PPB ADVISORY’S IAN CARSON EXPLAINS THE RECENT SHIFT IN HOW THE INSOLVENCY INDUSTRY AND MAJOR BANKS ARE HANDLING CORPORATE COLLAPSES.
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
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.
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.”