The situation at MIH
MIH is a heavily indebted company. In itself, that is not necessarily a bad thing, but any company (or person) who needs to renegotiate borrowings in the current financial climate is not having an easy time. Now the last published accounts available for MIH are for the year ending January 2008. The figures to January 2009 are expected in November, and so the information available to outsiders is over 18 months old.
MIH debt at January 2008 was £773m, with £27m due for repayment (or renegotiation) by January 2009 - not a particular problem. However, £406m needs to be repaid, or more practically renegotiated, by January 2010 - less than six months away. Given that this is taking place against the background of a weak property market and a cautious banking sector, calling the renegotiations difficult would not be overstating the problems.
The situation at RFC
RFC has a term loan facility which stood at £21m in June 2008 and is being repaid at £1m a year, making it £20m in June 2009 and £19m in June 2010. In addition, it has an overdraft facility of £15m, which is reviewed every November. Now talk of the banks running Rangers is short of the mark, but if they are trying to reduce that overdraft limit or trying to change the repayment schedule of the term loan, then that will necessarily put constraints on the money that RFC can spend.
RFC debt at June 2008 was £21.5m, a figure which will no doubt have risen because of last season's lack of European money and the late August spending spree. But it should be well short of £35m, so where's the problem? Even if the total borrowing levels have not been reduced, the problem is that June probably represents the low point for debt in the year as the season ticket money has just been banked. This year the Champions League money has still to come, but wages and other expenses will be more than the weekly income and so debt will rise. This is what the £15m overdraft is there to cover.
In previous years, if the need for cash to pay the bills exceeded the overdraft limit, then MIH or a subsidiary would lend RFC the money in the short term. Last January's desperate attempts to offload a player may have been needed to cover the gap. In the end with Kris Boyd refusing to go, maybe MIH had to stump up reluctantly. If that's what did happen last year, then it doesn't look like it's happening this year. However, as Barrybaldy explained in some detail on the Follow Follow messageboard earlier this week, the banks now appear to be happy that the combination of sales and guaranteed Champions League money will restrict debt to a level they are comfortable with
What if MIH sells RFC?
MIH has already paid a price for underwriting the 2004 Rights Issue and ending up owning the majority of Rangers. Because it paid a price higher than the book value of RFC for the shares, it had to create £80m of "goodwill". In layman's terms goodwill represents the amount you have paid for a business over and above what the financial accounts say it is worth. By January 2008, £70m of that had been written off and it is likely that the other £10m will also have gone by now. The book value of RFC at June was still £79m although this has probably fallen in 2009. Unless MIH gets this value for its shares then it will have to write off further amounts. This represents over 70p a share compared with the current price of under 40p and the buyer would inherit all the debt. Bottom line is that unless someone values RFC around £100m - £79m plus the debt - then MIH will have to write off the difference.
So a buyer coming in for RFC would be good news for the club, but potentially bad news for MIH.
Related party transactions
In the past I have contrasted how much RFC paid to MIH for services with how much MIH paid to RFC for services. There was always an imbalance which I think peaked at around £4m going out of RFC and £0.4m coming back in. The total amounts have fallen way back, but the 2008 RFC accounts show an odd situation. At the end of June 2008, MIH owed RFC £286,000, up from £16,000 the year before - in fact, up by more than the £207,000 of services it bought. Meantime, the amounts owed by RFC to MIH, fell from £521,000 to £79,000 over the same period. It looks like RFC paid up front for everything it got and wiped out most of the outstanding balances, while MIH paid for nothing that RFC supplied it. An odd situation and one worth monitoring in the forthcoming accounts.
The Possible Conflicts
So to summarize, MIH is in a tough place and what's right for MIH may not be right for RFC. Specifically, there is little chance of RFC getting any loan facilities from the parent company - hence the transfer actions/inactions. Selling RFC for a realistic price, which would be good for the football club, does not solve any MIH problems - it could in fact make them worse. It appears that RFC is being encouraged to pay up front for any services it takes from MIH while RFC is not being paid by MIH. The forthcoming RFC accounts will tell us little, other than the new level of debt, and whether or not the overdraft facility has been reduced.
Apparently the decision for Sir David to step down was taken some time ago, but that does not rule out conflict as a reason, as these issues have not suddenly appeared. Given the relative sizes of the businesses, then MIH does warrant more time and you don't have them nasty fans to worry about. Every year when the MIH accounts come out, the Celtc-minded always come up with "He's doomed" articles. To date they've been wrong, and quite probably they still are. Following the fortunes of a private company is difficult at the best of times, and well nigh impossible for one as active as MIH. However, it is clear that in the current climate Sir David Murray needs to spend the bulk of his time with MIH.
Brock Stoker