The Hearts Share Issue – Risk Factors Galore – One For the Die-Hards Only?

Who would have thought that Hearts would beat Rangers to offering shares in the club to its fans? At this stage let’s ignore the club/company issue. What I want to focus on is the section issued by Hearts detailing “Risk Factors”. It can be found here.

No one can accuse Hearts of “soft soaping” the fans. The Risk Factors are spelt out most starkly. It will be interesting to see the contract with the Rangers Prospectus when it is issued.

Clearly the two organisations are very different, in terms of debt, fan base, finances and reliance on third parties.

Many of the Risks associated with Hearts will not apply to Rangers and vice-versa. However it does give a template for things to be looked at.

General Warning

The statement makes clear that acquisition of shares “involves a significant degree of risk”. It states that “specifically in the context of an equity investment in a Scottish football club in the current economic climate and last reported net debt of £24 million you should not expect any income from or return on your investment”.

It continues:-

“You should not acquire shares in the company unless you are capable of evaluating the risks and merits of such investment and have sufficient resources to bear the loss of all the money invested by you.”

It then states:-

“The Directors are committed to strategies that are intended to deliver long term value but there is no guarantee that those strategies will succeed.”

It is quite clear therefore that there ought to be no expectation whatsoever of any financial return from investment in Hearts shares, nor even a speculative one. Therefore it would seem to be the case that this one is not targeted at institutional investors, unlike that of Rangers. This one is for the Hearts die-hards only, it seems.

Specific Risks Factors – Negative Balance Sheet

The company’s Balance Sheet is negative and the company would be insolvent without the ongoing support of Mr Romanov’s bank, as owner, or alternative funding.

That statement alone is enough to establish that normal loan funding from the banks, other than UBIG, is not available. Even in easier economic times, telling a lender that you are insolvent was unlikely to achieve an offer of loan!

Hearts state that there is no guarantee UBIG will continue to support Hearts in the future. The Board is comforted by UBIG having supported the club since 2006 by funding and debt re-structuring.

However, past performance is no guarantee of future performance, as we well know.

Specific Risks Factors – Trading Activities

The share value depends largely on how Hearts perform on the field of play. In addition changed in the economy are stated as matters which can substantially and adversely affect the company’s prospects.

Specific Risks Factors – No Market for Sale of Shares

The document makes clear that there is no market or dealing arrangement, so anyone who does buy shares will have problems selling them or even to obtain information about their value.

As it states:-

“Investors may realise less than their original investment and have a significant risk of losing all of their investment.”

There is no guarantee of an “exit route” as it may be difficult or indeed impossible to sell the shares acquired.

Specific Risks Factors – No Dividends

In light of the financial circumstances of the company, the Directors have no intention of declaring a dividend for the foreseeable future. Therefore, as there is no income from the shares, and no easy way of selling them to achieve value, they can only be a sentimental purchase.

Specific Risks Factors – Debt to UBIG

As at June 2011 the debt owed to UBIG stood at £22,413,000. Interest accrues on that at 4.5%. That means an annual interest bill of just over £1 million, or £20,000 per week, each and every week of the year.

Although UBIG has confirmed that it will not seek repayment of the dent in season 2012-2013, the position is to be reviewed on 1st July 2013.

As it makes clear, if UBIG demanded full payment, then the company would be insolvent and would face liquidation. As the assets are all secured by a Standard Security and a floating charge, both in favour of UBIG, there would be no value in administration. If UBIG calls up the debt, Hearts cease to exist (subject of course to the Trigger’s Broom analysis applied to Rangers).

Bearing in mind the apparent volatility of Mr Romanov, as expressed in his various public announcements, Hearts can never really be sure of their position. To be fair, any club which was indebted to a bank, and which was insolvent but for the bank’s support, would be concerned for its future.

The chill winds of the economic decline have affected every financial institution. Banks want their money back!

Specific Risks Factors – HMRC

This is the most note-worthy of the factors mentioned, I think, and especially so in light of the travails of Rangers.

There is a “significant ongoing dispute with HMRC. The tax man has claimed unpaid tax liabilities of around £1.75 million, excluding interest and penalties from Hearts. This relates to “arrangements between Hearts and Kaunas FC in relation to certain players who were loaned to Hearts by Kaunas.

The directors are robustly defending the claims, we are advised.

There is a clear recognition however that “the burden of proof is on the Company and the tax will be payable unless the Company is successful in challenging the claims, which will be heard by the relevant tax tribunal in November 2012”.

I do not recall as simple and clear a statement being made by Rangers, whether under the stewardship of Sir David Murray, Craig Whyte or Duff and Phelps. However it is quite clear, and is the same as happened with Rangers – assessments were made. The taxpayer refused to accept them and appealed. At the appeal it is for the taxpayer to establish the tax is not due, and not for HMRC to establish that it is.

I will write later about the specifics of this issue as regards SPL and SFA regulations, but for now would observe that it is unlikely that this matter will take as long as the Rangers Tax Case to be decided!

However, even with a hearing ending in November, a decision might not come till the summer, depending on the complexity of the case and the length of the evidence and submissions. Equally though, there could be a decision in December or January.

When interest and penalties are added, it is possible that the liability could exceed £3 million, depending on the precise circumstances.

Specific Risks Factors – Possible Need for Further Debt Capitalisation

UBIG have made clear that they are willing, over time, to consider allowing the club’s supporters to attain majority ownership of Hearts. This share offer is seen as a first step on the road, but there is no commitment made by UBIG that the process would continue nor any commitment to transferring ownership.

However it is made clear that further share offers may be required to capitalise the debt owed to UBIG, thus diluting the ownership of non-UBIG shareholders. As long as UBIG holds 75% or more of the shares, it is in position to force through resolutions effecting such further debt capitalisation.

So, even buying shares in this offer with a view, ultimately, to achieving a majority stake is not in any way guaranteed.

Specific Risks Factors – UBIG Control

The statement makes clear that UBIG, being owners and not directors, owe no legal duty to the company and are entitled to act entirely in its own self-interest.

The directors take comfort from the support extended since 2006, but as is made clear this is not unconditional and is not a long-term commitment.

Specific Risks Factors – Working Capital Shortfall

The plan for the share issue is to raise sufficient funds to ensure that the working capital requirements of Hearts are met till the end of season 2012-2013.

However, if the HMRC case goes against Hearts, or the offer is under-subscribed, then there will be insufficient funds to meet the working capital requirements and, as the statement says, they will need to seek additional funding.

It is likely that any such funding would be very expensive, being the equivalent of a payday loan.

Otherwise Hearts fans can look forward to even more of the star players being sold in the January transfer window, and the problem with having raised the share issue and the stark choices now is that it makes it a buyer’s market. Purchasing clubs will know that Hearts need to sell. This will affect what they can get, as will the requirement to be paid as much up-front as possible.

One wonders if the remaining instalment of Lee Wallace’s transfer fee has been paid by Rangers, and if not, whether the astute Mr Green might offer payment now, with a substantial discount for early settlement. After all, Rangers have over £10 million in the bank, based on his comments about season ticket money not having been spent yet. If the sum still due is £800,000, then offering, say, £400,000 now would likely meet with Hearts’ approval.


The Risk section of the statement ends with a section in bold making clear that investors should be prepared to sustain a total loss of their investment.

There is no possibility that anyone could later say that they were misled as to the prospects of the shares.

What is being offered are shares in a company where the buyer’s holding can be diluted without their approval; where there is no market for the shares; where there is no prospect of a dividend; where the company is effectively insolvent and therefore the shares are worthless the minute the buyer writes a cheque for them.

I suppose this might raise more money than passing round buckets at matches to collect cash, but how much more?

Hearts are seeking less than £2 million to cover the working capital shortfall. Bearing in mind that Rangers, in SFL3, boast of having cut the wage bill to £6 million, this shows clearly how, even in restricted circumstances, the Ibrox team is still a financial giant, at least in Scottish football terms.

Some Rangers fans would delight in thinking that it was their demotion which has caused this black hole in Hearts’ accounts – I suspect that is s systemic problem, caused by various factors, including the down-turn.

Of course the share issue comes just before the Tax Appeal. If it goes against Hearts, then all the funds raised, and the same amount again, could be needed to meet the bill.

HMRC has already, and repeatedly, had to take action against Hearts for delayed payment. This suggests that there is likely to be little leeway given to them. Are we therefore looking at a share issue which might have to be paid in its entirety to HMRC, with a further share issue seeking twice as much to pay the balance and fill the working capital shortfall?

It is a clear indication of the challenges facing Scottish football financially. Is it worse than before – not when there have been a string of SPL teams entering administration over recent years.

Will Hearts make it to the end of the season? Probably.

Will Hearts ever pay off the debt to UBIG? With interest running at £1 million per year, that seems very unlikely.

The Hearts experiment by Mr Romanov proves yet again that, to end up with a small fortune by owning a football team, you need to start with a large fortune! Still Fergus McCann is the only person in Scottish football history in recent years, and possibly ever, who has disproved that adage.

Posted by Paul McConville


NB None of the above should be taken as a recommendation to buy or not to buy these shares. Anyone intending to purchase shares in Hearts should seek independent financial advice from a suitable investment adviser.


Filed under Football, Hearts

33 responses to “The Hearts Share Issue – Risk Factors Galore – One For the Die-Hards Only?

  1. easyJambo

    As a contrast with Sevco/TRFC, the Hearts prospectus is refreshingly frank. However as you point out, it is really an emotional appeal to fans to support it the share offer.

    My fear is that Vlad is using it as a test of resolve on the part of the fans. If they come up with the required sums then he will carry on supporting the club, at least until the next cashflow crisis.. If it is not supported, then Vlad may turn round and say, “I tried my best, but if you as fans can’t support the club in their hour of need then I don’t see why I should continue to subsidise the club”.

    Administration would likely follow, most certainly in the event of the tax case loss. Vlad would cut his losses by selling up to get back as much as he can from the value of the assets (Tynecastle). HMRC would be marginalised as they would have less than 25% of the debt and would be unable to block a CVA.

    Hearts is a basket case in terms of its debt and there is no way they will ever be able to pay it off. The share offer effectively values the club at £17.9M which is a ridiculous sum when you consider the level of debt.

    I’m afraid that my emotional ties aren’t strong enough to put in good money after bad, so on this occasion, I’m out.

    • Jono

      A refreshingly frank prospective, and a refreshing frank and realistic view on the practicalities of the situation from a Fan!

      Let your awareness be a lesson to others!

      On a machiavelian bent…..if the share issue is successful, might that draw certain other club owners to draw comparison on market value of a debt laden club to one which is debt free? Just a thought!

      And a favour easyJambo, what value was put on any assets (ground etc)

    • Thomas

      Fair play to you, and good luck.

  2. spurtle

    Reblogged this on spurtle and commented:
    “What is being offered are shares in a company where the buyer’s holding can be diluted without their approval; where there is no market for the shares; where there is no prospect of a dividend; where the company is effectively insolvent and therefore the shares are worthless the minute the buyer writes a cheque for them.”

  3. Thomas

    £24M debt, jeez, never thought it was that much!
    My gut feel given that we’re all skint, if HMRC want £3M from UBIG, Hearts fans pay it or its a ‘firesale’ players, land the lot.
    Not good.

  4. Paul.
    I posted this on The Scottish Football Monitor regarding Hearts-:

    100bjd says:
    Thursday, October 25, 2012 at 16:29
    6 1 i

    Rate This

    Not The Huddle Malcontent says:
    Thursday, October 25, 2012 at 15:02
    0 0 i

    Rate This

    torrejohnbhoy says:
    Thursday, October 25, 2012 at 14:52

    Jamie Borthwick ‏@jamiekborthwick

    Hearts fans offered chance to buy 10% of the club in bid to raise £1.79m


    “Every pound raised by supporters, after costs, will be reinvested into the club and we expect that this will be a popular offer.

    sounds familiar!!!! LOL

    don’t really know the hearts financial situation, i know they are in HUGE debt compared to their turnover, and i know that they were paying huge wages based on turnover (but i think that has been reigned in)

    It’s an interesting one as it is different but yet similar to the Sevco share offer.

    most startling similarity is the need to raise money to pay running costs. For me, that would be a huge no no/warning sign

    Also, Vlad has put a lot of his cash into hearts and has little likelihood of a return, so is he selling his shares to get some of that back – or will it actually go into the club. (much like our thoughts with regards to the sevco consortium)

    Is vlad going to write off the money owed to him? or is there another plan to repay it to him – would hearts fans be happy to pay over money to him simply to reduce the debts to him?

    be interesting to hear the jambos thoughts on this – they will understand their situation much better than i do, so i’m keen to hear your thoughts

    So Hearts are now worth £17.9 m. In november last year they were worth £50m according to the bold Vlad so let me see…………Lets start with a quick comment on the latest accounts 2011. 2010 figures in brackets

    Turnover down from last year £6.9m (£7.9m)
    Operating loss £6.6m (£6.9m)
    Debt forgiveness by Vlad ! ££8.8m (£5.9m)

    Losing as much as it is turning over

    Fixed Assets £16.28m (£18.70m)
    Creditors less than 1 year £29.61m (£15.33m)
    Creditors more than 1 year £1.70m (£25.7m)

    Looks like Vlad has put his debt on demand

    So looks like negative asset value circa £14m

    And now some interesting notes to the accounts

    1 No need to worry about tax losses as “it is not clear that suitable taxable profits will be available in future…………………………ok

    2 Tynecastle development is not viable……..

    3 Vlad converted £10m of his debt into equity at 10p per share………..he wants 11p this week

    So a minority shareholding in Hearts is not looking a good investment in my opinion. Operating profit never likely, negative assets, no development potential. Sorry all you Hearts boys out there but this is a basket case without Vlad. Probably best to wait until Vlad runs out of cash and press the reset button…………………I am sure that lovely Mr Grier from Duff and Phelps could help…….himself

  5. Salt'n'sauce

    You have to respect the honesty in the document. It’s an appeal for help in a time of crisis. If they get through to the end of the season and manage to get rid of the higher earners then maybe, just maybe they can keep within budget for future years. That’s got to be the hope and that’s what will attract supporters on this occasion. 200 quid for a worthless piece of paper seems extravagant but at least we will have a team to support until the end if the season with the prospect of more years to come. As the club also makes clear; all other avenues of revenue have been exhausted so it’s put up or shut up time. I’ve blown 300 quid on an unused gym membership in xmas’ past so I’ll have no pains in giving my team some money this time around. But in future? If they are planning on moving us little by little towards a greater share of ownership without ever allowing us to gain a controlling interest then who do they think they are fooling? And there is NO prospect of Hearts fans ever gaining a say in club matters whilst Romanov is around.

    Oh well, at least the club is open about it and isn’t trying to raise cash by deceit. Merry Christmas Everybody!

  6. Robert D Bruce


    Thanks again for taking the time to read through some of this dry stuff and provide your readers with expert comment and opinion on it.

    Hearts situation looks to be dire and I appreciate that very few if any Jambo’s will be willing, or able for that matter, to sink their hard earned money into a sinking ship.

    This statement says it all.

    “However, if the HMRC case goes against Hearts, or the offer is under-subscribed, then there will be insufficient funds to meet the working capital requirements and, as the statement says, they will need to seek additional funding.”

    “It is likely that any such funding would be very expensive, being the equivalent of a payday loan.”

    Pay Day loans are exactly what Hearts require every 15th of the month at present.

    It looks likely from the comments in the share issue document that there is no way back for Hearts unless they take the SEVCO 5089 route.

    But can they they do what Rangers did?

    It’s unlikely because the debt is not going to be written off because Vlad and UBIG are not going to do what Murray did at Rangers and sell the assets for

  7. Marching on Together

    Perhaps they could merge with Hibs?

    Runs and hides……..


    Speaking of Hearts, remember when Vlad was ridiculed by the MSM, when he said Hearts will would win the Champions League?

    Well yesterday, the CEO of a new Scottish Club, currently playing in Division 3, said he’ll be staying in his job, until the Club wins the Champions League. But guess what? No ridicule, what so ever. Maybe they’ll start slating it tommorow…

  9. ecojon

    I feel for Hearts fans as, like Rangers fans, there is no way investing makes any sense in financial terms. It is purely an emotional decision but how much time will it actually buy?

    And would it be better waiting for melt-down and investing it what follows when debt is cleared with all the ordinary creditors being hammered yet again. I see the comment that ‘Tynecastle development is not viable’ and wonder if this means that the property assets could be purchased for a reasonable sum.

    It is at times like this that I remember just what an amazing guy that Wee Fergus was as a human being as well as being an ace businessman. But there ain’t many like him about.

    • Marching on Together

      That did not stop many in the crowd booing Fergus the day he unveiled the Premier League flag at Celtic Park.

      • ecojon

        @ Marching on Together

        I think that perhaps the wee man’s clamp-down on certain sections of the Celtic support brought about the demo you mention.

        Time has now passed and I would think a lot of Celtic fans who booed Fergus that day have realised by now what they might have got instead.

        I also know that a lot of Fergus critics have changed their minds over the years but of course a lot of them have grown older and become more mature and understand that having the liberty to sing songs, that many fellow fans find distasteful and irrelevant to Celtic as a Scottish football club, is no substitute to having no club to watch and no stadium to watch the Hoops in.

        And I have no intention in getting into any discussion with you on freedom of speech for the individual being more important that the wishes of the peer group majority. I know you position on that and you know mine.

        • Marching on Together

          I might have found the booing disgraceful, but I defend to the death their right to boo. 😉

          As for the cause of the booing, I was in the Jock Stein Stand that day, and to me it was far more to do with McCann’s perceived stinginess on paying popular players what they were demanding. A post from KerrydaleStreet earlier this years summed it up for me: “In the main I think people felt hard done to by him because they bought the media’s opinion of him. When the three amigos [Cadete, Di Canio, van Hooijdonk] were speaking to the press and holding the club to ransom this fitted with the stereotype that the press created about him, ie that he was the antithesis to Murray. This is the ultimate shame for those who booed him, that the bought the media’s portrait of fergus and acted accordingly. “

  10. dan

    No great lover of HMFC, but hope they get out of this as there are a lot worse than them. Talking of whom, the more often Chico sounds off about the true value of Sevco, it seems to me that gratuitous alienation could rear its lovely head. Could this be what the hoped for millions from the flotation is for? To pay what M’lord may consider a fairer price?


  12. ian lewis

    Not too many industries where you find a business with a negative balance sheet being valued at nearly £20million.Vlad tries to reduce the debt to nearer the value of the ground-puts the club into administration(by the way remember “there’s no problem we owe the money to ourselves”)-Tynecastle is sold -Edinburgh Council get together with the SRU and provide a joint stadium for Hearts and Edinburgh Rugby.Can you think of a better use of our Council Tax-if necessary we can limit emptying the buckets to once a month and close a few schools.

  13. Can’t believe nobody but no-one from nowheresville has even mentioned Eastern European money laundering …..hmmmmmmm

  14. Fraser

    Thanks for the analysis of the share document, but to be honest it was pretty clear what it was saying: “Give us your money or Hearts are rubber ducked.”

    What I was more interested in hearing was a legal view of the tax case. What HMRC seem to have decided is that Hearts were not entitled to have part of their loaned players’ wages paid in Lithuania by Kaunas. Since several players were signed for Kaunas and then immediately loaned to Hearts (and may never have played for Kaunas at all) it seems fair for HMRC to regard this as a tax dodge. The ownership of the two clubs was the same and the players were effectively employed 100% in the UK. No doubt the Lithuanian exchequer was grateful for tax income paid on employment in a foreign country, but you can see why HMRC weren’t so happy. However, what are the exact legalities around this, are there parallels with other international player loans, and what exactly does UK tax law say about ‘offshore’ earnings?

    • Fraser

      Though I suppose the obvious answer to my own question above is that the case wouldn’t have got to this point if HMRC didn’t have grounds to rule that paying the players in two different jurisdictions was not acceptable. Still, details would be nice.

    • K19

      I would remind the honourable gentleman that most of these players never played for Hearts either! Money laundering, tax-dodging, I don’t know but Hearts FC did not benefit from the efforts of 19 Lithuanian players, that’s for certain!

      • Fraser

        The strategy, as I recall, was to showcase lots of Lithuanian players and sell them on at a profit. Unfortunately Vlad kept appointing managers who had the temerity to pick their own teams instead of laying out the shop window. Tch. Managers! What do they think their job is?

  15. Thomas

    Will the SFA attempt to create ‘special rules’ for Hearts as they have now set a precident? Or are Hearts not ‘big’ enough? Perhaps the SFA doesn’t employ enough Hearts supporters to create ‘new’ rules.
    SFA should be investigated by an independant party, hand in yer badges you rotters!

    • Fraser

      Must be just a bit embarrassing for Campbell Ogilvie though, leaving not one but TWO tax scandals in his wake. Wonder if SFA employees are frantically revising their tax returns at this very moment?

      • K19

        Hate to keep picking you up on your posts, Fraser, but this is not (yet) a tax scandal. No laws have been broken nor any proof that attempts were made to break any laws. I also don’t think Campbell Ogilvie is necessarily tainted by association on this one. He should go for Sevco reasons.

        • Fraser

          Ok maybe scandal is a bit harsh here, but you get my point. It’s a dodge. And to say that no laws have been broken – well, HMRC clearly believe that Hearts have attempted to unfairly avoid paying tax on UK employees’ salaries. As Paul pointed out, HMRC have ruled and it is up to HMFC to try and prove otherwise.

  16. Dedrokstar

    So HMRC are pursuing this because they can and not because it is justified.They allowed RFC a long time to build up debts which were legitimitely recoverable. Now they pursue HMFC and no doubt more to come which the flimsiest of justification. Its seems that its not just the SFA &
    SPL who employee Rangers sympathisers in key positions.

    Just one issue with the article – the balance on Lee Wallace’s transfer is only £300k and becomes due in December 2012. It is therefore most unlikely that an early reduced payment would be accepted. If the £500k from June has not been paid yet it is legally recoverable in full with costs where appropriate.

    • Fraser

      Seriously? You think HMRC are full of RANGERS sympathisers? Or even that their actions are motivated by football team allegiances??


  17. Pingback: HMRC v Hearts – A New Winding Up Petition – Might Sink Share Issue…and the Club | Random Thoughts Re Scots Law by Paul McConville

  18. Tam O'Banter

    A wee word of warning for the green gloaters – no-one will miss Hearts more than hibs! (Half empty ground; losses for the last 2 years, no good players to sell, TF looking for a way out, etc.)

  19. Mark Robertson

    We Need to sell tynecastle !! use muaryfeild for a few years build pentland park bring jambos back to midlothian move on onwards and upwards

  20. Pingback: The Administration of Ukio Bankas and its Effect on Hearts | Random Thoughts Re Scots Law by Paul McConville

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