LCF administrators release first six-monthly update

Smith & Williamson, the administrators of £230m FCA-authorised Ponzi scheme London Capital & Finance, have released their first six-monthly update to investors.

The administrators are currently envisaging a return of “as low as 25%” to investors. This is predominantly based on expected recoveries from Independent Oil & Gas. All other LCF assets remain of extremely uncertain value.

This is actually an improvement on S&W’s initial forecast of 20% as a “best case” figure. But that is little cause for celebration, given that the LCF asset with the best hope of delivering returns for investors – the “jewel in the crown“, in S&W’s characteristically optimistic language – is its complex interests in Independent Oil and Gas.

An AIM listed oil exploration company may well have a better prospect of a return than, say, loans to failing resorts on Cape Verde, but that’s still a lot of chance involved.

As for those other investments:

LCF lent a total of £12 million to two companies investing in Cape Verde resorts, but the companies never took any legal title to land, and the recoverability of the loan is doubtful.

A total of £70 million was lent to the “Prime” companies investing in resorts in Cornwall and the Dominican Republic. The administrators’ efforts to establish whether these are worth anything have met with frustration.

We are very concerned that the management of Waterside, which is well aware that the Bondholders are depending on the LCF borrowers and sub-borrowers for their repayment, has made no efforts to engage with the administration to prove to the administrators either the value of the Waterside business or of the value of the security provided to secure the repayment of the debt. The administrators will be continuing to increase the pressure on Waterside’s management in this regard.

In regards to the proposed refinancing of the Prime group, as advised to us in February 2019 by the directors of Prime Resorts Developments Ltd, to our knowledge, there has yet to be any deal done and to date we have had no substantial response to our enquiries to give us any assurance as regards progress towards any refinancing or any useful update from Prime Resorts Developments Ltd with regard tothe general financial position of the company. […]

It is very surprising to the joint administrators that the Prime group is so extraordinarily reluctant to engage and consider this to be either suspicious or naive.

And the hunt for LCF’s missing gee gees hasn’t gone much better.

Since our last report to creditors, we have continued our investigations in order to progress realisation of LCF’s assets for the benefit of creditors and Bondholders. In particular, we have requested that Mr Cubitt (the sole director and shareholder of FS Equestrian Services) attend for interview to assist us with our enquiries. We have also requested an up to date list of all FSE’s assets including the stock of horses (which were provided as security by FSE in respect of its borrowing from LCF), the names of such horses, their location and current value. In addition, we have requested details in relation to the sale of any horses and details of the use put to the proceeds of such sales. To date, Mr Cubitt has not attended voluntarily for interview.

As for £16.6 million invested in London Power & Technology, this seems to have disappeared.

We previously reported that this lending of £16.6m appeared to be in respectof a redemption of preference shares in London Power Corporation. Our investigations to date suggest that this transaction did not take place and furthermore, there does not appear to be any transaction to support lending of £16.6m.

So all eyes are still on Independent Oil and Gas, to which LCF lent a total of £38.6 million via its London Oil and Gas subsidiary.

IOG has agreed to farm out some of its Southern North Sea gas fields to CalEnergy Resources Limited. Should the deal go through, which is expected in September, IOG will get the cash to repay LCF’s non-convertible debt of £16.6 million, plus accrued interest.

LCF / LOG’s existing convertible loans will be renegotiated into unsecured loans convertible into shares at 8p and 19p, which the administrators will sell when they (and expert advisers) think the time is right.

At time of writing IOG currently trades at 18p. For conversion rights to be worth anything, the shares have to trade above the conversion price (otherwise you get more money from having the debt paid back). This suggests that S&W are still banking on IOG’s shares going up, and eventually getting back more than the £40 million that RockRose Energy offered for the debt back in March (which would have recovered the initial amount lent by LCF to IOG, plus change).

Another £5.4 million loaned to Atlantic Petroleum is said to have “high” prospects for being repaid.

Escrow payments

Readers may remember that the Four Horseman of LCF, CEO Andy Thomson, Simon Hume-Kendall, Spencer Golding and Elten Barker, all of whom benefited from multi million pound sums arising from the Waterside and Dominican Republic investments going into their “personal possession or control”, were asked by S&W to repay those sums into escrow, to be repaid if LCF investors were repaid in full.

 

At the time of that report, S&W stated that Thomson and Hume-Kendall had agreed to this arrangement, while Golding and Barker had yet to reply.

None of the Four have paid up.

Thomson has claimed, from his sickbed and through his lawyers, that he never said any such thing.

Mr Thompson, through his lawyers, and notwithstanding his illness, has disputed he ever made such an offer.

(Note: S&W use both spellings of Thomson’s surname throughout the report; I have stuck with the one on Companies House.)

Hume-Kendall “continues to engage with the administrators albeit little progress has been achieved in their dealings with him.”

Golding and Barker, through their lawyers, have told S&W to swivel.

Spencer Golding and Elten Barker have indicated through their lawyers that the Bondholders should be fully repaid through repayments to LCF from its borrowers. Accordingly, the administrators do not anticipate that Mr Golding or Mr Barker will agree with the proposal to put funds into escrow.

The entire point of the escrow proposal is that if bondholders are fully repaid, the escrow funds will not be drawn on, and the Four Horsemen will get their money back. This appears to have fallen on deaf ears.

Given that S&W are forecasting recoveries of 25%, Golding and Barker are probably the only people in the country who think that LCF will fully repay bondholders.

Paul “Captain” Careless, the CEO of LCF’s marketing agent Surge, has also comprehensively lawyered up, hiring the Serious Fraud Office’s former top lawyer, according to the Evening Standard.

In March S&W was reported to have written to Surge to ask them to repay the profit (not their entire 25% commission) it made from selling London Capital & Finance bonds.

No mention of this or Surge’s response is made in the latest update.

Fees to date

S&W have so far incurred a total of £2.3 million in fees. A further £2.9 million has been incurred by professional advisers to the administration, of which lawyers Mischon de Reya account for the lion’s share of £2.5 million. £215k of other costs have not yet been approved.

Most of these fees remain outstanding, and the creditors’ committee has not yet approved S&W’s fees.

Only £3.6 million has so far been realised by the administration, mostly cash that LCF still had in the bank when it collapsed. This should in theory change quite shortly if the Independent Oil and Gas deal concludes as hoped.

5% dividends put on hold

At the creditors’ meeting in April, Smith & Williamson indicated to investors that they could be paid dividends in 5% increments, with the first dividend potentially arriving in the summer, if sufficient funds were realised.

At the Creditors’ Meeting held on 24 April 2019, it was stated that dividends would be paid to Bondholders in 5% increments, once sufficient net funds were realised. It was envisaged that it may be possible to pay the first dividend at the end of the summer, dependent on the outcome of the IOG investment.

This turned out to be another bout of S&W’s optimismitis.

Whilst it is anticipated that the IOG deal will complete in September, this first dividend is now very likely to occur later than originally hoped, because of the potential strategy as regards realising the administrators’ interest in IOG in an orderly fashion as advised by our specialist oil and gas advisers.

As Smith & Williamson needs to have covered its own fees, plus the fees of Mishcon de Reya and its other advisers, plus the future costs of any further attempts to pursue recovery from individuals or LCF’s assets, before it issues any dividends, investors should probably not hold their breath.

As is standard as part of administrators’ duties, S&W have submitted a report to the Secretary of State for Business, Energy and Industrial Strategy (that would be Andrea “having kids makes you a better Prime Minister” Leadsom, at least at time of writing) into the conduct of LCF’s directors.

As is equally standard, S&W remain tight-lipped over what was in it.

S&W states that there is a “concerted and very likely co-ordinated” exercise aimed at frustrating the administration process.

It is unfortunate that the administrators are being required to deal with a concerted and very likely co-ordinated exercise on the part of a number of individuals aimed at frustrating the joint administrators’ enquiries, for their own reasons. This approach causes delay and additional expense to the joint administrators’ objectives, to the prejudice of Bondholders and so is most unwelcome.

Who these individuals are is not made clear by S&W.

The next report is due in six months’ time.