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 2011,² 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.⁵  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.