Monday, May 18, 2015

Bond-A-Geddon: What We Know

"No need for tinfoil - nothing sinister or strange afoot at CCP!"
Adam Kahn, Sr. Director of Communications at CCP
Over the weekend, TMC published an article by Dirk MacGirk publicizing the fact that CCP removed all financial documentation from its corporate website, probably following the delisting of its bonds on the NASDAQ Iceland exchange on 29 April. The fact that CCP intended to buy back the outstanding bonds was not a secret to observers in the EVE community. The marketsforISK blog covered the story on 5 April, speculating that CCP is undergoing a recapitalization process because its balance sheet is under pressure and the company needs new capital in order to continue. The news today is CCP is no longer required to publicly post any financial information.



Before continuing, I should point out Dirk did not get the story from reading Bill Bones comments in Friday's post about CCP abandoning its trademarks for Project Legion. I reached out to Dirk Thursday night with a financial question related to the trademark story and that's when we discovered the removal of the financial information from the corporate website.

The story of Bond-A-Geddon1 began, perhaps unsurprisingly, in the aftermath of Incarna and the Summer of Rage in 2011. With a reported subscription drop of 8% and a large loan (perhaps as much as $11.7 million USD) due on 28 October 2011,many predicted that the layoffs that occurred on 19 October were a precursor of worse news to come.

The news reports at the time never explained how CCP managed to pay off the loan. According to CCP's financial statement for 2011:
"The Company entered into an agreement with Silicon Valley Bank on a long-term financing in the amount of $20 million, thereof $8 million as revolving credit facility. The $12 million term loan was funded on August 24th, 2011 and half of that amount is currently held in the Company's account with Silicon Valley Bank. In accordance with IAS 32 the $6 million cash is offset against the remaining 700 million ISK obligation. The terms of such bank loan provide that the Company will not secure its property with respect to additional financial debt, other than permitted exceptions outlined in the agreement, interest only payments through August of 2012 and interest and principal payment thereafter with a maturity date on July 1, 2016. Subsequent to December 31, 2011 the remaining ISK obligation was paid in full." 3
CCP managed to weather the immediate storm and even establish a revolving line of credit, but at a cost. If the company wished to continue development of DUST 514, CCP would need another way to raise the funds.

On 16 July 2012, CCP issued $20 million USD in convertible bonds. CCP's financial statement for 2012 described the bond issue:
"The Company issued 200 convertible bonds at a total par value of USD 20,000,000 on July 16, 2012. The bonds have a fixed nominal interest of 7% per annum and mature five years from the issue date at their nominal value of USD 20,000,000 or can be converted into shares at the holder's option at any time until maturity at the rate of USD 32 per share. The values of the liability component and the equity conversion component were determined at the issuance of the bonds." 4
CCP Financial Information Page, 19 August 2014


On 28 June 2013, CCP listed the bonds on the NASDAQ OMX Iceland exchange. Listing the bonds on the exchange required CCP to release certain financial information according to a prospectus published by the game company. The prospectus itself provided a summary of financial information from the years 2010-2012. As the screenshot above shows, CCP listed the financial reports for those same years on its corporate website.

For those wondering, converting the bonds into an equity interest in CCP would not result in a controlling interest. A full conversion into stock would only result in 650,000 shares while the initial number of outstanding shares as of 11 April 11 2013 was 9,415,452 shares.6 The prospectus did show that a single individual who purchased all the bonds and did a full equity conversion to stock would become the fourth largest shareholder. The prospectus identified the four largest shareholders as:7
  • NP ehf. (2,823,988 shares/30.0%)
  • Teno Investments S.Á.R.L. (2,215,255 shares/23.5%)
  • Sigurd Harðarson, founder of the company (881,141 shares/9.4%)
  • Hilmar Veigar Pétursson, CEO (491,564 shares/5.2%)

UPDATE 19 May 15 - Jonny in the comments identified the buyer of the bonds. General Catalyst Partners, a stockholder in CCP, purchased the bonds on 9 August 2012. GCP is the parent company of Teno Investments S.Á.R.L.

Nothing so far in the timeline is especially noteworthy, although CCP faced two potential time bombs. The first, on 1 July 2016, involved the loan deal and revolving credit line with Silicon Valley Bank. But according to the last publicly released financial statement, CCP had not drawn any funds from the revolving credit facility as of 30 June 2014.8

Latest information on CCP loans and bonds (30 June 2014)

The second date on the calendar, 16 July 2017, had the potential to have the same affect on CCP as the loan that came due on 28 October 2011. But that threat ended with the buyback of all outstanding bonds on 28 April. CCP no longer has to worry about the financial decisions made to develop DUST 514 coming back to haunt the company.

No EVE financial story is complete without a bit of tinfoil, if only to give CCP Manifest, CCP Falcon, and the rest of the employees at CCP something to laugh about on a Monday. The most obvious theory is preparing the company for sale. If the price is right, anything is for sale. In September 2014, Microsoft purchased Minecraft-maker Mojang for $2.5 billion USD. The month of February saw Sony Online Entertainment sold off to investment management company Columbus Nova. Perhaps closer to CCP's operations, Facebook purchased Oculus VR for $2 billion in March 2014.

The question I have, though, is how did CCP manage to pay off the bonds? Did the company have $17 million on hand to pay off the bonds? Highly doubtful. The most likely explanation is that one or more investors used the option to convert their bonds into CCP stock. I don't know who the mystery investors are, but I think I know the reason for the interest in CCP: virtual reality.

In addition to EVE: Valkyrie, the possible killer app for the Oculus Rift, CCP introduced the world to its VR Labs group at Fanfest in March. Attendees who ran through the VR experiences were then asked to answer a short survey about their experience. As someone who worked in the market research industry for 18 years, I wondered exactly how CCP intended to use the information.

The whole VR Labs experience seemed slightly out of place. I now wonder if CCP used Fanfest as the setting to show off the technology to potential investors to seal the deal. The timing is slightly suspicious. Fanfest ran from 19-21 March and CCP declared its intention to buyback all the outstanding bonds if investors did not use the conversion option on 27 March. Coincidence?

No matter if any of the tinfoil theories are true or if CCP, under its new CFO Sigurdur Stefansson, decided to put its financial house in order, one thing is true. CCP definitely reduced its long term debt. The fact that players lack the information to write such detailed articles as this one in the future is probably a pleasant bonus.


Notes:

1. So named because CCP ended the public reporting of financial information, leading some to predict the end of the virtual world. Also, because the term "Gate" is so cliche.

2. CCP hf. (2011). Consolidated Financial Statements for the year 2010. Retrieved from http://go-dl1.eve-files.com/media/corp/Herschel/CCP_Financial_Statements_2010.pdf. page 31.

3. CCP hf. (2012). Consolidated Financial Statements for the year 2011. Retrieved from http://web.archive.org/web/20140207105526/http://www.ccpgames.com/media/47056/ccp%202011%20consolidated%20financial%20statements.pdf. page 27.

4. CCP hf. (2013). Consolidated Financial Statements for the year 2012. Retrieved from http://web.archive.org/web/20131029210040/http://www.ccpgames.com/media/47002/ccp%202012%20consolidated%20financial%20statements.pdf. page 28.

5. CCP hf. (2013). Samantekt. Retrieved from http://en.fme.is/media/lysingar/CCP-Samantekt-final.pdf. page 10.

6. Ibid.

7. Ibid. page 5.

8. CCP hf. (2014). Financial Statements for the period 2014.01.01 - 2014.06.30. Retrieved from http://web.archive.org/web/20150517200259/http://web.ccpgamescdn.com/ccpgames/assets/ccp-hf-financial-statements-june-30-2014.pdf. page 14.

13 comments:

  1. Viince_SnettertonMay 18, 2015 at 8:34 AM

    It comes down to this. We will now never know how bad (or less likely, how good) CCP's finances are, until the company is sold or goes under.

    All we have left as an indicator are the numbers from Chribba's site, and we already know that the PR guys and fanbois spin the decline as no big deal because of multiple subs/account now.

    I think the real test will be when the new sov mechanics are rolled out, and if they get the asshat from Wisconsin's blessing (ie. can he continue to monetize Eve at the same rate). He has already demonstrated to CCP that he can mobilize a whole bunch of his followers to move to a new game at his whim.

    If he decides that the new mechanics don't work economically for him, and all those idle goon subs are not reactivated, and worse, he directs a whole bunch more to pull the plug, then we will see real panic in Iceland.

    But I don't think that is how it will play out. I thought about 6 months ago that CCP might have turned a corner when they released the jump range nerf. But now, it seems pretty clear that CCP plans on entrenching the wealth generation for the current alliances. I am waiting for the 10 fold increase in NPC's in sov null to be announced.

    Who knows though. For an investor to convert debt to equity means they have faith in the business model, or maybe they looked at potential value of the company in a sale, and figured the return on that investment beat the bond yield.

    ReplyDelete
  2. CCP investors are public you can find them online if you search
    CCP revenue is going down and it is most likely not profitable

    Information in your post tells one thing
    CCP is actively looking for a buyer or wants to hide significant recapitalization. What if old guard does not own the compamy anymore and it's all capitalist sharks now?

    Imagine the effect on players.

    ReplyDelete
  3. Why do I need to search for CCP's major investors when I listed the four that have over a 5% stake in the company according to the latest available data? I don't know how to tell you this, but capitalist sharks (NP ehf. and Teno) have owned over 50% of CCP for years. The only thing I don't know is any recent investment over the past 9 months, which doesn't have to be declared since CCP no longer has any financing that requires public disclosure.

    ReplyDelete
  4. Why? Because as a blogger you factcheck, and when pointed that you are wrong you search and edit accordingly.

    But your blog is awesome and I will help you.

    Those are not largest investors like for 3 years already
    General catalyst partners and maybe another VC fund are.
    And those invest with the only goal - go public or sell.
    They will eat CCP alive.

    http://www.dealipedia.com/deal_view_investment.php?r=26220

    These guys helped to make decision to close Legion, WOD, etc

    Just one more thing.
    If Valkyrie is not a hit, CCP will be sold for pennies to tencent, or even funnier Chukong, or Wargaming and then highsec will finally become highsec and I will be finally be able to shoot pirate npc carriers in Amarr in my gold plated Titan.

    They have been stuck in "we are hardcore, evil shit" for too long. Catering for evil people never pays off in the long run.

    ReplyDelete
  5. http://freeminecraftgiftcode.net

    ReplyDelete
  6. You realize that the information in the Dealipedia link that you provided is a copy of the Tech Crunch article I linked to, right?

    http://techcrunch.com/2012/08/09/ccp-dust-514-funding/

    As for the largest investors, CCP's financial documents indicate that the 10 largest shareholders on 31 December 2013 were:

    NP ehf. - 29.8%
    Teno Investments S.Á.R.L. - 23.4%
    Sigurd Harðarson - 9.3% (founder of CCP)
    Hilmar Veigar Pétursson - 5.2% (CEO)
    Matthías Guðmundsson - 3.1%
    Meson Holding S.A. - 2.5%
    CCP Holding S.Á.R.L. - 2.2%
    Guðmundur Kristinsson - 2.1%
    Friðrik Örn Haraldsson - 2%

    A.C.S. safnreikningur I - 1.7%

    I also see that General Catalyst lists CCP Games as one of its notable investments and that Wikipedia lists the company as a major stockholder. When I checked out the information on Wikipedia, it lists an article from December 2008 as its source.

    http://www.vb.is/frett/9841/

    So who do I go with? Wikipedia which is using information from 2008, or CCP's financial documents that don't list General Catalyst as one of the top 10 investors at the end of 2013, which is less than 18 months ago?


    If you'd like to give me more recent information, I'd love to read it :)

    ReplyDelete
  7. You realize that the information in the Dealipedia link that you provided is a copy of the Tech Crunch article I linked to, right?

    http://techcrunch.com/2012/08/...

    As for the largest investors, CCP's financial documents indicate that the 10 largest shareholders on 31 December 2013 were:

    NP ehf. - 29.8%
    Teno Investments S.Á.R.L. - 23.4%
    Sigurd Harðarson - 9.3% (founder of CCP)
    Hilmar Veigar Pétursson - 5.2% (CEO)
    Matthías Guðmundsson - 3.1%
    Meson Holding S.A. - 2.5%
    CCP Holding S.Á.R.L. - 2.2%
    Guðmundur Kristinsson - 2.1%
    Friðrik Örn Haraldsson - 2%

    A.C.S. safnreikningur I - 1.7%

    I also see that General Catalyst lists CCP Games as one of its notable investments and that Wikipedia lists the company as a major stockholder. When I checked out the information on Wikipedia, it lists an article from December 2008 as its source.

    http://www.vb.is/frett/9841/

    So who do I go with? Wikipedia which is using information from 2008, or CCP's financial documents that don't list General Catalyst as one of the top 10 investors at the end of 2013, which is less than 18 months ago?


    Now, the fact that General Catalyst purchased the bonds in 2012 is suggestive that they are the new owners, but I don't think that is the case. The bonds were put on NASDAQ Iceland, which means they were publicly traded and that anyone could own them. With that uncertainty present, I am not going to say that General Catalyst now owns 6-7% of CCP's privately held stock.

    I guess I should add that General Catalyst partnered with NP ehf. to form a joint venture called Verne Global, with plans to open a data center at the former NATO airbase in Keflavik. Interestingly enough, Hilmar was involved in the deal.

    http://agiledatacenter.cio.com...

    If you'd like to give me more recent information, I'd love to read it :)

    ReplyDelete
  8. VCs invest on the promise of growth: dust, legion, growth, valkyrie. If growth does not happen they usually cut losses short. (Remember venture capital darling Hawken?)

    When VCs invest,they always buy convertible bonds or preferred stock. It does not list them as owners. Silicon valley bank loan definitely secured against the stock (they only do such deals - they are no hsbc) and was most likely tied to the GCP deal.

    Based on the information the only conclusion we can make. Bond owners converted to stock - new shares created, silicon valley bank converted to stock (someone lost shares used as a security). Where it will lead now we don't know. Serious dilution happened.

    ReplyDelete
  9. One other thing to note. The Chairman of the Board is Birgir Már Ragnarsson. According to Bloomberg, he is a Partner and General Counsel of Novator Partners LLP. That's the top shareholder in CCP.

    ReplyDelete
  10. http://www.generalcatalyst.com/team/adam-valkin
    He is still there

    ReplyDelete
  11. < Insert joke about Bloomberg here >

    ReplyDelete
  12. The latest. 3 members were added to CCP's board of directors on 11 April 2013, which could be significant.

    Adam Valkin - GCP
    Liv Bergþórsdóttir - CEO, Nova (wireless communications). Owned by NP ehf.
    Ragna Arnadottir - deputy CEO of the national power company.



    But I don't see any new players.

    ReplyDelete
  13. On the 19 May 2015 the CCP 2014 Financial Statements were filed with the Directorate of Internal Revenue in Iceland.


    I have obtained a copy and done a review of them on my Blog:

    http://marketsforisk.blogspot.co.uk/2015/05/ccp-financial-statements-for-2014-review.html

    I have also replicated the 2014 Financial Statements on my Blog so that others may apply their own analysis.

    ReplyDelete