Often Partisan

Loans, Debts and the Nightmare Scenario

Having been asked by a few people what the news from Friday evening means in context to Birmingham City I’ve decided to put together this post. As always, where I have stated something as a fact I’ll cite it with what sources I can and if something is my speculation/conjecture I will make it clear that it is so. I also ask that you take into account that I’m not a trained accountant and lawyer and what I have put together is based on what I have read, understood and deduced via what I believe is logical.

As you may know already from reading this blog, there was an announcement made to the HKSE on Friday stating that a company called China Water Industry Group were to initiate legal proceedings against Birmingham International Holdings due to non-payment of approx £3.5mil worth of loans.

However, the reason for the announcement wasn’t to confirm that they intended suing BIH. Buried on the fifth page of the announcement is an explanation as to why they had to make the announcement:

The Company failed to publish announcements in respect of the above loans pursuant to Chapter 14 of the Listing Rules because management had failed to appreciate that financial assistance constituted “transactions” under Chapter 14 of the Listing Rules.

It then goes on to say:

Each of the Directors has since attended training from an accredited course provider to enhance his/her knowledge of the Listing Rules and the roles and responsibilities of directors of listing companies. The company is also recruiting additional staff to its internal audit department. The Company has revised its internal control system relating to the finance management to enhance management control and introduce more stringent procedures to improve the existing internal control system. In particular, the Company has produced and implemented a manual on the provision of financial assistance to independent third parties on 1 May 2012 so as to reinforce the efficiency and effectiveness of the financial control of the Group. Internal training has been provided to the accounting staff of Group’s PRC operating subsidiaries to reinforce their understanding of the Group’s internal control requirements. Further, the Company has appointed an independent internal control auditor to conduct a thorough review of and make recommendations to improve the Company’s internal controls for compliance with the disclosure requirements under the Listing Rules.

If you simplify that down from the Jargonese it’s written in it boils down to China Water Industry Group having to retrain its execs, it’s audit department and it’s PRC subsidiaries in how to lend money legally – in short, they’ve been caught out doing something they shouldn’t have done and they’re now having to rectify that. If they hadn’t been caught out would we have found out about these loans?

It’s also worth noting that they lent Carson all this cash without any security. Why did they do this? This is announced on page 2:

The Board at the time approved the BIHL Loans by majority vote on the basis that the provision of financial assistance to BIHL and its subsidiaries (at the best lending rates) could strengthen the Group’s relationship with both BIHL group and its chairman and substantial shareholder, Mr. Yeung Ka Sing, Carson (“Mr. Yeung”). They perceived that with a closer relationship the Group could benefit from Mr. Yeung’s extensive business connections in the PRC, through which good investment opportunities in the PRC may be identified.

In short, they lent him the money because he was perceived to be a mover and a shaker, who could bring them better contacts to make more money.

Whilst that may seem a bit alien to us in the Western world, this is how Chinese business works. I’ve explained in the past that connections, contacts and face have a big meaning in the boardrooms of the Eastern business world and it’s not uncommon at all for a company to lend money to another company based on the perceived belief that it would help them better their contacts in the long run.

So what changed? Why are they now considering pursuing legal proceedings only now bearing in mind the loans are between seven and twelve months overdue? Again, I believe that this question can be answered via the same explanation as the previous paragraph – since Carson has been arrested, he’s no longer seen as a mover and a shaker. He’s lost a lot of face, and he’s probably a bit of a pariah. Thus it is now imperative to not be seen to do business with him – and as such China Water are hanging him out to dry.

What does this mean in the context of Birmingham City?

Well, this is the big question. For me, it’s all to do with those long overdue accounts from Birmingham International Holdings. In the last accounts available to us – the unaudited set for the six months to December 2010, BIH announced that they owed HK$124million (approx £10mil) in loans with HK$80million (approx £6.5mil) on demand and due within a year. This had risen in six months from HK$77.7 (approx £6.4mil) and HK$35.7mil (about £2.9mil) that they said that they owed in June 2010 – a massive increase in a short amount of time. What troubles me is these are the last figures we have.

We know that the figure of HK$124mil doesn’t include a HK$10.8mil (£800k) loan made by China Water in January 2011 mentioned in their announcement, nor the HK$50mil (about £4.12mil) Carson borrowed against his house, nor the HK$76.5mil (about £6.3mil) sold in convertible notes to Yang Yuezhou , nor the HK$80mil (about £6.5mil) lent to the company by Yang Yuezhou at the end of last August. If you add all those together, you get a figure approaching £28mil – which is arguably a bit more than BCFC are worth – and these are the loans we know about. How much is there that we don’t know about – and more importantly, how much of it is due to be repaid or overdue?

What worries me is the nightmare scenario. In the last BCFC accounts, released a month and a bit ago, it was confirmed that BCFC owe Carson/BIH £21.5million. Consider this:

BCFC –owes £21.5mil–>Carson Yeung/BIH –owes £xmil–> Creditors

I’m not sure if it could be done,  but is it possible Carson passes on his debts to BCFC in exchange for cancellation of the debt that BCFC owes him? It would effectively cut him out of the equation, leaving

BCFC —-owes a wad o’cash—-> Carson’s creditors

If that happened, BCFC would go from owing a significant amount of money to someone who is in no rush to get it back to owing a significant amount of money to people who want it now… and the only place BCFC would get that cash would be to sell players. As I said, it’s the nightmare scenario.

The logical thing to happen surely is for Carson to sell the club. However, I don’t think that following the most cause of action will necessarily happen. I’ve seen situations before where people in desperate financial trouble do silly things in the hope that it will get them out of the hole rather than cut their losses and lose something that they can’t afford to keep. There is the apocryphal story of the football club owner (I’m sorry, I can’t say who) who borrowed money from venture capitalists at what can only be described as wonga.com rates in a last-ditch bid to hold onto his club. As you can imagine, it ended badly – the owner lost a pile of cash and the club was hurt badly.

I’ve said all along that we need assurances from Carson or BIH that they’ve got plans in place to do something to solve their debt crisis; or that they plan to sell the club if they can’t afford to keep it. Their continued silence and the continued delay of their accounts is doing nothing but feeding paranoia and means I’ve had to spend a long time explaining something like this rather than delight in Blues scoring ten goals in two pre-season friendlies. I’m not normally a doom and gloom type but I am worried by this – and I can only hope that someone can push through a deal to buy the club before things really do go tits up.

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42 Responses to “Loans, Debts and the Nightmare Scenario”

  • Ainsley says:

    Do you think there is any chance Carson could use Blues to pay the debt?
    Because If we owe Carson, but he owes them, possibly, more money, then could it be an option?

    Thanks for another article explaining a lot, So many blues fans would be lost without you

  • BLUENOSE BINGOWINGS says:

    I would be very surprised if this was the case, as with Limited companies in this country, a company would go into liquidation and then pay off any debt owed by selling its assets. The company owns the assets, not an individual. Any alleged wrong doings done by the owners or directors of a company would mean they are personally responsible and not the company itself. If a take over was on the cards for a company they would buy the business and take over both its debt and assets, but realistically a potential buyer would only pay a bottom price to take over a troubled company, or wait until it folds and try and buy that asset alone.

    I could be wrong though.

  • BCFCnick says:

    that is some depressing reading after a night out getting hammered!

  • daddyblue says:

    I totally agree Bingowings, you can’t pass a personal debt onto a company but you could sell the company to whom you owe the debt and clear said debt. A brilliant piece of searching through the chinese maze O.P keep digging, Idon’t think we will ever get to the bottom of it. Our only hope is we are bought by British or American buisnesses and that is very unlikely. eventually we will go into adminerstration but when who knows, it is the only solution to clear this mess up sad but true Kro4ever

    • BLUENOSE BINGOWINGS says:

      It really is complex, I’m sure it must be approaching a point where its either going to go one way or the other, again great reporting and comment from OP.

    • Jay Sidney says:

      Almajir’s point about the need for Blues to be sold is certainly correct because the current ownership is a disgrace. However, to imply all American and British businesses are squeaky-clean is surely a little on the naive side…

  • Mike Hodder says:

    How does the arrangement with HSBC fit into this scenario?

  • Paul Carter - The Voice Of Reason says:

    I’m through worrying about things I can do fack all about, it got me down in the summer.

    Go positive.

    Have done all the friendlies and we’re looking OK.

    Just don’t fack us all over and start selling anyone now.

    KRO

  • an oldun says:

    I do not like so much of the comment ,in paricular the offensive use of language some of which
    seeks to avoid the spelling of specific words in the vain pretence that they are not using the
    precise expression The coment by t,t,t,attracts the respose ,that if you believe you have better
    knowledge, or information perhaps you will assist us all by indicating in exact terms
    what it is you know that justifys your insult to a supporter who has taken the trouble to seek
    to assist those of us who are concerned that the legal minefield of Hong Kong company law
    which could result in disastrous cosequences for football fans.. Perhaps the writer who is
    the subject of this comment will now set out in clear,precise and understanable language what
    information ,knowhow and expertise prompts this snide contribution

    • tarantini says:

      Perhaps the oldun can put down his quill and explain what he’s trying to say.
      PS It’s a blog, not the Economist

  • dodger says:

    Surely you cant pass on the debt from Carson to the water Co on to BCFC and what will the FA do if this does happen?
    KRO,

  • willvbcfc says:

    I thought we had an arrangement with HSBC, whereby they would protect BCFC’s assets from any sort of stripping, ensuring we’re still a viable business to invest in and increasing the chances of getting their money back when the club is sold?

    • almajir says:

      Will – there are ways of taking money out (for example a Management charge) that HSBC cannot stop.

      • willvbcfc says:

        True, but to make £21.5m of those charges? Do you think he could really get away with that? Surely the best way to get his money back is to sell the club for what it’s actually worth. He could pay his debtors and have a few million spare to disappear in Kowloon with after the trial!

      • andy says:

        You refer to a “management fee ” as a means of extracting money from the club,presumably this would have to be shown in the accounts,was their any such thing like this(excluding kit money) in the accounts just released.If not then why not given that CY is skint at prsent and that most people are saying money from player sales is going to hong kong,also why has he not called in one of his loans,surely he could have done this to finance his house

  • Mickey07 says:

    This is what happens when fans keep there head buried in the sand and say “cut Carson some slack”…..well I ain’t as he is the biggest nightmare this club has come across…these unforeseen cracks start to appear when people are just happy to tick along and think everything is ok…(I bet pannu didn’t know about this either I bet he’s fumming) I will also say that I bet more debt wil start to appear very soon as well…like you say as well mayor who the heck wants to be seen to be doing business with “Carson yeung”, the bloke is the cancer of our club and if he thought anything of us fans he would have spoke to us ages ago but he couldn’t give a monkeys deep down….I really really hope he gets sent to prison to end all of this…

    • almajir says:

      Mickey – I bet Pannu has known about this.

      And as for your comment re Prison Mickey – you’ve got to be guilty of a crime to go to prison. Let’s not pre-judge that either based on the fact you don’t like him.

      • Mickey07 says:

        Well if pannu wants to continue to build bridges with us fans and if you say “I bet he has known” now is the time to keep us in the loop and don’t undo all the good work he has done over the last 10 weeks or so in keeping us in the “know”…..one positive to come from this is Carsons world is crumling down even more and his grip on our club is loosening….Carson out.

  • Zeus says:

    I’m pretty sure there is absolutely no way Yeung could effectively swap the clubs debts to him for his debts to various chinese creditors. Firstly they would be all at varying interest rates, and secondly remember that Yeung is only the majority shareholder at BCFC, there are other shareholders who I am pretty certain would not agree to take on Yeung’s debt at higher interest rates. I think the only person who can transfer debt is the creditor should they decide to sell the debt on.

    • Julian Glass says:

      CY is a minority shareholder in BIH not BCFC. BIH is almost the majority shareholder in BCFC, about 97%. This if the BIH board pass a resolution to ‘swap’ the debt there is no-one to outvote them at a BCFC board meeting.

      Whether such a resolution is illegal is one thing but procedurally I believe this is the case.

  • Atahualpa is a BlueNose says:

    What I find difficult to fathom is all these piddling loans that CY took out to ostensibly help the club, why oh why were they necessary considering the fact that he had cash in his bank accounts running into the tens of millions of GBPs before his assets were frozen??

    Would you really wish to pay junk rates of interest and jeopardise your original substantial investment??Obviously he did not factor in his arrest and subsequent criminal proceedings, but a million here and a couple there, have the whiff of desperation about them considering they were taken out before his tribulations. Perhaps he wished to only have his stake in the club – of about a quarter of the total – and ‘trade’ on his name and reputation to raise funds where necessary and increase his value. It might be said his endeavours were not as successful as he had originally hoped for and when relegation came and the costs of running the club hit home, a certain amount of anxiety and desperation kicked in.

    As you say Almajir, just when we should be discussing positive signs about what is going on the field, yet again off-field dramas seem to be getting the thoughts of many. Personally I believe the it will all start to become clearer when CY’s trial is over – one way or the other something will give.

    Let us all just hope that the promise being shown by the team is not affected in any adverse way.

  • Smokin says:

    Simples really.

    1) If the debt to the Water guys is unsecured, then BCFC is out of the picture in relation to this. The Water guys sue BIHL, BIHL loses is ordered to pay, and as a result either does (in which case everything is as it is) or doesn’t (in which case BIHL goes into liquidation and BCFC repays loans to BIHL but not necessarily CY).

    2) Timing is important re point 1. The Water guys have not sued yet only noted their intention to do so. Any Court case will take some time to arrange. It should also be noted that if the Water guys sue now, and BIHL is liquidated before CY’s trial, they will not be secured creditors and will likely get close to zero of their money back. Their best chance of getting what they are owed is waiting to see what happens to CY.

    3) Everything depends on November:

    a) If CY is found guilty, everyone sues BIHL, BCFC has a busy January selling in the transfer window to repay loans. As our squad is depleted we start dropping down the table and lose value. Potential investors change from multi millionaires to the Wheldon’s of this World. This is unlikely as it reduces to pot of monies to the creditors.

    b) CY is found guilty but is wise enough to have lined up a solvent buyer / investor for BCFC who will repay loans in return for a controlling interest in BCFC. As BCFC is far more valuable to a buyer with a squad capable of challenging for promotion, this option is the logical fall back position for CY to try to arrange. This raises the chance of the biggest pool for creditors if BIHL is liquidated.

    c) CY is found innocent, his assets are unfrozen, and he repays loans. BIHL is refunded and life continues until the next emergency comes along.

    As for me, I will just enjoy the football until November and then see what happens. Its the life of a Bluenose.

    As for Almijar, I can only assume he will get more stories of other creditors lining up to sue over the coming months. Afterall, the creditors are now under starters orders….

    KRO

  • Blueboy88 says:

    BIHL is now an untenable business model , & that’s without knowing the full extent of its debt .

    Its only tangible asset is BCFC , which is also its largest debtor , as far as we know.
    (Yes it could get worse , with the continuing unpublished & unknown accounts situation)

    BCFC assets are the players that could command a fee , & St Andrews , which in there entirety within a buyers market , are probably not worth a lot more than the outstanding debt.

    The bell tolls for the liquidation of BIHL & the asset stripping of BCFC to pay off creditors.

  • Blueboy88 says:

    BIHL is now an untenable business model , & that’s without knowing the full extent of its debt .

    Its only tangible asset is BCFC , which is also its largest debtor , as far as we know.
    (Yes it could get worse , with the continuing unpublished & unknown accounts situation)

    BCFC assets are the players that could command a fee , & St Andrews , which in there entirety within a buyers market , are probably not worth a lot more than the outstanding debt.

    The bell tolls for the liquidation of BIHL & the asset stripping of BCFC to pay off creditors.

  • Paul Carter - The Voice Of Reason says:

    You can say that again!

    • BLUENOSE BINGOWINGS says:

      Isn’t there an agreement in place that HSBC takes ownership of BCFC should it default on its loans or payments to the bank, or even step in if BIH becomes insolvent (according to the Mail). If, theoretically, BIH goes to the wall then its only major asset isn’t really owned by them, the bank would effectively step in and take over the club to sell on and re-coup any money. Its seems that if this charge is in place, then CY would be last in line of creditors and the bank won’t stand for any debts charged against the club. I can’t see any viable scenario where the current ownership come out on top, unless as you said things change in November or they sell up quickly.

  • Bluehobba says:

    It wasn’t until I went over the blog again that I realised it was the directors of the China Water Industry group that went on the training course. BIHL should take a leaf out of their book. Altogether now.. what course of training could the directors of BIHL attend.

  • Blueboy 88 says:

    Another possibility that could hasten the unfolding of this chapter , is BCFC’S banker HSBC.
    They have a debenture in place to take over the running of the club if it defaults on its loan repayments. (Which is has not)

    However it could now be spooked by the prospect of an avalanche of debtors now coming out of the woodwork with claims on BCFC’s parent company.
    HSBC may get their retaliation in first & call in BCFC’s loan, which would enevitabely lead to an immediate firesale….

  • DoctorD says:

    Almajir — you mentioned in your previous blog post that “iMerchants [the subsidiary of CWIG who lent BIH the money] were forced to look into similar proceedings for money lent to another of Carson Yeung’s companies, the newspaper Sing Pao.”

    What happenned to those proceedings? In other words, did they get enacted and how long did it take? I am just wondering over what time scale any action is like to drag on for.

    On another note, these loans to the water guys aren’t humungous in the greater scheme of things. Isn’t there always a chance that they get paid off by taking out “more reputable” loans. That’s what the Glazers are doing at ManU. It’s not great, but loans these days are almost like products that get traded around. Sickening really that loans get bought and sold but that’s the world we live in.

  • Martin says:

    I myself had grew board of this song last season but, “WE DON’T CARE ABOUT CARSEN, HE DON’T CARE ABOUT US, ALL WE CARE ABOUT IS B C F C” simple but true.

    KRO

    • Paulo says:

      I said this song would be back …with a vengeance. Also, I think it will have a lot less bluenoses hating it this time round.

  • Paulo says:

    This isn’t great news, but thanks almajir for finding this out, a great piece that is also another piece of the unfolding puzzle that is BIHL.
    I’m under the impression that the future of BCFC’s financial stability is kind of hinged on Carson’s court date in November. Maybe there is some more ‘customers’ of CY that are waiting for repayments?
    Thanks the lord that PP has kept us going and got the embargo lifted. I dont think he has saved us from the HK lot, but we could have been a lot worse off already. The biggest problem now is the link between BCFC to CY to BIHL to ‘the creditors’.
    It’s scary, but I have faith that we wont go tits up ..even though I know it’s out of our hands and there’s nothing we can do. I wonder how much damage BIHL could do to BCFC though?

  • KeeprightCroydON says:

    BCFC (in theory) has a lot of cash in the bank, generated in 2011/12, through player sales, euro run, parachute payments etc. We do not know extent until BCFC accounts for this year are released. According to PP a few weeks BCFC is heading for a significant profit, tho a loss of £10m from 2010/11 and previous yrs needs to be offset against this. Against this BCFC does owe BIH quite a bit of dosh, who in turn owe other parties. As the patent company of BCFC, I guess BIH can call in debts from BCFC to pay it’s creditors such as the water boys. Not a great outcome for Blues, but not the end of the world cos we should (in theory) have money in the bank. Don’t panic just yet.

  • KeeprightCroydON says:

    BTW Al I think the unnamed club you referred to is Crystal Palace. I see no issue with naming them as what happened is in the public domain. Their then chairman Simon Jordab had taken a £5m loan from a hedge fund company who got cold feet when they thought that other CP creditors would call in loans resulting in CP going under and they would be left with nothing. So they made a preemptive strike which put CP into administration. Sadly that put paid to Jordan who did a lot for CP, losing lots of his own money keeping them afloat through difficult times.

  • Aussiebrum says:

    Another scenario could be:

    a) The 76% shareholders in BIHL remove Carson & Son as Directors
    b) The deal with BCFC as best possible to salvage whatever money they can from a sale but it’s possible BCFC has a value under 10m GBP
    c) They Yeung loans will be written off in return from an agreement from the buyer of BCFC not to pursue Yeung for Directors Liabilities.

  • FrancisHattonLatchford says:

    Hilarious post by Old Un. He talks of bloggers using offensive language and abbreviations and then goes on to use abbreviations in the very next sentence!! A more pompous, pseudo-intellectual post you will struggle to find, undone by his inability to spell, punctuate or write English!

  • Think of the children says:

    Many people who post here are either so desperate for hope they think Pannu doesn’t know exactly how these arrangements are likely to play out or Pannu posts under more than one name here.

    “GOD BLESS PANNU FOR BEING STRAIGHT WITH US”

    would you know about any of this if it wasn’t for this blog? almajir, where’s part 2 of the Meet Peter Pannu story?

    Blues aren’t even trailblazers for corporate football laundering. How many clubs going under will it take?


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