I don’t believe that anyone is saying they’re insolvent. At least not yet.
Fact (for those of us who follow it religiously) is, they get funding from 1) parent company in the US 2) EU sales paid directly into UK 3) loans (they have two secured ones now, and about $5m in unsecured)
The notion that banks don’t lend to “insolvent” companies isn’t remotely true. Look up debt refinancing. Or even recapitalization funding and similar vehicles.
The issue with collateral is that, in all cases of secured lending, yes, the bank secures the company assets. But here’s the thing (I cover this in my blog), like the funding of 529, lottery winnings, insurance (accident, life etc) claims, the secured assets are those. Nothing else. So if you have money in a lottery that you want to borrow against, rather than taking the huge hit on a lump sum, a company can loan you money - secured against that winning. The same happens with tax credits - every where they are offered. Heck, there is an entire movie industry dedicated to specifically this sort of lending against all kinds of art/movie credits including arts, movies etc.
The issue with this SC loan is that the bank secured ALL the assets of TWO companies. The parent company, CIG, a well as the sub, F42). They have a secured interest in the tax credit. They didn’t need anything else. And there are several companies in the UK - as evidenced by those who have posted about this since this news broke - that take loans on these tax credits ALL THE TIME. And they don’t have to put up such security against it.
In this instance, in exchange for such a small sum, for a company which, according to its 2016 filing burns through almost $20m a year, it’s a huge Red flag that they need the money now, rather than six months from now. And were willing to pledge ALL these assets in order to get it.
The bank - who would be privy to their financials - obviously figured out that they ran the risk of being insolvent ahead of them “earning” the tax credit. So they secured all their assets just in case.
WARNING: copy pasta coming up…
Ask yourself this :
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In what world does a company that has raised over $152 million in crowd-funding, with an unknown amount of investor money and US loans, need to so desperately need to play the currency market to the extent that they have to take what is, for all intent and purposes, a high-risk loan, against “future” tax credits? And an amount which – assuming we believe Ortwin that it was against the tax credits – is a measly $4m?
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Go check the currency conversion, and do the math. It would be cheaper – and zero risk (no collateral needed) – for the US to continue funding UK ops while the USD is stronger against the GBP.
This has absolutely nothing to do with Brexit or any of that nonsense.
And there isn’t a single accountant or CFO who, knowing the circumstances, would agree that taking a $4m loan, that pledges the current and future assets for two ENTIRE companies (F42/CIG), is a good idea. Especially where a govt. tax credit – which fluctuates – is concerned.
In fact, someone else – a banker – already did the math and analysis. It’s in my blog update. Go read it.
- If this was just about tax credits, isn’t it curious that, like with other companies, the collateral would just be for the tax credits? Why would a $4m loan be collateralized against a multi-million dollar studio assets? And not just some assets, but EVERY SINGLE THING? Could it be that the bank, who would be the best entity to know the financial state of the companies, know something that the public – and backers – don’t know? As in, it’s a huge risk because the company is on shaky financial ground, so we’d better secure everything – just in case?
Note that we don’t even know if it’s just $4m. It could be several years of future tax credits, which would be applicable for as long as the company is solvent, and they are spending the amounts that warrant the max tax credit amount.
And no, the govt. doesn’t cut you a check for your tax credit. Jesus Christ, I’ve seen people type up that rubbish all weekend. I am not going to explain. So look up what tax credits are, how they work, and how they are applied. It’s not rocket science. You just need the ability to read and comprehend what’s written in public docs – right there on the FSA website.
BONUS: You know they have already been using the tax credits, right? Go read their 2016 filing. They never took out a loan against it. Until now. Why is that? Take a wild guess. Then give yourself a cookie if you guessed that it’s because they NEED the money – NOW.
- Why, even though it’s all RIGHT THERE in the filing, are people saying that the collateral was just for the “tax credits”, when the bank was thorough enough to list THREE FREAKING PAGES outlining the collateral, and which amounts to EVERYTHING the studios own now or in the future (until the loan is paid off)?
To the extent that the bank has complete control over, not only the company assets, but also assumes ownership and control of the assets – including the games they are working on – and grants back the studio the license/rights to exploit those assets. You know why that sounds familiar? It’s because that’s what happens when you get a mortgage or car loan. You don’t own the assets for as long as you owe the bank. So the bank gives you permission to use those assets, and they can take them back at any time if you fail to make payments.
So yes, win, lose, or draw, CIG/F42 basically mortgaged assets that backers poured $152 million into. It really is THAT simple. Again, it’s not rocket science.
And they did it without disclosing it. It only became public when I wrote about it. And of course it was concerning enough that Ortwin – not Chris – had to come out on a Sunday to spin doctor it, though his statement completely confirms precisely what they did: took a high-risk loan, against a asset which is worthless for all intent and purposes because unless and until they complete ONE of these games, there is NO INTRINSIC VALUE and the bank can’t use them as collateral.
Look at this way way. There is no bank, investor, or publisher, who would look at this project, and pay $152 million (let’s ignore the investor money and loans for now) for it. Why? Because there’s nothing “there”. Like, at all.
- I left the best for last. Anyone who has more than two brain cells and actually READ all 29 pages of the filing, can easily see that Star Citizen is excluded in “name” only; and that since SQ42 is built from EVERYTHING that was developed for Star Citizen, everything the bank listed for SQ42, by extension, also ties up engine, tech, media etc of Star Citizen because, aside from unique music and performance art (mocap for cut scenes), there is NO SQ42 without Star Citizen. Do you think if the loan defaults, the bank is going to take everything, and all of a sudden there’s going to be a Star Citizen “game” left untouched, and CIG/F42 can just carry on developing that game, having stiffed the bank, like it’s perfectly OK? LOL!!!
The notion that “Oh, the collateral doesn’t include Star Citizen, we’re OK” is as hilarious as it is stupid. That’s like taking out a loan on your car, but the bank says you can’t have the engine. But you’re OK with it.
The project is FUBAR. It is a total loss of backer money. And there is absolutely nothing that leads me to believe that I am wrong. And one day soon, we’ll be having this same discussion, right here, even as everyone starts playing armchair detective trying to figure out how it all went so wrong.
