Bank Goes To The Rescue Of Stocks Lender Chimaera

The Age

Thursday April 24, 2008

Michael West

ANZ Bank moved to bail out troubled margin lender Chimaera Capital yesterday and has not ruled out a deal with the Opes Prime's administrator to pay out disgruntled creditors and head off years of lawsuits and bitter publicity.

The bail-out is a big change of strategy from the Opes situation where the bank called in receivers, seized control of the Opes pooled stock and began selling it.

Then ANZ and Babcock & Brown bailed out Lance Rosenberg's brokerage and stock lender Tricom. Now the ANZ has been forced to take a majority stake in stock lender, Chimaera Capital, for $55 million to stave off another collapse, not to mention the prospective fire-sale of Chimaera's loan book. The size of the Chimaera loan book has still not been disclosed but ANZ has charges over the group and its associates in the order of $1.5 billion.

Only last week, another ailing margin lender, Lift Capital, lapsed into administration when major lender Merrill Lynch cut off credit to the group. Although there is no suggestion of "irregularities" in Chimaera as in Opes, the two bucketshop lenders are similar in that they allow clients to borrow against illiquid speculative securities. They both use jumbo loan agreements with their banks where the clients' shares are pooled and repledged. They both lend their clients' stock to short sellers. Meanwhile, Business Day understands the ANZ is considering overtures from Opes administrator John Lindholm of Ferrier Hodgson for a Deed of Company Arrangement (DOCA) to be struck between the creditors of Opes. Were there to be a settlement between the Opes antagonists and litigants, a DOCA would be by far the best solution said a lawyer close to the players. Any deal between the warring parties would require concessions on both sides - by the banks ANZ and Merrill Lynch and by Opes unsecured creditors.

Although ANZ and Merrill appear to have solid title over the Opes stock, myriad cracks in their potential defences are beginning to appear, such as the execution of the charges before receivership, the involvement of ANZ employees in Opes before the collapse, the deal to transfer stock to Tricom after the administration had commenced and the legal arguments around the status of the securities lending contracts.

The bank declined to comment on the DOCA idea, and would not rule it out. A spokesman would only say, "We are in a strong legal position".

While not wanting to prejudice its legal position over the coming weeks, ANZ will have discussions with Lindholm before he writes up his second creditors report. That report is likely to include the option of pursuing the banks legally on behalf of the Opes unsecured creditors. Even if the bank were to take the view that its case were impregnable it would still have to make a decision based on years of negative publicity and the potential damage to the ANZ brand. A DOCA is shaping up to be the likely outcome from the Opes fracas rather than an outside chance.

Meanwhile, Lift Capital administrator Tony McGrath held his first creditors meeting yesterday. Lift is in better shape than Opes. No "irregularities" uncovered as yet. Merrill has flogged most of the shares already and McGrath expects to claw back about $90 million in surplus from the Merrill sales. All up, McGrath has identified around $270 million in equity so far for Lift clients, and he won't rule out legal action to recover more.

Creditors were told the lending agreement with Merrill mirrored the Opes contracts - with ANZ but also with Merrill - but they were not the same.

Lift clients' securities had been pledged to Lift and repledged to Merrill, which pooled them. Of that stock, clients can look forward to getting around 50? in the dollar in returns. Other Lift clients, not exposed to Merrill, may get the lot back.

Lift had been under pressure since the stockmarket legged down in January. There had been a few problem exposures. One was a stake in MFS. The funding hole grew as Lift lent less to its clients than it borrowed from Merrill. There were margin calls from Merrill. In the end it was not prepared to extend any more credit. Lift clients, wary of the Opes fallout, had been trying to get out. When bankers pulled the pin, there was a liquidity crunch.

Lift clients, who are free to pursue legal action along similar lines to the Opes actions, will watch the Opes legal saga unfold, then decide how to move - as will the administrators. The Lift contracts are not the same as Opes, but they are similar, and the same principles apply.

As the law is yet untested on these contracts, there seems to be sufficient doubt about the beneficial ownership of the disputed assets to encourage the likes of litigation funder IMF Australia to back an early action against Opes, an action which may turn into claims against the banks.