article in the age with a silly headline..lol

Source: www.theage.com.au/business

A is for ABC, B for banks, C is for collapse
Eric Johnston | November 8, 2008

IT APPEARED as if they were collapsing alphabetically.

ABC Learning, Allco Finance Group and Freightlink had dangled on a financial lifeline for most of the year.

Suddenly this week, all three were gone. But it was not a case of the banks callously turning off support. They fell and others may, too, as the cumulative pressures of the market crisis became too much for a company and its financial backers to bear. The question now is how many other companies are being pushed to the brink by the same forces.

"It's the end of the liquidity boom. A number of companies with high leverage or that were dependent on increasing asset values are finding that their business models are unsustainable," said Colin Nicol, a senior partner with insolvency specialist McGrathNicol.

As administrators moved in to ABC and Allco more then $1 billion went up in smoke, leaving banks scrambling to see what could be salvaged among their other loans.

In the worst situation remains stricken shopping mall operator Centro Properties Group, which requires billions of dollars to be rolled over next month.

In the case of the infrastructure investment house Babcock & Brown, while it is financially sound, some fear a shortfall in a planned program of asset sales could lead to its rapid demise.

Both have the potential to cause shock waves through the local banking sector. While banks have been taking a tougher view towards problem loans, particularly following credit market upheaval of October, the rule of thumb remains that banks are loath to force a company with large loans into administration.

For ABC and Allco, it was not the banks that forced their demise, rather it was a decision by the directors of the respective companies to pull down the shutters.

When a company is placed into administration, banks are required to make a larger provision against the loan compared to keeping the company solvent.

"At the end of the day the banks don't want anyone to go under. On a large loan it takes a lot of customers to make up a bad debt," said an investment banker.

Asset quality for the banking sector has remained remarkably strong in recent years given the absence of big-name collapses.

But now analysts expect souring loans to run up to the highest level since 1994, when Australia was still working through the impact of a recession.

Lending losses for banks peaked in 1992, when charges for bad and doubtful debts represented nearly 3% of the sector's total loans. The worst-case scenario for the current collapses could see losses at just 0.5% of total loans.

Collectively the major banks have more than $1 billion exposure to the child-care operator and a further $370 million to Allco. On a worst-case basis, some predict a further $6 billion in bad loans could emerge over the next year.

Banking watchdog, the Australian Prudential Regulation Authority, yesterday noted the increased exposure among some banks to problem corporate loans, but said the exposures were "not large" relative to total balance sheets.

Still, fund managers speculate the latest string of provisions will most certainly lead to more aggressive capital raisings as banks bolster their balance sheets.

While local banks are believed to be willing to support Centro as it seeks to push ahead with a complicated debt-for-equity swap ahead of a December 15 deadline on about $5 billion of loans, some offshore banks involved in the consortium have been raising doubts.

Some European and US lenders that have been subject to government support or have been forced to inject fresh capital could be looking to jettison anything that is weighing them down.

"They may take the view, 'we can write it off and then we start 2009 with a new year and any upside is not mitigated by downside'," an investment banker said.

Indeed, a decision this week by an unlisted US fund, Inland American Real Estate Trust, to acquire a $200 million Centro note was seen as a bet that Centro may be forced into administration. This could deliver 25 US-based shopping malls secured by the note directly into the hands of Inland.

Elsewhere, analysts have cautioned that Babcock could risk breaching some of its banking covenants next year if its program of planned asset sales falls short in a market falling away for infrastructure. This could affect efforts to cut debt by $400 million by next year.

Babcock management continues to insist the company remains financially sound.

Despite the sudden rush of collapses, Mr Nicol, whose firm has been appointed as an administrator to Allco and is acting as a receiver to ABC Learning, said there was no single link that pushed each over the edge.

Neither did the complex Bell Group court decision handed down last week prompt a rush of directors to file for administration. Some had suggested the Bell Group case might have resulted in directors having a greater obligation to act responsibly when it came to a troubled company agreeing to take on new debt.

It is believed the Allco board opted for protection of administration after refusing to commit the company's solvency during a refinancing deal.

Among the findings of the long-running case into the failed Alan Bond-backed firm, was that Bell directors breached their duties by entering into transactions that gave the banks control of assets even as the Bell directors knew the company was close to insolvency.

"Its been a case-specific situation and I don't think you can draw a broader inference from that (case)," Mr Nicol said.

Bankers are developing their own theories.

"Allco was simple — it had lots of debt thrown at it based on inflated asset values," said a senior bank executive with knowledge of the companies. "Now the problem is it's got to actually sell assets to refinance debt."

However, doubts are growing over the reasons behind the unravelling of ABC Learning.

Focus among bankers centre on ABC transactions that can't be explained around normal operating procedures.

The company, which operates more than 1000 child-care centres — most of which are unprofitable — has been the subject of initial investigation by the Australian Securities and Investment Commission.

Centro hopes it can convince some lenders to join a complicated debt-for-equity swap ahead of a December 15 deadline on about $5 billion of loans.


Ends.

Cheers, Pie :)