Reality hit home this week for some former corporate high-flyers as the credit crisis finally brought them down - and also led a banking icon to fall into the arms of a bigger rival, reports Danny John.
The past few days have made the "bad boys" a lot uglier than they were when the term was coined at the start of the year as the global credit crisis first ripped through the sharemarket.
Back then the label was attached to those corporates that had relied on cheap debt in the boom years to produce stunning success but quickly found the same source of finance was dragging them to the bottom.
Top of the "bad boy" list today is Allco Finance Group, which lost almost $5 billion in a spectacular fall from grace that has become a salutary lesson in hubris.
In 20 months Allco turned from archetypal financial engineer - and driving force behind an $11 billion punt to buy Qantas last year - to an almost worthless debt-laden wreck that confronted its stunned shareholders on Tuesday when the receiver finally moved in.
In second place sits the child-care operator ABC Learning Centres, which on Thursday followed Allco into the corporate graveyard and became an even greater example of a company ill-equipped to handle life after the good times.
One banker involved in the negotiations with ABC that led its directors to finally throw in the towel said the arrival of the receiver was aimed at ring-fencing further losses. "There is goodwill on both sides, but this thing is such a basket case," he said.
A victim of the almost evangelical global corporate ambitions of its founder Eddy Groves, ABC should have been a solid investment for its shareholders, given the nature of the heavily government-subsidised industry in which it operated and the country's desperate need for quality child care.
But just like Allco, it was undone by over-expansion, a mountain of debt that cost too much to service and couldn't be repaid as the bottom fell out of the market, and a complicated corporate operating structure that few people understood.
Exactly the same features can be detected in our bad boy No.3: Centro Property Group.
The seeds of Centro's near-demise were, as with ABC, sown in the US, where it spent billions buying shopping centres at the top of the boom, just as America was falling victim to its subprime housing loan-induced bust.
Centro is still on a banking life-support system that was put in place midyear, its management charged with selling as many of its malls as possible to bring its liabilities down to more acceptable levels.
But the list goes on: Babcock & Brown's debt problems, in excess of $2 billion, are less pressing, but its sharemarket value has been demolished by the credit crunch; and there's its struggling energy offshoot, B&B Power.
Next come the property "tragics", MFS (now Octaviar) and City Pacific, which are barely keeping the wolves from the door.
What has been noticeable this week is the change in sentiment towards such troubled operators and the draining away of corporate will within some to fight on after nursing the businesses through the initial stages of the debilitating liquidity crisis.
There is no doubt that lenders are beginning to take a tougher line with the "bad boys', partly as a consequence of the longevity of the credit crisis - in which normal sources of financing across the globe have dried up and the cost of what little is available has soared.
And for all the signs of a thaw in short-term funding markets following government intervention and falling interest rates, Australia's senior bankers still accept for the most part that it will take another two to three years before the markets return to some kind of normality.
So it is little surprise to find that the big banks are taking the view that it would be better to accept some short-term pain in the shape of further large write-downs, and even write-offs, this year so that they can start 2010 with relatively clean slates.
The $4 billion-plus jump in provisions made by the leading banks to cover increasing bad debts at the end of the 2008 financial year was a further sign of this new reality, foreshadowing as it did an acceptance that things were going to get worse before they got better.
The demise of Allco and ABC Learning has prompted a further set of disclosures from the Commonwealth Bank, Westpac, ANZ and National Australia Bank about their respective exposures. And their statements contained not-so-subtle hints that they expected further charges against their bad debt positions.
Working out publicly how much of these loans could be at risk is an imprecise science at the best of times. But industry analysts have pieced together a reasonably accurate picture from what the banks and many of the "bad boy" companies have been required to tell their investors.
Jonathan Mott, the analyst at the investment bank UBS who first came up with the phrase to describe a worsening family-style relationship between the two sides, has estimated that the Big Four domestic banks could be exposed to the tune of $10.4 billion.
And what is clearly evident from his research over the past 11 months is the increasing number of companies contained by the banks on what are officially called "watchlists".
As Mott so succinctly put it yesterday on his updated research following the demise of Allco and ABC: "The bad boys are turning into bad debts."
Of course, not all of the amount quoted by UBS will go bad, and as in the case of Allco, the banks may well recover a fair chunk of their money. But with the economic climate worsening and buyers deserting the market, even for distressed assets, there is an increasing risk of larger losses.
An analyst at Goldman Sachs JBWere, James Freeman, reckons the losses could rise to $7 billion over the next year, although some of this amount has already been covered by existing provisions.
"As the real economy starts to slow and debt refinancing proves challenging, we expect to see further exposures emerge from other known high-profile names in the coming months as their survival is determined by the banks," Freeman said.
"In our view all of the banks are likely to be impacted."
The plight of Centro is a good case in point for the latest difficulties, even though it continues to earn revenue (and therefore money to cover its interest payments) from the retailers that lease space in its shopping malls, among which are some of our biggest - think Woolworths.
Centro owes its global banks $6 billion, of which $4 billion sits with its Australian lenders, and the pressure on their respective balance sheets is ratcheting up the need for certainty that they will get their money back.
The company finds itself in the same position as Allco and ABC: it is trying to sell many of its centres at a time when prices have fallen sharply because of the recessionary times.
This situation has been made even worse by fewer buyers on the ground and a lack of available debt finance to fund such deals.
This is the theme repeating itself across the market where various companies, even those in sound financial shape, are finding it hard to offload businesses they no longer want or can no longer afford to invest in.
"The problem is the usual buyers for these assets - Macquarie Group, Babcock & Brown and private equity groups - are no longer in the market," one insolvency expert said.
For debt-laden companies like Centro, the dearth of buyers has made it harder to honour deals it agreed to earlier this year that required repaying debt at regular intervals - arrangements which have been undone by last month's turn for the worse in global financial markets.
That, in part, is what undid Allco, and there are increasing worries that Centro is facing the same scenario as it approaches next month's deadline to roll over its existing loan facilities.
To this has been added a far greater concern for company directors, particularly those of the "bad boy" operators.
Following a ruling a little over a week ago in the long-running court saga concerning the collapse of Bell Resources, the view emerged that board members now face a more stringent requirement than before to ensure they don't allow their companies to continue trading if insolvency may be an option further down the track - even if the companies are not bust at the time.
Banks, which as the main creditors are usually first in the queue to get their money back, were also placed on notice about their once-iron-like grip over a company's assets.
In particular, the banks have to be even more certain about the solvency of a business before they commit additional financial support in return for a necessary security.
Failure to exercise the due diligence required for such certainty could leave the banks lining up with other key investors for a slice of what is left of a company's assets in the case everything goes pear-shaped.
Such a scenario might well create some reluctance among the banks to lend money in the first place.
These issues played a direct role in the decisions taken by the directors of Allco on Tuesday and of ABC Learning on Wednesday to call in administrators. Suddenly the likelihood of eventual failure had become so much greater.
For Allco, the question revolved around the drawing down of a further $20 million from its existing bank facilities to get the company through the next month of operations.
It was a similar situation at ABC Learning.
"We were with them this weekend and they've taken advice on how the board sees themselves trading insolvent," said a banker who was close to the discussions that led to the appointment of the administrator.
This is the new legal minefield that has compounded the difficulties of trying to pull many a troubled company back from the brink of failure.
But as the inevitable investigations by the receivers will no doubt come to show, neither the law nor the financial crisis should take all of the blame for the failures of companies that had been in the hands of far-too ambitious and overstretched corporate "bad boys", or for that matter, the loose lending practices of banks that should have known better given their experience.
It is easy in hindsight to say that what happened to Allco and ABC was inevitable. But in neither case was it simply a matter of being in the wrong place at the wrong time of the financial cycle. There are specific reasons why they have become the poster-boy twins of the "bad boy" era, especially as many of their problems were largely self-inflicted.
A day after Allco gave up the ghost, its senior non-executive director (and Federal Government infrastructure adviser), Sir Rod Eddington, spoke candidly about the mess the company had found itself in.
"If you look at the challenges that Allco faced … they weren't all external by any means," he told a forum of business leaders in Sydney on Wednesday.
Eddington was referring to at least one particularly bad deal the company had done last year and the amount of debt it had taken on overall.
"The question then is, what does the board do about it? The Allco board, or the non-executives, took the view that we would work hard to restructure the company and find a company inside the old company that had a strong economic rationale.
"That journey lasted nearly a year, but it stopped sadly when it went into voluntary administration."
It was a largely unemotional judgment by Eddington of a previously high-flying company's complete and utter downfall, which brought with it the fall from grace of its once-lauded former chief, David Coe, and its most recent boss, David Clarke.
A more blunt assessment was provided by one close observer of Allco's last days before the receivers moved in: "The risks were just too big and it all got too hard."
It is an epitaph that will be engraved on the corporate headstones of many "bad boys".
additional reporting by Eric Johnston
Ends.
Cheers, Pie :)
CNP Price at posting:
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