A Debt-Free Future for the Bluebirds?

In his recent statement on Cardiff City’s official website, major shareholder Tan Sri Vincent Tan outlined his financial commitment to the club. He said: “To date, I have invested a total of £40.8 million, which comprises of £34.8 million in loans and £6 million in equity.” 

Tan continued: “Going forward, Cardiff City is expecting a cash injection in the amount of £35 million to meet its financial obligations from now until May 2013, including a substantial amount for squad strengthening within budgets. Of this amount, £10 million has been earmarked to settle the long-standing Langston debt, which if accepted by Langston will go a long way to cleaning up the balance sheet of the club. This further £35 million cash injection, coupled with my earlier investment of £40.8 million, will add up to a very sizeable £75.8 million invested in the club. 

“In addition to this, we have budgeted £10 million for new Premier League standard training facilities and £12 million to increase the stadium capacity to 35,000 seats. Add this further capital expenditure and our investment in Cardiff City will have ballooned to £97.8 million. With a contingency provision of another £2.2 million, our total investment will reach £100 million.” 

The club’s recent radical re-branding exercise has been reluctantly accepted by many fans in the belief that the club could soon be debt-free as a result of Tan’s investment. The £34.8 million in loans he has already given the Bluebirds are attracting interest at a rate of 7% per annum according to the latest set of accounts, but Chief Executive Alan Whiteley has strongly suggested that the Malaysian business magnate will convert his debts into equity once the Langston issue has finally been resolved. 

Whiteley recently told the South Wales Echo: “Vincent Tan’s money is in as debt at the moment. He has, though, made a statement that if Langston come to the party and sign up in terms of the offer we have made to them, he will start to look at restructuring the balance sheet to put the club in an even better position. That would be a debt to equity conversion.” 

Something didn’t seem quite right when I read Tan Sri Vincent Tan’s statement last week, but it wasn’t until this afternoon that I was able to put my finger on exactly what was bothering me. Tan said he has invested £6 million in the club in the form of equity, whereas I had been convinced that the figure was £11 million. That’s because I was one of the attendees at the General Meeting of shareholders which took place at the Cardiff City Stadium on 28 July 2011, a report of which can be found on this blog. 

Fortunately, I still have all of the relevant paperwork from that particular meeting in my possession. In his notice to the shareholders, Chairman Dato’ Chan Tien Ghee clearly stated that the following debt to equity conversions were set to take place: 

£2,850,000 owed to PMG Estates Ltd would immediately be converted into 18,164,436 new ordinary shares at a subscription price of 15.69p per share. 

£500,000 owed to director Michael Isaac would immediately be converted into 3,186,743 new ordinary shares at a subscription price of 15.69p per share. 

£400,000 owed to director Steve Borley’s company CMB Engineering would be converted into 2,549,395 new ordinary shares at 15.69p per share. 

£5,089,441 owed to Vincent Tan and his fellow Malaysian investors would be converted into 32,437,482 new ordinary shares at 15.69p per share. 

Documents filed at Companies House in October 2011 indicate that the debt to equity conversions involving Michael Isaac and Steve Borley went ahead as planned. However, the latest set of accounts, which were published in March 2012, reveal the PMG debt to equity conversion did not take place because the club defaulted on repayments to Paul Guy’s company, thereby rendering the amended loan agreement void. 

No mention is made in the accounts of the Malaysian investors’ proposed £5 million debt to equity conversion, but share returns filed at Companies House in October 2011 suggest it didn’t happen and Tan Sri Vincent Tan’s recent website statement appears to confirm as much. 

According to the latest paperwork which is publicly available, 101,079,418 of the new ordinary shares created by the May 2010 and July 2011 share issues have now been allotted, which leaves a balance of 263,577,301 shares. At the current share subscription price of 15.69p, the unallocated equities are worth approximately £41.3 million. 

Tan Sri Vincent Tan last week stated that he is currently owed £34.8 million by the club. The £10 million allegedly earmarked to clear the Langston debt would take that figure to £44.8 million, which is £3.5 million higher than the total value of the shares presently available for allotment. If my calculations are correct, it seems certain that another share issue and another General Meeting will be required in the near future in order for these debts to be converted into equity, let alone the additional debts that will arise from next season’s running costs, the new training centre and the planned stadium expansion. 

Bear in mind that the loans from the overseas investors are currently racking up interest at a rate of 7% per annum, although the accounts state that the lenders have the right to convert any amounts outstanding, including accrued interest, into equity at any time. To put that interest figure into perspective, the failure by the Malaysians to convert the £5 million debt outlined in the July 2011 shareholders’ circular into equity has cost City an additional £350,000 during the last twelve months, while the annual interest on the £14.8 million they loaned the club during the 2010/11 season amounts to more than £1 million. 

Given the fact that the Langston issue is still dragging on and considering the alarming operating losses the club is continuing to make, I cannot see any way in which Cardiff City will be even remotely close to debt-free in the near future. Many Bluebirds fans have accepted and even embraced the re-branding exercise because they believe the club’s financial situation will improve dramatically as a result of it, but I have a feeling they are going to be disappointed, at least in the short term. I sincerely hope I’m wrong about that, but the evidence in the public domain is less than encouraging.