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.

The deceptive Craig Whyte

“Deceptive”:  adjective   Giving an appearance or impression different from the true one; misleading.

Whyte has released a statement on the official Rangers website dismissing the calls for “vigilance” from outgoing directors as just sour grapes from men replaced for resisting change.  His statement includes the following:
I believe most Rangers supporters understand that, as a result of the takeover, the Club’s debt to the Lloyds Banking Group has been cleared and I have repeatedly stated to the Board my intentions to invest in the team.”
This statement is nothing short of a clear attempt to mislead Rangers supporters.  It is a craftily worded statement (Hay McKerron must be exhausted) that amounts to an attempt to deceive his paying customers.  Craig Whyte does not say that Rangers FC’s debt has been reduced.  He did not say this because he cannot say this.  He cannot say this because it is not true.  As this blog has stated several times, the debt that Rangers owed Lloyds banking Group was purchased by Whyte’s Wavetower company (as it was then named) in a transaction that did not involve Rangers.  The purchase of MIH’s shares in Rangers FC by Whyte’s firm for a single pound was a separate transaction.  So Rangers do not owe Lloyds this money any more, but they owe the same amount to someone else: Whyte’s company.
Prove me wrong, Mr. Whyte.  Make a fool of me.  Discredit this blog by revealing the structure of Rangers’ debt today.  It is a plc and it does have 26,000 other shareholders who have a right to know the amount of indebtedness of the company they co-own with you.
The truth is that Rangers’ debt is about £28m (including negative working capital).  The takeover did not change Rangers debt, but Whyte is trying to imply otherwise.  Whyte is shaping up to make Sir David Murray look like a model of transparency and straight-talking.
Rangers supporters and journalists should note what Whyte did not mention.  Whyte ignored the “circular” that he is alleged to have promised to the Independent Board Committee (a sub-committee of the old Rangers board that reviewed the takeover proposal).  Alastair Johnston says that this was originally promised to be released on 16 May, but is now scheduled for 6 June.  This “circular” is supposed to reveal the how Whyte plans to fund Rangers going forward (the £25m investment promised).  Perhaps Whyte is just practicing ‘dignified silence’ on this subject?  Perhaps this is simply a subject that he does not want to discuss publicly in advance of a result in the tax case?

Whyte of the long knives

The news that Alastair Johnston and Paul Murray have been removed from the Rangers’ board, swiftly followed by reports that Martin Bain and Donald McIntyre have been suspended pending an inquiry into financial irregularities, is somehow still stunning despite its predictability.  What makes these events remarkable is the lack of decorum.  Whyte was always going to form his own board.  In fact, I have been surprised that he has waited this long.  (Some have suggested some legal i-dotting and t-crossing was required before Whyte could act).  However, following most takeovers, the changing of the guard usually proceeds without much of a fuss or fanfare.  The rules for how to remove board members varies from company to company, but the mechanics for a new owner to place his own directors on the board should be straightforward.  When you own 85% of the company, you can have the directors of your choice.  (Dave King’s board seat may be guaranteed by previous contracts related to his original investment).  It is the style of this “night of the long knives” that marks a stunning departure for Rangers (or at least a leap back to pre-David Murray times).

This blog has nodded and winked at the extent of wrong-doing by prominent members of the Rangers board.  I know for a fact that the actions of some board members would shock even those who has been following the financial fate of Rangers FC closely.  At some point this was always going to explode.   However, there are more questions than answers about Whyte’s motivations in acting now and in this manner.

Has Whyte had a sudden epiphany after getting access to the ‘real’ behind the scenes information? Contrary to popular myth ‘due diligence’ does not guarantee that a potential buyer gets access to all of the information he requests.  The seller always has the right to simply withhold any data of his choice.  The only obligation of the seller is to not tell outright lies about the prospects for the firm.

Alternatively, is this just a stage-managed event to portray the previous board as the villains who will be responsible for any failure to deliver on promises leaked to the media during the long takeover process?

Are Martin Bain and Donald McIntyre under investigation for EBT-related activities or is this a separate issue altogether?  I can say that the EBT-related activities of board members was not some rogue action secretly executed by one or two individuals.  To a fault, board members over-communicated what they were doing.  If today’s news is EBT-related, then I would be ready to declare these dramatic moves as a smokescreen to distract from other actions.  Every Rangers FC board member since 2001 will have been aware of the EBT.  I know of five who definitely had detailed involvement in its operation.  Two of these directors remain on the board.

We cannot ignore the fact that as executive directors, Bain and McIntyre will be on significant salaries and will likely have some job security through multi-year contracts.  Such contracts can only be terminated for ’cause’.  Such cause has to be very serious for terminations to be upheld, but if a case can be made that shows the executive to be untrustworthy, the terminations will stick.  This could all just simply be a pretext to fire two highly paid people without having to pay them for the remainder of their contracts.

The refusal of Alastair Johnston and Paul Murray to resign is a further sign of their deep misgivings about the new Rangers ownership.  That Johnston broke with the standard cover story about ‘confidence’ over the tax case to express concerns that Whyte had shown no proof of having the funds to pay such a bill would have made his removal inevitable.  That Paul Murray broke ranks to try to organise an alternative financing program to thwart Whyte’s advances will also have marked his cards.  However, this is just standard corporate politics and normally defeated directors in a hostile takeover fall on their swords. This is inevitable when 85% of the shares are held by one shareholder.  That both Johnston and Murray have tried to make as big of a splash on their departures as possible can be interpreted as a warning.  I am bound by a promise of confidentiality to a source of information, but I know that Johnston and Murray would have solid reasons (not tax case related) to want to send a warning to the Rangers support at-large.

It will be interesting to see how willing and/or able these four directors will be to speak to the media (old and new).  Even if gag-agreements are in place leaks happen in the normal course of events.  The challenge will be for the Scottish media to publish their comments.  Most Scottish media outlets will want to continue dining on the easy meals of succulent lamb fed from Ibrox.  Journalists whose salaries depend on getting their quota of transfer exclusives and interviews with players will fear retribution for printing anything not approved by the new politburo.  However, I suspect that Hay McKerron will be busier than they ever imagined in the coming weeks.

 

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