"Octaviar: Ruling against Fortress sets precedent for Australian LBO loans
By Carolyn Lim and Luc Mongeon
Published: April 2 2009 13:42 | Last updated: April 2 2009 13:42
This article is provided to FT.com readers by Debtwire—the most informed news service available for financial professionals in fixed income markets across the world. www.debtwire.com
--------------------------------------------------------------------------------------------------------
Private equity shops rode the recent surge of LBO deals in Australia on a tide of secured debt they sold to hedge funds and asset managers. But a somewhat arcane court ruling in Octaviar’s insolvency calls into question just how safe some of those loans really are.
Queensland Supreme Court Justice Philip McMurdo ruled on 6 March that a loan Octaviar received from Fortress Credit Corporation does not benefit from a secured charge the two parties agreed upon because of a technical omission. The decision supported a complaint brought by the Queensland trustee on behalf of unsecured bond holders related to an increase of debt that was not registered with Australian regulatory authorities.
That precedent will likely prompt other secured lenders to try to register additional documents for their credit agreements retroactively, said Bruce Whittaker, a partner at Blake Dawson. “There are a lot of securities out there given by a lot of companies, [so there will be] a flood of lodgements,” Whittaker said.
The ruling also may also boost the slim recovery holders of Octaviar’s AUD 349m ASX-listed notes due 2011 will receive as the bonds now rank pari passu with the Fortress loan. The bonds were quoted 3-7 this week, according to a distressed fund manager.
Octaviar bond holders include Arrowgrass Capital Partners, Cannizaro Capital Parnters, DE Shaw, Deutsche Bank, GLG Partners and Redbrick Capital Management, a source familiar with the matter said.
Lodge it or lose it
McMurdo ruled that any increase in the size of a liability against which a charge is secured, requires relevant documents to be lodged with the Australian Securities & Investments Commission within 45 days of the addition of the liability. Otherwise, the secured charge will exclude the increase in liability, he decided, despite objections from Fortress and the company itself.
The controversy concerning Octaviar originated from some loans that the tourism and finance conglomerate guaranteed in 2007. On 25 May 2007, Octaviar guaranteed the obligations of Young Village Estates, which had borrowed AUD 53m from Fortress Credit Corporation. The loan was unsecured at that time.
A few weeks later, Fortress provided an AUD 250m cash advance facility to Octaviar Castle, a 100%-owned Octaviar unit. Octaviar guaranteed the facility and provided a security to Fortress in the form of a fixed and floating charge.
The cash advance loan was repaid in February 2008 but shortly before that, Octaviar, Castle and Fortress agreed that Octaviar’s guarantee of the loan to Young Village Estates would also be covered by the secured charge backing the larger facility. McMurdo determined this inclusion meant that the charge had changed and that additional documents on the change should have been lodged with the ASIC.
As documents were not lodged in Young Village Estates’ instance, McMurdo ruled in favor of the note holders that the charge on Octaviar was void as security for the Young Village Estates loan. That overrules Octaviar’s and Fortress’ defence that from 22 January 2008, the charge on Octaviar also covered the loan to Young Village Estates.
LBO scramble
McMurdo’s decision overturns the long standing market practice. Previously, if lenders had registered with the regulator a charge to secure a loan, and the loan amount was later increased, it was assumed that the charge was effective for the increased amount, said Whittaker.
With McMurdo’s decision, banks have been advised to review documentation on secured charges put in place previously and register relevant documents on any increase in liabilities secured by those charges, said a partner at an Australian law firm.
The Octaviar ruling prompted Colorado Group’s legal counsel, Allens Arthur Robinson, to inform lenders to the retailer that the security pledges that backed Affinity Equity Partners’ acquisition of Colorado could be jeopardised, bankers said. The loans that part funded the LBO were increased in August 2007 to allow the private equity fund to increase its stake in Colorado to 100% from the 83.6% share acquired in November 2006. Since ASIC was not notified of the increase within 45 days, the security backing the facilities could be in peril, the bankers said.
Allens Arthur, the legal counsel to Colorado’s senior lenders, advised the security agent to notify ASIC now that the debt facilities and liabilities secured by the charges had been increased – even though the 45-day period had long expired. The law firm also recommended that an application be made to the relevant courts for an extension of the 45-day registration period, the bankers said.
If 45 days have lapsed from the time of a debt increase, banks might want to consider applying to the court for an extension of the registration period, said Whittaker. However, it was unclear if it was within the powers of the court to extend the period, he said.
Still, Whittaker thinks further clarification of the matter is required, either on appeal or possibly through the passage of new legislation. "
http://www.ft.com/cms/s/2/a4326d6c-1f82-11de-a7a5-00144feabdc0.html
I believe that G20 have called for a better/clearer regulation globally.Hopefully clarification of such proceedures gets attention across borders.
Does'nt the increase/changes and perhaps prefential treatment of lenders charges rate a mention in Bonds case? and Opes proceedings? It appears to be of some importance rather than being "arcane".imo.
I found the naming of supposed noteholders a bit of new information.
Can anyone tell me what the following means?
"The bonds were quoted 3-7 this week, according to a distressed fund manager."
I am not legally qualified but interested in others comments.
OCV
octaviar limited
