Rangers’ Administrators Want to Rescue the Club with a Share Issue – Why It Won’t Work

On Friday Lord Hodge issued his decision in the application by D&P for “Directions” in connection with their handling of the Rangers administration.

Put very simply (and with due respect to the 63 paragraphs of the decision), he decided:-

A             that any rights Ticketus hold in Ibrox Stadium, the season tickets for the stadium and the proceeds of future tickets sakes are personal contractual rights. This means that Ticketus can only enforce their agreement against Rangers Football Club PLC, and they would have no rights against any other party who acquired Ibrox Stadium for use as a football ground during the currency of the Ticketus agreement, which ends after season 2014-2015.

An excellent analysis of that aspect of the decision can be found here, and I commend it to my readers.

B             that he was not wiling, standing the information he had been given, to make any order or give any guidance to D&P permitting them to break the Ticketus contract with impunity.

 

D&P, as stated to the court, see two ways of achieving the purposes of administration. As you may recall, the primary goal is to rescue the company as a “going concern” which failing to achieve for the generality of creditors a better result through administration that through insolvent liquidation.

Their two ways of doing so are as follows: a share issue and sale of the majority stake in the company; or a sale of the assets of the business. In either case this would be accompanied by a CVA.

I will look at both in more detail now, with reference to the Ticketus scenario. (For fans of large thrillers, doesn’t “The Ticketus Scenario” sound like a Robert Ludlum title? I digress.)

 

The Share Issue Option

The Rangers Debt Situation

Rangers Football Club PLC is in a dreadful financial mess. It presently owes at least £9 million to HMRC in connection with unpaid taxes accruing since May 2011, as stated by counsel for D&P in the Court of Session. That figure may be as high as £15 million.

Rangers owe the Debenture holders who contributed some years ago to ground improvements around £8-9 million, the Debentures becoming due and payable upon the company entering administration.

Rangers owe HMRC in relation to the “Big Tax Case”. Whilst the case awaits a decision from the Tax Tribunal, HMRC cannot enforce payment, but they will move to do so as soon as they have a judgment. The determinations under appeal by Rangers date back to February 2008. The appeal was commenced in 2009. HMRC will have lodged a claim with D&P for the full sum it is seeking, together with interest and penalties. This liability was described by Craig Whyte as possibly running to £75 million!

Martin Bain, the former Chef Executive, has a damages claim due to be heard in court in July where he is seeking over £1 million in compensation.

Rangers FC Group Ltd, which appears to hold security in the form of a floating charge over Rangers’ assets claims to be a substantial creditor too, for many millions.

Rangers’ business model has resulted in it having an annual £10 million “black hole” in terms of excess of expenditure over income, if European income does not appear.

D&P have been able to cut £1 million per month from running costs by letting 4 employees leave, and by having the players take temporary pay cuts till the end of the season, at which time one imagines the players will want paid in full again.

The Ticketus deal means that 60% of Rangers’ season ticket income would go to that company and not to Rangers.

Let’s ignore for a minute the requirements that an ongoing Rangers needs to fulfil to play in the SPL next season, as I am sure that the SPL would exercise its discretion to allow them to compete even if deadlines were missed. (For the avoidance of doubt, I do not criticise that decision, should it be made. If the football authorities can act legitimately in a way which helps a member club, as long as this is not at the expense of other members, then this is consistent with the notion of a “league”).

However, UEFA will not, and ought not, to excuse the failure of Rangers to obtain a UEFA licence for next season. As Financial Fair Play is a key part of Michel Platini’s manifesto for UEFA, then it will not excuse Rangers owing tax, being in administration and failing to produce unaudited accounts. Therefore, for at least one season, the existing Rangers will not have any European income.

I am also ignoring, for this purpose, the ongoing SPL inquiry into the legitimacy of payments to Rangers players, and the penalties which could be imposed on the club in the event that guilt is established.

I am also assuming, for this purpose, that the SFA Judicial Panel investigating Rangers and Mr Whyte for bringing the game into disrepute will neither suspend nor terminate Rangers’ membership of the SFA.

So Where does that Leave Rangers at the Start of Next Season?

It would have a squad of players it could not afford. It would need to cut costs drastically. There would be no prospect of a credit line from any bank. Therefore, it would have to run on the income it generated. The Ticketus deal removes the majority of the season ticket income. And all of this has still not paid a penny to the outcome of the Big Tax Case.

To escape from administration in a positive way, D&P need funds to put into the pot for a CVA. Even ignoring the HMRC publicly declared policy which leads me to believe they would oppose all but the most generous CVA’s (and by that I mean something like a 90p in the pound deal – which is clearly not going to happen), I see no way in which the existing club can generate money to offer to creditors.

In fact even if the Ticketus deal had been unravelled by the court, it would not really help much. Whilst Rangers would get all of its season ticket revenue, it would just have increased the pool of creditors by in excess of £30 million, as Ticketus will look not just for return of its capital investment, but also for its profit, if Rangers breaches the contract.

We are looking at a pot of creditors exceeding £100 million.

How could Rangers raise a substantial sum? Remember this is existing “oldco” Rangers we are talking about.

Some people talk of a sale and lease back of the ground. That, in the present circumstances, would be a huge risk for a buyer. Ibrox’s value lies in it being used as a football stadium. If you are the landlord, you need a football team to play there. Could oldco fund a rental? If oldco disappears, what guarantees are there that a newco will be able to play there?

This also ignores potential court battles over the floating charge and the rights of creditors in security over the assets.

Therefore oldco Rangers needs many millions of pounds paid into the pot to survive. One or two investors, with huge bank balances, might do so, but generally such people do not get huge bank balances by paying off huge debts other people have run up!

This brings us, finally, to a share issue.

The last share issue for Rangers failed to generate public support. It seems that the fans viewed it not as a method of improving the club, but instead of paying off Sir David Murray’s debt.

How likely is it that a share issue in oldco Rangers would generate from the fans and business community the sums – £50 million, £60 million, £100 million – needed to solve the club’s problems?

How many Rangers fans would be willing to invest the large sums needed to pay off tax debt accrued by the Murray and Whyte regimes, together with the other bills due? This would be against the backcloth that the team would be drastically reduced in salary levels, if not necessarily quality, and for at least one year would have no prospect of European income. Paying huge sums to see Rangers survive, but with a massively weakened team, seems something only the most loyal and committed fans would sign up for (and I would compliment such fans for their dedication to the club they support). However, especially in the present economic climate, that is not going to happen in sufficient numbers.

Even if a share issue led to an acceptable CVA (which is highly unlikely) this would still leave Group ie Mr Whyte, owning a large number of shares, although diluted by the share issue. He would still be the largest shareholder.

Whilst D&P have made rumblings about Mr Whyte no in fact being the owner, due to irregularities in the purchase, then that too would require a long court action. Till then he is still there.

As some of the players seem to have had their contracts amended to include a clause entitling them to leave for no fee if Mr Whyte is still in charge, then D&P need to get rid of him too. This can only be achieved by liberal applications of large bags of money. Would Rangers fans be willing to subscribe to a share issue knowing that every penny paid in would go to paying off old debt and also to buying out Mr Whyte? I doubt it.

The other alternative with a share issue would be issuing sufficient new shares to a consortium looking to take over the club, to dilute Mr Whyte’s shareholding to a point where the new kids on the block take control. However, as that will have to raise money for the reasons mentioned above, I find it hard to see why anyone with business acumen, even if a Rangers fan through and through, would countenance this.

Therefore, as far as I can see, the share issue idea is a dead duck, and, at least as that suggestion is concerned, the Ticketus decision is irrelevant.

 

What Does the Lack of Prospects of Success of a Share Issue Mean for Oldco Rangers?

Put simply, oldco Rangers cannot survive.

The company is hopelessly insolvent, and probably would be so even if it was 100% successful in the Big Tax Case!

Any “normal” business in these financial straits would have slashed staff the minute the administrators came in, and would have been winding up very soon afterwards.

However, in this situation, the most readily realisable assets of the club are players. Therefore, if D&P work out that they can get the club to the summer transfer window and sell some players then, this will increase the pot for creditors. To do so they need continuing support of the fans turning up and paying for admission (although most coming to Ibrox will be doing so on season tickets D&P are honouring).

As an aside, it is clear that D&P honoured the season tickets, not out of generosity to the fans, but because of the Ticketus involvement. They could only dishonour season tickets sold by Rangers for Rangers, not those sold by Rangers for Ticketus, and the mayhem caused by refusing admittance to thousands of fans all over the ground would be a cost, in financial and bad PR, which D&P elected not to incur.

If Rangers cannot achieve a successful settlement with its creditors, it will be wound up. This can be done by a liquidator or by an administrator, depending on the circumstances. In either event, oldco Rangers will be no more.

 

NB – If financial wizards, or even sorcerers’ apprentices, can see how this analysis is wrong, then please feel free to comment.

 

Next post – How Does the Ticketus decision affect sale of the assets of Rangers – some good news for D&P

Posted by Paul McConville

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17 Comments

Filed under Administration, Bain v Rangers, Craig Whyte's Companies, Rangers, Ticketus

17 responses to “Rangers’ Administrators Want to Rescue the Club with a Share Issue – Why It Won’t Work

  1. Morning Paul
    Thank you for your analysis. I have two questions for you, if I may. I have long held the view that the HMRC claim lodged with the Admins would include the BTC element, i.e. assessments having been raised and rendered albeit now under appeal. Your piece is the first time I have seen that view endorsed. Ergo, presumably any CVA propsal would require to recognise the overall HMRC claim in full if the proposal was made oeior to

    • Pardon me, careless fingers

      ….prior to FTT decision being made. Agree?

      Secondly, and less importantly, why could the Admins not be able to decline to honour “ticketus’ ST’s when they could with the “RFC” tickets? I am struggling to see what difference the identity of the ST purchaser (i.e. Ticketus or Joe Punter) would make to the Admins. Incidentally, do punters know whether their ticket has been bought from Ticketus or RFC? Wouldn’t have thought so. From whom do they seek redress, therefore, if told they are no longer valid?
      With apologies for the inevitable typos. Damned phone!

      Iain

      • TheBlackKnight TBK

        Iain, I can only suggest that (cumulatively) Ticketus have a contract for a sizeable amount of future sales. Those who invested in 3year season tickets (I believe ran out in 2011) may be in a similar position if extended or renewed.

        Those who purchased individual year by year season tickets do not have a contract per se. (except for that season) Ticketus have a contract (consisting of circa 25,000 season books) until 2015.

  2. Gortlosk67

    Avoidance of liquidation would require so many things to go well for Rangers that the chances of them doing so are close to zero. As a non Rangers fan I’m now pondering what the future holds for the rest of Scottish football. The SFA SPL will bend over backwards to keep the income from Rangers fans and I can’t see them not being in the SPL as either a new oldco next year. This raises all kinds of questions concerning special treatment of member clubs. It’s not unlikely that several other SPL clubs might choose the liquidation route if they know that by doing so they can get rid of all their financial obligations and stay in the league as a Newco2 or Newco3. Where will this leave the integrity of the game and why would any invester want to put their money in Scottish football ever again.

    • shug

      Gortlosk,

      I’m not sure other clubs would choose or succeed in using the liquidation route if RFCIA get away with it. Any “RFC” newco would be considered a special case because of the financial strength their fans bring. No other club can boast this apart from Celtic. If Kilmarnock, for example, chose liquidation, I could forsee the other clubs telling them to go hang because they do not feel they their own finances depend on Kilmarnock being in the league.

      So it would be a highly risky proposition for the other clubs to follow, IMO. This is part of the reason I find any newco coming straight back into the SPL so disgusting: it really is only open to one club.

      • GiGi

        I agree. The GoT are wheeling and dealing with RFCia with no guarantee that RFC (old/new co) will exist next season. This whole sordid mess is likely to have them so embroiled in legal arguments that they may never be able to apply for a licence to play even in a local pub league.
        The GoT may think they are in a position of power but in fact, they will be in a position of total dependance on Celtic. If the GoT want a better ‘deal’ I suggest they speak ‘with’ Celtic rather than speak ‘about’ Celtic.

        An interesting little sideline to all of this… Many Celtic fans (& rumour has it Celtic themselves) have been eyeing off moving to our southern neighbourhood to play. If Scotland votes for true independance, where does that leave the notion of Scottish teams playing in England?
        Would FIFA countenance this?
        Are there any other clubs, anywhere in the world, playing in a league in a (politically) different nation? Voting for a truly independant Scotland may also mean killing off once and for all any notion of Celtic (or any other Scottish clubs) playing in England.

        Paul, it may be worth a word or 2 on the legal aspects of this (if you have time that is…).

  3. TheBlackKnight TBK

    Nicely set out as always Paul.

    I’m getting the feeling that there are going to be some very angry people in the coming weeks (if not today, sadly).

    I get the feeling David Murray is not the only one here being “duped”? (albeit I believe his faux claims will be over shadowed once the truth is out)

  4. TheBlackKnight TBK

    Nicely set out as always Paul.

    I’m getting the feeling that there are going to be some very angry people in the coming weeks (if not today, sadly).

    I get the feeling David Murray is not the only one here being “duped”? (albeit I believe his faux claims will be over shadowed once the truth is out)

    TBK

  5. TheBlackKnight TBK

    PS!
    can’t access RTC site 😦

    (wee sad / frustrated/ angry face)

  6. Derek

    Hi Paul
    Any “oldco” would also have to come up with a sizeable 7-figure payment to pay inevitable VAT and PAYE securities. Rangers would in all certainty see the first use of the new PAYE security legislation.

  7. Auldheid

    This link to a business case (posted on RTC before) reflects the considerations you have covered Paul and shows the kind of wage levels a Newco would be able to afford if run properly from their own earned income .

    https://docs.google.com/spreadsheet/ccc?key=0Aq2m3ggkEX2RdExpY2o1b1luZHFDWXU1VnIwVFJtS1E#gid=0

    Any repayment to Ticketus (assuming they bankrolled a Newco to keep football being played at Ibrox) can be added but even a 1% claw back (and 25,000 tickets = around 65% over four years) means a reduction in the wages on offer to stop the bottom line turning red.

    Lower wages would not matter so much with a Div3 start, in fact that is what would be best to allow a Newco time to prove it was worth getting a place at all in the top division. It would also allow them time to produce audited and ratified accounts in support of a licence application.

    These accounts are not just for effect, they tell the other clubs they stand a chance of actually being paid after playing Newco if they are allowed to participate..

    • I’m not forgetting for a moment that liquidation appears to be unavoidable for Rangers FC (currently in Administration), but leaving that aside for one moment and postulating the notion that some form of RFC is playing SPL football next season, a devious wheeze occurred to me.

      In terms of the assumption that Rangers must sell the first 25,000 season tickets each year for the benefit of Ticketus, I was wondering what might happen if Rangers supporters elected not to buy any season books at all next season and simply paid their way into each individual match.
      If the cost structure of the admission to individual games was such that there was little or no saving to be made by buying a season book anyway, the club would not only make it worth the supporters’ while to pay as they go but would presumably have all of the ticket revenue at their own disposal.
      With 25,000 season tickets lying unsold on the shelves and a stadium full of supporters, Rangers would simply be able to say to Ticketus, “The season books are for sale but nobody’s buying them. Bad luck, chaps. You win some, you lose some . . .”
      Is there some reason (apart from the sheer improbability of Rangers existing at all when next season begins) why this scheme wouldn’t be possible?

      • Without knowing the contract that is in place between ‘ticketus’ and any club that they are funding I would harbour a guess that the figures for repayment with either A) include a clause of sorts to cover this type of idea or B) be in reference to an average ticket sale rather than particular ‘season tickets’ so to speak.

        What do i mean by that? Well basically that the 25’000 season tickets is an average figure used to explain the amount of money that it will cost the club: not a deal in itself. I do not believe for a minute that a company such as ‘Ticketus’ would be stupid enough not to cover the base that you are suggesting.

        The idea is one that was passed among many Rangers fans sites a while ago i believe, but i do not harbour any thoughts of it being a possibility.

        I must add that this is only my opinion,i may be wrong, but i would be shocked if no security clause was in place for the system used by ‘Ticketus’. Otherwise it is a loophole that would be regularly exploited.

  8. Paul; in the section headed, “The Share Issue Option: The Rangers Debt Situation,” you wrote (in paragraph 10), “As Financial Fair Play is a key part of Michel Platini’s manifesto for UEFA, then it will not excuse Rangers owing tax, being in administration and failing to produce unaudited accounts.” Should that have been “audited accounts” rather than “unaudited”?

  9. Richboy

    Another great article Paul, much better than anything we are getting from the main stream media sycophants.

    I note, with concern for Scottish football, that you believe in the event of liquidation Newco Rangers would be allowed to play in the SPL next year. Do you truly feel that, with their image severely tarnished at present, the SPL/SFA could pull off such a bare faced stroke of hypocrisy? I would not put it past them but feel that it would result in such a maelstrom from the other clubs that they would be sucked ever further into chaos.

    Even though you have explained this tragedy in clear and precise terms I feel that there is something that is being kept out of view of the ordinary man. Perhaps Craig Whyte is in the wings waiting on a positive result from the FTT to appear at the final moment as a saviour with bags full of cash. Perhaps D&P are simply struggling through to the end of the season in order to collect SPL prize money and sell off all of the decent players. This extra cash not only enhances their reputation but allows them to collect fees for another couple of months. Something’s rotten in Ibrox.

  10. GiGi

    I think the big, big gotcha for rangers newco (which I believe to be inevitable) is that they will most certainly be oldco in everything but name. This will be a must for all their fans.
    Then Hector (and possibly others) will have them straight back into court as being the the oldco (ipso facto), demanding full payment of oldco debt by newco.

    This is the major problem for TFOD would be purchasers be they mega-millionaires or ordinary punters.
    To pacify the fans, they must appear to be oldco.
    To pacify HMRC (& others) they must appear to be anything other than oldco.

    The only true solution to this conundrum is to avoid liquidation and retain oldco. But, are any of the interested buyers willing to fork out the 100million+ to bail them out. Certainly the fans on the street haven’t go that kind of cash to burn.
    Even then, they still have the issue with double-contracts and all it’s repercussions. Here again the solution is newco.
    Here again oldco dressed up as newco will spend more time kicking papers round the courtroom than kicking balls/opposition-players on the park.

    Ticketus and CW aren’t going to just walk away either (ironically).

    Well done CW & SDM, you really have stitched up this bird good and proper!

    Note: “Something’s rotten in Ibrox.” I think the phrase should be “Everything’s rotten at Ibrox.’

  11. Pingback: Rangers & Ticketus – Part 2 – What Does Lord Hodge’s Decision Mean for a Newco Rangers? | Random Thoughts Re Scots Law by Paul McConville

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