Corporate Debt Disasters Worsen

Sydney, Mar 7, 2008 (ABN Newswire) - One way or another, the Allco Finance Group is dying, who's next?

The National Australia Bank has moved on the Allco Finance Group associate, Allco Principals Investments, pushing AFG closer to the brink. And it has been joined by the Bank of Scotland as the pair pursue an estimated $150 million in margin loans that are owing.

The principals of AFG have refused to put their multi million dollar Sydney homes and other assets personal assets on the line to keep Allco Principals alive, or couldn't.

That's in stark contrast to the tens of thousands of ordinary Australians who are struggling to keep their home loans and other debts from falling in on them.

AFG's former executive chairman, David Coe and his close mate Gordon Fell refused to put their Sydney eastern suburbs homes (worth the best part of $50 million, on the line).

AFG itself is owned tens of millions of dollars by API and its group of executives including Mr Coe..

The NAB released a statement at 4.20 pm appointing administrators to take control of Allco Principals Investments, which owns 34.5 million Allco Finance Group shares and 4.1 million Allco HIT units.

There's now a scramble over who gets control with the API board attempting to appoint their own administrator, NAB claiming to have appointed two Grant Thornton accountants as "mortgagees in possession" and the Bank of Scotland (which owns BankWest) is trying to appoint a more traditional receiver. Bloomberg reported that The Bank of Scotland took possession of 18.3 million Allco shares.

API said NAB had appointed agents to take possession of a further 10.76 million Allco shares, pledged to the lenders by entities associated with "certain" Allco executives.

"The directors expect to appoint a voluntary administrator shortly," API director Chris West said in a letter to Allco, which was lodged with the ASX late yesterday.

API said that Bank of Scotland had informed it that it would appoint a receiver to all the asset and undertaking of API, including 600,000 shares in listed fund Allco HIT. The receiver would also be appointed to 18.34 million shares in Allco and 2.4 million shares in Allco HIT pledged to Bank of Scotland by entities associated with the Allco executives.

The conflicts of interest, related party transactions and preferential payments throughout the Allco group in recent months will trigger a wave of legal action and and investigations.

Does Allco Finance Group's shareholders have a strong case against the board for the $45 million loan to the Allco Principals vehicles as the shop was going down in flames: that includes a loan of $5 million on January 9, the day AFG's shares fell under the level that triggered the $2 billion capitalisation covenant on the $900 million loan with its banks.

If the banks can grab control of the Allco board, they will have access to all the files and could launch proceedings against Mr Coe and his friends - who still have plenty of assets worth chasing.

Up till now the NAB has been gentle with AFG and API in not yet selling a single share when its $110 million margin loan has been under water for several weeks.

The Allco insiders were promising additional security but have now walked away. No wonder Gordon Fell and David Coe quit the board last Friday, a move announced on Monday.

Gordon fell got his $28 million home in Sydney's east and $28 million cash from selling the failing Rubicon group to AFG.

NAB would not provide an estimate of what sort of loss it faces from the margin loan but said it "will pursue all avenues of recovery against Allco Principal Investments and related parties to mitigate its loss."

At the moment the $110 million is dead.

The flurry of late moves came after Allco requested a trading halt in its shares around half an hour before trading ended at 4pm, noting the suspension was linked to margin loans over Allco shares.

A trading halt has also been called on Allco Finance Group Notes (AFGHA), while shares in related company, Allco HIT, were also suspended.

In an earlier statement yesterday, Allco said investment bank Credit Suisse had informed the company it had "effected'' the sales of the bulk of Allco's stakes in the Rubicon property trusts Wednesday afternoon.

Credit Suisse sold most of Allco's stake in Rubicon Japan Trust at 22 cents, compared with a closing price Wednesday of 28 cents. Credit Suisse also sold most of Allco's stake in Rubicon Europe Trust at 15 cents, (matching Wednesday's closing price) and it also sold most of Allco's Rubicon America Trust stake at 13 cents compared with the 13.5 cents close.

Allco shares traded up as much as 31% at 68 cents, and were 11 cents higher at 63 cents when trading was halted. Will trading resume Friday?

Trading in associate Allco HIT was also suspended. Its shares last traded at 21 cents, up 1.5 cents, or 7.7% for the day.

The Allco situation is verging on the uninformed. Will the ASX and or ASIC step in to try and force some clarity?

APT has 6.5% of Allco Finance Group and David Coe owns 28% of APT. APT also has shares in Allco HIT, which in turn has to repay $770 million by June 30. The parent Allco is up for $250 million to be paid or refinanced by May and total debt across the entire group is in the vicinity of $8 billion. There's another $900 million in a bank facility that may or may not now be triggered.

There is some $43 million owed by the Allco to APT and another $45 million due APT from Allco HIT (whose APT stock the Nab's Mr Billingham now controls).

This is going to be the situation that triggered an implosion of all the creaky edifices surrounding the financial engineers. It is now going to get very ugly.

Here's one for the lawyers.

It could very well turn out to be bigger and uglier than HIH.

Co-founder John Kinghorn this week lifted his stake in Allco to 9.75 per cent, prompting heavy trading of its shares. An interview in yesterday's Australian Financial review suggested that Mr Kinghorn was investing in AFG and its associate, record, because he saw value.

No more. He looks like he has done $100 million or more.

Meanwhile another multi billion dollar deal appears to have fallen over and will prove very tough to resurrect.

Lachlan Murdoch's side of the joint bid for Consolidated Media Holdings Limited with its 38% shareholder, James Packer, has failed the first round.

No money for Mr Murdoch and his company, Illyria Pty Limited which has lost the equity financing arrangements with SPO Partners & Co of San Francisco.

The two announced a joint bid at around $4.80 a share in cash and the distribution of Seek shares owned by Cons Media. The value was around $3.3 billion.

(Lachlan Murdoch and SPO had been conducting due diligence of Cons Media's and its major assets, 25% of Foxtel and 50% of Premier Media Group (Fox Sports) and 25% of PBL Media for the past three weeks).

CMH said in a statement to the ASX late yesterday, around 7-8 hours after asking for trading to be suspended, that "SPO's withdrawal is primarily due to changes in investment conditions specific to SPO and not the Consortium's assessment of the value and prospects of CMH's investments.

"Illyria has advised it is in discussions to replace the SPO equity commitment from within its existing investor group and third parties."

"CMH is not in a position to give any assurance that Illyria will be successful in replacing the SPO equity commitment; that the proposal's conditions will then be satisfied, and that CMH Board Sub- Committee's evaluation will lead to a recommended proposal, or that the proposal will proceed. Shareholders will be informed of further material developments as they arise in line with all legal requirements and the protocols that the Board has established."

It's claimed SPO withdrew because the US dollar fell against the Australian dollar since January 23. But that fall was only around (% and the Aussie dollar could quite easily reverse that given its volatility over the past few months.

Some commentators also wonder if the ANZ Bank, which has committed to fund the debt part of the bid with around $900 million in loans, might be having cold feet. It's led $910 million in loans to the troubled Queensland hotels group, Hedley, which asked for its shares to be suspended yesterday after a sharp fall in its share price.

The confusion and possible implosion at Allco will also make it tough for Mr Murdoch to find new backers in the current debt averse climate.

And there was a big thumbs down from investors to the news that ABC Learning Centres had sold 60% of its US centres to private equity associated with Morgan Stanley.

The shares rose, then fell afternoon trading after the company announced it will sell the stake in its US child-care centres to Morgan Stanley Private Equity to help cut debt.

ABC shares closed 18% down or 39 cents at $1.79, compared to the close of $2.14 last Tuesday week when it asked for trading to be halted.

Earlier in the day, the shares rose as much as 29%, or 61 cents, to $2.75.

More than 109 million shares changed hands, 20 times the average full-day trade over the past year: 157 million shares had changed hands last Tuesday week.

The fact that the shares fell sharply in afternoon trading proves the lie that there were a lot of short sellers waiting to buy shares to complete the settlement of their trades from last week.

ABC's managing director, Eddy Groves said that the company would get $502 million for the sale of 60% of the centres as part of a joint venture with the private equity arm of investment bank Morgan Stanley.

The funds, when combined with the proceeds of a convertible notes issue, would reach $811 million and would be used to repay a large part of the $1.2 billion in senior bank debt after investors feared the company was in danger of breaching its banking covenants.

Mr Groves said the earnings from the US were guaranteed for the next year and would not rule out future write downs as part of the sale. He said ABC planned to pay off the remainder of its $1.2 billion senior debt facility by June.

ABC also said it was proposing to sell its British child-care vouchers business, valued around $240 million, through a tender, and is continuing the sale of $210 million in properties.


 

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