Southampton convert Loans to shares (1 Viewer)

Interesting report on the BBC. Southamptons owners have converted £33m loans into shares - thereby removing the possibility of the club having to repay the loans, reducing the risk, changing the balance sheet of the company for the better.

http://www.bbc.co.uk/sport/0/football/17547804

Something that SISU could learn from perhaps ?

the people who loaned the money own the shares in CCFC already. SISU dont own anything at CCFC nor are they creditors they are agents for their investors who are the creditors and owners of CCFC.

I am more worried by people having £30m of loans they can ask to be repaid than owning £30m of shares they cant ask to be repaid

Rob is quite right the prospects for return are different but the mechanics and reasons why are exactly the same.

Read the first line of the article DH.

Then just one question ...... what piece of paper do you (or your estate) need to have, to own a company you have lent £33m to ..... which would allow you later to convert loans into something else without changing the ownership?

The rest DH you can go figure out as to why it isnt so different to our situation, but the clues are in the question. Wouldnt like to offend or patronise you further :facepalm:

DH - Sky Blue said:

My point is nothing to do with the likelihood of return based on league position.

I'm guessing the reason Southampton and Markus Liebherr have come to this agreement is because from Southamptons point of view it gives a stronger net assets figure and Liebherr is speculating that as a shareholder, his profit ratio > annual loan repayments received?

My point being, from you suggesting 'SISU learn from this' you are suggesting the loan (£30m?) be turned into more shares of rough equivalent value ala Southampton. In our case though these people are already shareholders, in Southamptons it was not?

This isn't me stating facts, it's me asking questions based on a very small knowledge of a subject that i can't quite match to your point, so im interested to know why from your more knowledgeable view (no sarcasm!)

Your initial response seemed to be verging on the metaphorical equivalent of say a 5 year old child asking a teacher about the complex hatching method of a duck, and the teacher replying "a duck says quack"

Click to expand...

OK I will take it as asking questions ....

Leibherr's estate has decided they will convert the loan to shares. Mr Leibherr died owning the shares of Southampton which are now controlled by the trustees of his estate. Mr Liebherr's estate (or was it Liebherr himself) it seems lent the money to Southampton to the tune of £33m. That loan has been now been converted into shares instead. My understanding is that Liebherr owned 100% of the shares which became part of his estate on death, he or his estate was owed £33m which was converted into shares, thereby maintaining the same 100% ownership.

The effect of calling it shares is .....

before making the loan shares say Herr Liebherr owned £1m shares. (i dont have a copy of Southamptons accounts so this just illustrative) the balance sheet could have looked like this (have simplified it just to make it clearer)

Assets 10m
Liabilities 40m (of which 33m is loans)
net liabilities -30m

represented by
shares 1m
Reserves -31m
net shareholders deficit -30m

big liabilities shares have no value not much likelihood of getting loan back

after converting 33m to shares the balance sheet would look like this

Assets 10m
liabilities 7m
net assets 3m

represented by
shares 34m
reserves -31m

net share holders funds 3m

no longer big liabilities and share have a value (not much admittedly but it is there)

Southampton are making significant losses. Just like we have. That situation is very similar to the situation at CCFC.

There are 2 shareholders at CCFC - the fund operated by SISU for their investors and Mr Brody. SISU could negotiate with Brody to either accept a smaller % of ownership, put in or convert a proportionately similar amout to keep the ratio of ownership the same or they could buy his shares. They could then convert loan to shares. That would, like above, leave shares with some worth but lots of them rather than a few shares with no worth because of big loans.

While there are negative reserves shareholders can take no income or share of profits. Nor can they withdraw the cash value of the shares they converted - the money is locked in. If it were a loan then in theory they could charge interest or demand repayment in full or part. There is a greater risk to the club if it is left as loans rather than converted to shares

In our situation everyone knows that there is no way SISU investors get any of their loan back any time soon, if ever. What converting to shares does is to immediately discount the value of the loan to a share value that is equivalent to the sum of all the other assets and liabilities (excl the loan). But in terms of financing or saleability the club be it Southampton or CCFC becomes more attractive, a better risk, gets a better rating from the FL or Premiership. However in effect the owners have lost nothing because they couldnt get the full loan back anyway. If the club becomes successful then they could see a premium on the discounted share value should they sell it. If they left it as a loan and charged interest to get a return all they would do is increase the losses, make the club less attractive and probably increase the debts

There may be very good reasons that SISU dont do it but it has to be worth considering. However the two clubs are not all that different in structure.

Southampton are not the only club to have done this. Chelsea did something similar about 2 years ago for instance.

hope that helps

to my mind it is a choice between what drives the ownership of the club

is it getting the return out of the investment at the earliest time for the benefit of the investors - in which case you leave it as a loan

or is it an empathy for the club and safe guarding its future with the hope of success and return on investment much later - in which case loan conversion is a definite option