Subprime Casualties Find No Need To Sweat The Big Stuff

Sydney Morning Herald

Saturday June 7, 2008

Ian Verrender

Remember that old saying: owe the bank a thousand dollars and you're in trouble, owe the bank a million dollars and it's in trouble.

That no longer applies. What with inflation and all, the truism has been upgraded. These days it takes a million and a billion respectively.

But the principle is the same. In fact, those who have taken the banks for a ride in the past few years - generously relieving them of the billions they were desperate to lend - have never had it so good.

Perhaps you haven't noticed, but of all the big companies that hit the wall in January and February, not one has been placed in receivership.

When global credit markets ground to a halt early in the new year, any company with short-term debts lined up like sheep for the slaughter. Consider the list: Centro Properties, Centro Retail Trust, MFS, City Pacific, Allco Finance, ABC Learning Centres.

And yet, unlike during the last great meltdown two decades ago, not one of them has been sent to the graveyard.

That's not to say it won't happen. But in the past few months, every time a major debt deadline has loomed, the banks have left the directors and executives to sweat it out until the last minute, and then announced an extension.

It happened with Centro last week. Massive debts were due on Friday night last week. There were no surprises when the deadline passed because, while Centro has some decent assets, it doesn't have two spare cents to rub together.

But it took until Monday before the banking syndicate gave the company the green light to continue trading.

So why not just put them out of their misery? Why prolong the agony for everyone involved when it's clear some of these companies have no chance of survival in their current form?

The answer is the banks have become smarter with the way they deal with miscreant borrowers. They've adopted a de facto American approach to corporate collapses. And it's an approach primarily designed to their benefit.

Legally, Australia adopts a hardline approach to corporate collapse. If a company's directors believe it is insolvent, they are obliged by law to appoint an administrator. If a secured creditor such as a bank is concerned about a company's ability to repay its debts, it can approach the courts and have a receiver appointed to look after its interests.

But once a receiver or liquidator is appointed, the bank loses control and merely stands in line for a slice of whatever the liquidator retrieves.

That's part of the problem. Put several big companies into liquidation and it's difficult to get a premium for the assets. Buyers know it is a fire sale and pay accordingly. That reduces the amount of cash the banks retrieve.

In some cases, the winding-up process grinds on forever. It's lucrative work for the insolvency specialists, who often wait around for a decade until they can feast on a good old-fashioned market collapse.

You might be surprised to learn that Bond Corporation was only wound up late last year. The creditors received their final payment in September, 14 years after the company collapsed owing more than $1.1 billion. All up, the creditors received just 15.7 cents in the dollar. The shareholders got nothing, and Alan Bond is now back in the rich list.

That story was repeated time and again in the aftermath of the 1987 collapse. The banks have now decided to take matters into their own hands.

Rather than approach the courts to appoint a receiver, they are going directly to the companies and their directors with the receivers in tow.

They threaten liquidation. They threaten bankruptcy. But while there is a show made of removing the management, many of those responsible for the debacle, such as at Centro, are kept on as consultants to help sort through the mess. All the big insolvency specialists, KordaMentha, PPB and Ferrier Hodgson, are working overtime on firms such as MFS, Centro and Allco as forensic specialists for the banks.

But there's a downside. A court-appointed receiver or liquidator will pursue those who have fleeced a company, and anyone else who has unfairly extracted money from a collapsed corporation. They have the power to conduct court hearings to hound rogue executives who have squirrelled away cash and then hand them over to criminal prosecutors.

The banks have no real interest in any of this. They just want their money back. And in the quest for a "commercial solution", the notion of justice takes a distant second place.

The insolvency experts, when court-appointed, act in the interests of all creditors. That's not the case when they are working for a handful of big creditors.

In typical fashion, our corporate regulator, the Australian Securities and Investments Commission, has yet to pick up on this trend. So far, it's been hugely impressed the banks are trying to sort out the mess themselves behind closed doors.

It's only in cases like Opes Prime, where the "irregularities" were so obvious they couldn't be ignored that the bank - in this case the ANZ - ran to the courts for a liquidator. And look at all the dirty linen being aired.