the low probability of receiving much from Rangers or agrees to accept whatever crumbs Whyte and his friends decide to throw its way. If HMRC feel that a deal could damage the public sense that it is best to pay to taxes, in-full and on-time, the public display of the metaphorical corpse of The Rangers Football Club plc could follow swiftly thereafter.