Monday, June 26, 2017

A Kerfuffle This Way Comes

This weekend, an article about Star Citizen developer Cloud Imperium Games taking out a loan set the Interwebs ablaze.

If you want to play along from the beginning, go read this NeoGAF thread (or rather, the first couple of pages).

No one knows the acutal amount of the loan. No one really understands why they took out the loan. It seemed off, though, that a company with $150M+ in funding for a game was taking out loans.

To help sort through what's/what's not, I turned to you guys.

Management consultant "Ricky S" (who gave me additional details establishing his bona fides) looked over the documents and sent back this:
I've gone through to the companies house site and looked directly at the charge notice and can pull out the following points:

--Coutts is a pretty respectable bank - they're the rich man's/private investment arm of National Westminster (NatWest) - one of the biggest banks in the UK and no loan shark.
--Those 'charge' notices are essentially the same as a mortgage - but for a company. A bank is unlikely to loan a small, new company millions of pounds without some form of security. This is just the same as them not loaning hundreds of thousands of pounds to people without a charge on the house they're buying.
--The bank doesn't own the company/rights etc (just like they wouldn't technically own your home when you have a mortgage) but will get first rights to the named assets if the company becomes unable to pay its loan. If it comes to this the company is already pretty much dead, and these charges are there to soften the blow for the bank.
--The rights to a game aren't very useful unless that game is actually published. So the bank has a shared interest to see the game progressing and published.
--As to why the developers have had to get a loan - that is a more difficult question and any answer I gave would just be speculation.
--For the Kickstarter backers - there are a few scenarios:
Scenario A - the game gets published, money comes in from more sales. The developers pay their loan and everyone is happy.
Scenario B - further delays in development mean that the publisher goes bust:
                 With the loan - the bank takes the assets, tries to sell them on for cash (banks don't want to be stuck with intangible assets)
                 Without the loan - the assets may try and get sold on by the receiver for cash to pay any other creditors.
                 Note that either way it isn't much different for the Kickstarter backers who get nothing if the game fails to get released. There isn't any guarantee that another company buying the rights to the game will honour the Kickstarter agreement (although that would be the honourable thing to do).

I hope this helps. 

It certainly does, Ricky. Thanks.

This became enough of an instant controversy that Cloud Imperium released this statement to clarify:
We have noticed the speculations created by a posting on the website of UK’s Company House with respect to Coutt’s security for our UK Tax Rebate advance, and we would like to provide you with the following insight to help prevent some of the misinformation we have seen.

Our UK companies are entitled to a Government Game tax credit rebate which we earn every month on the Squadron 42 development. These rebates are payable by the UK Government in the fall of the next following year when we file our tax returns.  Foundry 42 and its parent company Cloud Imperium Games UK Ltd. have elected to partner with Coutts, a highly regarded, very selective, and specialized UK banking institution, to obtain a regular advance against this rebate, which will allow us to avoid converting unnecessarily other currencies into GBP.  We obviously incur a significant part of our expenditures in GBP while our collections are mostly in USD and EUR.  Given today's low interest rates versus the ongoing and uncertain currency fluctuations, this is simply a smart money management move, which we implemented upon recommendation of our financial advisors. 

The collateral granted in connection with this discounting loan is absolutely standard and pertains to our UK operation only, which develops Squadron 42.  As a careful review of the security will show and contrary to some irresponsible and misleading reports, the collateral specifically excludes “Star Citizen.”   The UK Government rebate entitlement, which is audited and certified by our outside auditors on a quarterly basis, is the prime collateral. Per standard procedure in banking, our UK companies of course stand behind the loan and guarantee repayment which, however, given the reliability of the discounted asset (a UK Government payment) is a formality and nothing else. This security does not affect our UK companies’ ownership and control of their assets.  Obviously, the UK Government will not default on its rebate obligations which will be used for repayment, and even then the UK companies have ample assets to repay the loan, even in such an eventuality which is of course unthinkable.  

Well, that's that, then, isn't it?

Not exactly.

Tomorrow, I'll explain why.

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