And this is why capital raising is better than going to a bank...

And this is why capital raising is better than going to a bank for a loan.....like I said, capital raising aint all bad ......

Bell rings for Allco
Michael West
October 28, 2008 - 1:56PM

All eyes are on Justice Neville Owen of the Supreme Court of WA who hands down judgement today in the longest case in insolvency litigation history, Bell Group.

It is also the most critical case of its kind as it may set a precedent for what unsecured creditors can expect to pick up in a liquidation, vis-à-vis the banks, that is, who secure an eleventh-hour charge.

The liquidator of Bell Group brought the case 15 years ago in an attempt to claw back $300 million it claims the banks lent to Bond Corp when they knew it was heading for the rocks. He claims the banks were "perfecting their security'' before Bondy's empire collapsed, leaving nothing for unsecured creditors and shareholders.

Ever since the credit crunch, the banks have been busy ''perfecting their security'' over the so-called ''Bad Boys'': the likes of Allco, Centro and ABC Learning.

That is, they have sought to prop up the Bad Boys with a credit lifeline in return for a secured charge. In so doing they replace their unsecured ''negative pledge'' positions with secured creditor status and therefore rank ahead of shareholders in a wind-up.

Anybody unfortunate enough to still own shares in the ''Bad Boys'', or foolhardy enough to have waded in for a spot of bargain-hunting, should be under no illusion - the prospects for the survival of your equity are remote.

Under company law, a charge that has been taken over a company's assets can be rendered void if the company goes bust within six months of that charge being taken. In the case of some credit meltdown victims, we are approaching that 6-month threshold now.

In the case of Allco, the six months is almost up. The banks were unsecured before the board granted them a charge in May. Similarly, the bankers to Commander Communications had no security before they took a charge last year for tipping in some extra cash. Now they have total security Commander has gone under.

In the case of Centro, the banks keep rolling their debt and the secured component of that debt has become materially higher.

When the syndicate of banks to Eddie Groves' ABC Learning refinanced in December last year it was still unsecured.

Banks take charge

Then a strange thing happened. The banks, led by Commonwealth, took a charge over ABC in June. A search of the charge shows ABC had granted security subject to an ''oral'' agreement. It smells like a rush job.


Usually, a charge is pursuant to a written loan agreement. By the next month the banks with their syndicated $1.1 billion loan had a full fixed a floating charge over all the assets of the company.

The Bell Group case should establish precedent on the test for solvency. The issue being that the banks should ensure that a company is solvent before they take a charge. But what is the test for solvency? Surely the company should get something in return. Surely the deal should deliver solvency, or otherwise should be void.

While Neville Owen's judgement should shed further light on the legal position of the banks and other creditors, the decision of the High Court in the Sons of Gwalia case two years ago has already rearranged the dynamics in favour of shareholders.

It was found that shareholders who had bought Sons of Gwalia shares in an uninformed market before Gwalia bit the dust ranked equally in the wind-up with unsecured creditors. Formerly, shareholders had always ranked behind creditors.

Since them, the banks have lent a lot of money on a ''negative pledge'' to wobbling corporates. They are not secured that is but only protected to the extent of the company's assets.

When asset values looked as though they were going south in a hurry the banks moved to take security, to jump ahead of other unsecured creditors in the queue.

This course of action invariably suited their purposes as one, they were loathe to cop a writedown at the next balance date, two, they could control the ''work-out'' rather than losing fees and control to a liquidator, and three, there was always the prospect that one of the Bad Boys could trade out of its leveraged misery.

The company executives with which the banks held their exclusive negotiations were mostly on board in this process. Afterall, they were still getting paid while the company remained solvent.

The question is - and the corresponding answers are not often public - did the directors get anything for granting a charge to the banks? Was it merely a little more cash for a large security? Was there an enforceable undertaking? Or was it simply the threat? If you don't give us a charge we'll pull the pin.

The Bad Boys

The independent directors of the Bad Boys have an impeccably poor record of sticking up for shareholders' rights so there are grounds for suspicion.

Once the banks have taken their charges and seen out that six month period, shareholders can kiss their chance of a return goodbye. Shareholders must be aware of this and should put pressure on so-called independent directors to protect their rights. If independent directors deem the banks are merely perfecting their security and the company has little hope of surviving in the longer term they should appoint a voluntary administrator.


Let's look at the case of Allco. The banks were granted their charge on May 6. The six month period for the banks to perfect their security is up on November 6. There is a little over a week then before shareholders get to line up behind the banks.

Here's the background for the ten-day ultimatum given by Allco directors to its banking syndicate.

Allco reported on May 1, "... in order to obtain the bridge facility extension and as a condition to the other senior banks continuing to negotiate the restructure of Allco's senior debt facilities, the banking group required Allco and each of its subsidiaries who are currently guarantors of the senior debt to grant security over all of their assets to the senior banks."

At that time there had been no financial default by Allco and all interest and principal repayments had been made but the relevant market capitalisation clause caught the company out and the banks used their negotiating position to obtain security via a debenture charge.

Since then, the senior debt has been reduced by around $350 million, from $1 billion to $667 million as of 17 October 2008. This is not a bad effort from chief executive David Clarke and his corporate repairment. And it is certainly better than a forced sale given that the company retains its "crown jewel" operations.

At June 30, Allco's net tangible assets (adjusted for minority interests and deferred tax assets) stood at $21 million. There was some commentary that the carrying values of the assets of the company undervalued its main shipping and aircraft leasing businesses.

But the economy has since deteriorated, dragging realisable values along with it, indeed to the point that there may now be a deficiency of assets.

In other words, equity value in the company is probably zero, a fact that has been readily implied in the market price of the Allco ordinary equity for months. The stock prices have reflected option value only.

What happens if/when Allco goes caput? The loss to be suffered in the event of an administration falls firstly on the unsecured creditors of Allco, the largest constituent part of which are the holders of Allco Subordinated Notes (AFGHA). These notes were issued in mid June of 2007 at a face value of $100 per note, raising $350 million.

Typically, the notes were subscribed to by income funds and pensioners or retirees looking for a steady but unspectacular payment of interest until redemption. They have received anything but.


However the granting of security by Allco to the banks on May 6 has had a terrible effect on their position. Instead - instead of ranking equally with the senior debt holders, they now rank behind them. Instead of sharing any return they will only get to see the crumbs left over after the banks have fed, if there are any crumbs to be had.

While the granting of security was permitted under the terms of the note, noteholders could hardly have anticipated that this would have occurred just ten months after the notes were issued.

As for the issue of the banks' security be voidable by a liquidator within the six month period, this issue is paramount for the board of Allco.

The senior debt holders provided no additional advance in exchange for their first-ranking debenture but have simply used their superior negotiating position to oblige the issuance of the debenture security at a time when Allco was still complying with its obligations under the lending agreements.

By doing so, they have been elevated from being unsecured creditors to holding first ranking security. Their win is a noteholder's loss.

Against this background, you can bet the banks will bend over backwards in their speed to grant Allco an extension of time to meet a revised debt repayment plan. The banks need only wait till November 6 and their security will be perfected.

The Allco directors should seriously consider whether an extension is in the interest of the stakeholders of the company. Are noteholders and shareholders better served by placing the company into liquidation? It would appear so.

The economic havoc has only got worse. It will persist for some time as asset values come under further pressure amid the rush to deleverage.

Shipping rates have reduced significantly in the face of looming global recession and airline leasing faces a harsh operating environment. Property prices are unlikely to recover for years.

Unless this logic is faulty it would appear the best option for Allco directors would be to file for a wind-up. The noteholders would benefit. Thanks to the lack of equity, shareholders are probably toast anyway.

Allco directors are locked in talks with the banks now. They will exploit this timing issue to get maximum leverage and thrash out a better deal on the repayment schedule.

This is even more the case now given management has been granted options over 20% of the equity of the company. They stand to benefit from any upside.

That the liquidator of Bell Group has been slugging it out in the courts since the early 1990s does not bode well for the prospective costs and duration of the disputes which are now arising from the present cycle.