: Thu Jul 09, 2009 8:17 pm
Sadfish wrote:
debentures are directors loans changed into shares in the club.
This means that its even more in the best interests of the big debenture holders to ensure the club goes from strength to strength.
debentures are medium to long term usually, those who have converted
loans will undoubtadly be with us for some time!
No they are not. Paul Youane above is pretty well spot on.
Debentures are loans (i.e debt) secured on the assets of the company. Usually but not always with a fixed future repayment date and an interest "coupon" (rate). There is usually a formal debenture agreement, similar to a mortgage, to cover the rights and obligations of all parties, including what happens in the event of default. Bank overdrafts and loans are secured by debenture, and larger companies issue debt instruments to the market secured by debenture. Where debentures are issued to investors directly, there is usually a trust deed and trustee appointed to look after the interests of the debenture holders. In the case of sports clubs, you tend to find that debentures may have no fixed repayment date - or its a very long way in the future - and carry no interest coupon.
Anyway, from the press report, it appears two things happened:
1. Directors' (I presume mainly McManus, but have not seen the accounts) loans of £1.35m were converted into shares.
2. A further £0.4m of new shares were issued.
Maybe I can add a bit of general background, which may expand on what the guy above said and possibly help some more? Making some assumptions - and if I had hold of the latest published accounts I could be more specific and accurate:
Item 1: NO new cash will have come into the club. What happened is that £1.35m of debt - money that the club owed creditors, in this case directors - was converted into shares. Shares are at the bottom of the pecking order when it comes to distributing the assets of the company in a winding-up. They rank behind ALL the creditors.
Where a company is technically insolvent - its liabilities exceed its assets - then it will have difficulty borrowing money or obtaining trade credit, and indeed can only continue if key creditors - usually lenders to the company - continue to support it and do not require their loans repaying. This is often the case with sport clubs which can only survive because of the generosity of a rich owner.
In such cases, the lenders - the directors - often recognise the reality of the situation, which is that they will not get their money back, and so convert the loans into shares. This paper exercise at a stroke writes off the loans, and probably eliminates the technical insolvency, and locks in the directors' money probably until the club is finally wound up. The big big losers are of course the directors, but they will in reality have already taken the hit on the loans which were never likely to be repaid.
Quite a bit more to it than that, but I've tried to simplify it.
Item 2 WILL be new money. Item 1 amounted to a financial reconstruction, and in your case I assume may have eliminated a technical insolvency (but have not seen the accounts so I am assuming). If the club WAS technically insolvent before that (or if it had only modest net assets) then the existing shares would have been pretty worthless and attracting new share investment would be very difficult. Indeed, anyone putting money in would usually require a disproportionate degree of control. But once you have written off debt and issued new shares in place of debt, then issuing further new shares becomes a more practicable option for the club - and the new investors too.
My guess is that for the club to be able to borrow money commercially for the new stadium, prospective lenders required a much stronger balance sheet and clearance of existing debt. Their loans will presumably be secured on the new stadium. Maybe your club will seek to issue debentures to supporters (i.e. get supporters to lend money to the club long-term, secured on the club assets) like many soccer clubs do. Would be a brilliant move if they did.
Sorry, that's probably all pretty boring. But to sum up from what I am guessing, most of what has been announced is probably financial engineering to strengthen what was probably a very weak balance sheet, to enable the club to obtain funding for the new stadium. The directors are recognising the realities of the situation, and the club will be much less in debt that before. Good news for you guys, and good for you that you have directors with deep pockets prepared to sink so much into the club.
If you compare, say, with a club like Bradford - no such rich owners, and what directors' loans there were were repaid in full out of the Odsal settlement cash. So, unlike you guys and most other clubs, Bulls have not been "in debt" for years - despite the nonsense to the contrary some folk spouted. But without a rich owner, they are also unlikely ever to be able to compete again with clubs like yours who have. Money is everything, and you guys are very fortunate in having a rich owner who is also a very capable businessman at the helm.
