Res­cue squad


The Australian - The Deal - - Contents - BY DA­MON KITNEY

A par­a­digm shift in the way the in­sol­vency sec­tor and ma­jor banks look at cor­po­rate col­lapses means they are now far less likely to call for the un­der­taker.

Few in­sol­vency prac­ti­tion­ers will ad­mit to be­ing proud of hav­ing qui­etly saved a busi­ness with $300mil­lion in turnover fromthe cor­po­rate grave. But Ian Car­son will.

The sec­tor vet­eran and chair­man of part­ners at PPB Ad­vi­sory is talk­ing for the first time about a res­cue ef­fort he be­lieves says plenty about a change in mind­set by big banks and the pro­fes­sion to­wards cor­po­rate col­lapses.

“In the past two years, we saved a build­ing com­pany where, be­cause of a break­down in the re­la­tion­ship be­tween the com­pany and the bank, the bank wasn’t com­fort­able,” Car­son, 54, tells the deal. “So we went in and said: ‘It is OK. Just give them time.’

“That prob­a­bly saved a $300mil­lion busi­ness and it was due to the fact that the banks trusted the in­de­pen­dent ad­vis­ers. Andthat’s a story that will never be writ­ten be­cause who wants to tell a story about howthey nearly went broke? That busi­ness em­ploys thou­sands of peo­ple.”

Car­son, who founded Car­son and McLellan be­fore it merged with PPB in 2000 and was state pres­i­dent of the Vic­to­rian Lib­eral Party from 2000 un­til 2003, has seen in­dus­try trends come and go. But one that has been clear since the global fi­nan­cial cri­sis is that many banks are choos­ing not to put com­pa­nies into re­ceiver ship,

pre­fer­ring to try to work them out. Cyn­ics say the banks are sim­ply sick of pay­ing hefty fees to re­ceivers dur­ing years of sub­se­quent lit­i­ga­tion and be­lieve that a trou­bled com­pany is bet­ter off with an ex­ter­nal ac­coun­tant com­ing in and tak­ing a tougher line. The banks now em­ploy for­mer in­sol­vency prac­ti­tion­ers, mean­ing they are bet­ter equipped with the skills needed to help busi­nesses sur­vive.

But Car­son, who has worked closely with all the ma­jor banks, says to view the change as sim­ply an ef­fort to re­duce fees is sim­plis­tic. “There is a big­ger part to the value equa­tion than sim­ply the fee. It is about pro­tect­ing the brand, about keep­ing cus­tomers, about be­ing part of so­ci­ety, part of the mar­ket, and about in­form­ing the stake­hold­ers. It could even be about pro­tect­ing jobs.

“We are talk­ing to the banks about help­ing to keep the cus­tomers. The banks are say­ing to the peo­ple in the-work-out ar­eas [in­volv­ing at-risk or de­faulted loans]: ‘Let’s find ways to keep th­ese cus­tomers, so that we don’thave to re­place them.’ The­mar­ket is driv­ing that. We have never been driven by the fees. We have been driven by try­ing to save the busi­ness.”

Car­son was at the cen­tre of a storm ear­lier this year when the Fed­eral Court or­dered an in­quiry into the fees and ex­penses charged dur­ing the last weeks of the Bur­rup Fer­tilis­ers re­ceiver­ship. At is­sue was PPB’s pro­pri­ety in ac­cept­ing the role of re­ceiver and man­ager of the WA-based Bur­rup, and the ex­tent to which PPB’s staff be­ing based in Melbourne in­creased the fees, ex­penses and dis­burse­ments charged.

In­dian en­tre­pre­neur Panka jOswal, Bur­rup Fer­tilis­ers founder and for­mer part-owner, has crit­i­cised the $2.2 mil­lion in fees and $303,295 in ex­penses in­curred by PPB staff in the fi­nal six weeks of the re­ceiver­ship. How­ever, Car­son said in April that it was right for the re­ceiver­ship to be car­ried out in­Mel­bourne where PPB and ANZ, which was owed $ 860 mil­lion af­ter the col­lapse, were lo­cated. Fed­eral Court judge Antony Siop is made it clear that the case­was not to be an in­ves­ti­ga­tion of the re­ceiver fees gen­er­ally, but a nar­row in­quiry in the con­text of the com­plaints raised by Oswal.

Car­son cites PPB’s ad­vice to the­mepark and at­trac­tions owner MFS Liv­ing and Leisure on its re­struc­ture and re­cap­i­tal­i­sa­tion five years ago as an ex­am­ple of the de­sire of the firm– which counts for­mer chair­man of the Aus­tralian Se­cu­ri­ties & In­vest­ments Com­mis­sion Tony D’Aloisio and Mir­vac and National Wealth Man­age­ment di­rec­tor Elana Ru­bin among its di­rec­tors – to look at the big­ger pic­ture when deal­ing with com­pa­nies in trou­ble, rather than sim­ply call­ing in the un­der­tak­ers.

“The di­rec­tors came to us on that and they had a $30mil­lion fund­ing short­fall to get to the win­ter ski sea­son. Be­causewe had four months, wewere able to de­fer cred­i­tors, do deals with cred­i­tors, sell sur­plus as­sets and get an in­vestor in­volved – James Packer – who took a big stake in Liv­ing and Leisure to bail the­mout. And that thing is still go­ing to­day be­cause we had time.

“We­have found eq­uity for a lot of busi­nesses [in sim­i­lar sce­nar­ios]. The new par­a­digm has been to say: What are the is­sues for the wider stake­hold­ers? In Cen­tro’s case, ev­ery­one got to­gether and said it was too big to fail,” he says of prop­erty gi­ant Cen­tro, known as Fed­er­a­tion Cen­tres, which sur­vived af­ter a com­plex and pro­tracted debt-for- eq­uity swap. “That is the best ex­am­ple of a chang­ing par­a­digm. The big­gest thing is to have time to plan the is­sues. They [of­ten] come to you when it is so far gone, and the hole is so big that you can’t fill it. With Cen­tro, they had time to deal with it.”

An­other key fac­tor in the par­a­digm shift has been the emer­gence of pow­er­ful in­ter­na­tional hedge funds and pri­vate eq­uity in­vestors who re­gard debt as the new eq­uity. There are as many as 30 global funds, such as TPG, Oak­tree and An­chor­age, that are ca­pa­ble of bring­ing bil­lions of dollars to a distressed sit­u­a­tion.

An­chor­age and Oak­tree did just that to take con­trol of the em­bat­tled Nine En­ter­tain­ment Group last year. The same hap­pened at West Aus­tralian util­ity Alinta. The aimis to pur­sue “loan to own” deals, where they buy enough debt to se­cure a vot­ing po­si­tion that can con­trol de­ci­sion-mak­ing by se­cured lenders.

Crit­ics ar­gue the funds are gain­ing con­trol of com­pa­nies by stealth, but Car­son says the emer­gence of the hedge funds brings an­other op­tion to the ta­ble. “The hedge funds and the pri­vate eq­uity funds give you an ex­tra op­tion. When a pri­vate eq­uity fund comes in and says it will pay you 60c in the dol­lar, it gives you a fu­ture for the busi­ness. It is good for the­mar­ket.”

How­ever, he adds one key caveat. “One of the risks is that they are not as wor­ried about their brand as the banks, and so they might be a bit harsher when it comes to deal­ing with cer­tain sit­u­a­tions.”

He won’t comment fur­ther, but there have been re­cent cases, such as that of Aus­tralian and New Zealand print and lo­gis­tics provider Geon Group, in which the hedge funds have ar­guably pushed too hard.

Geon changed hands in early Fe­bru­ary for a re­port­edly nom­i­nal sum af­ter pri­vate eq­uity firms KKR and Al­le­gro ac­quired $113 mil­lion of the com­pany’s debts for $ 6 mil­lion. They placed the com­pany into ad­min­is­tra­tion and sub­se­quently made an of­fer to ac­quire the busi­ness out of re­ceiver­ship.

But when sup­pli­ers un­happy with the deal, in­clud­ing Paper­linX unit Spicers, re­fused to re­stock the pa­per sup­plies, Geon’s pro­duc­tion was brought to a halt and it was even­tu­ally placed into re­ceiver­ship.

Car­son sees more work for PPB emerg­ing in three key ar­eas– min­ing ser­vices, agri­cul­ture and au­to­mo­tive man­u­fac­tur­ing.

“The min­ing ser­vices sec­tor is the ex­am­ple at the mo­ment where there has been mas­sive



un­re­strained growth. When you have plenty of sun­light, all the oak trees grow and you get the canopy. The best ones find the sun­light and then there are all the oth­ers, where the busi­ness mod­els are not good enough.

“We­have also been talk­ing for a while about the re­tail de­cline flow­ing through to prop­erty val­ues. It takes time as it is a huge space, but there will be im­pacts on val­u­a­tions. And then you need to look at the in­di­vid­ual cases.”

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