Listed below is an article which appeared today in the SMH regarding the chances of shareholders extracting value from Allco in the event of it going under. Any thoughts???
Time-out for Allco • Michael West • October 28, 2008 - 10:58AM Ever since the credit crunch, the banks have been busy perfecting their security over the so-called Bad Boys: the likes of Allco, Centro and ABC Learning.
That is, they have sought to prop up the Bad Boys with a credit lifeline in return for a secured charge. In so doing they replace their unsecured negative pledge positions with secured creditor status and therefore rank ahead of shareholders in a wind-up.
Anybody unfortunate enough to still own shares in the Bad Boys, or foolhardy enough to have waded in for a spot of bargain hunting, should be under no illusion the prospects for the survival of your equity are remote.
Under company law, a charge that has been taken over a company's assets can be rendered void if the company goes bust within six months of that charge being taken. In the case of some credit meltdown victims, we are approaching that six-month threshold now.
Once the banks have taken their charges and seen out that six-month period, shareholders can kiss their chance of a return goodbye.
Shareholders must be aware of this and should put pressure on so-called independent directors to protect their rights. If independent directors deem that the banks are merely perfecting their security and the company has little hope of surviving in the longer term they should appoint a voluntary administrator.
Allco poised
Let's look at the case of Allco.
The banks were granted their charge on May 6. The six-month period for the banks to perfect their security is up on November 6. There is a little over a week then before shareholders get to line up behind the banks.
Here's the background for the ten-day ultimatum given by Allco directors to its banking syndicate.
Allco reported on May 1, " in order to obtain the bridge facility extension and as a condition to the other senior banks continuing to negotiate the restructure of Allco's senior debt facilities, the banking group required Allco and each of its subsidiaries who are currently guarantors of the senior debt to grant security over all of their assets to the senior banks." At that time, there had been no financial default by Allco and all interest and principal repayments had been made but the relevant market capitalisation clause caught the company out and the banks used their negotiating position to obtain security via a debenture charge.
Since then, the senior debt has been reduced by around $350 million, from $1 billion to $667 million as of 17 October 2008. This is not a bad effort from chief executive David Clarke and his corporate repairment. And it is certainly better than a forced sale given that the company retains its "crown jewel" operations. At June 30, Allco's net tangible assets (adjusted for minority interests and deferred tax assets) stood at $21 million. There was some commentary that the carrying values of the assets of the company undervalued its main shipping and aircraft leasing businesses.
Asset values shrink
But the economy has since deteriorated, dragging realisable values along with it, indeed to the point that there may now be a deficiency of assets.
In other words, equity value in the company is probably zero, a fact that has been readily implied in the market price of the Allco ordinary equity for months. The stock prices have reflected option value only.
What happens if/when Allco goes caput? The loss to be suffered in the event of an administration falls firstly on the unsecured creditors of Allco, the largest constituent part of which are the holders of Allco Subordinated Notes (AFGHA). These notes were issued in mid June of 2007 at a face value of $100 per note, raising $350 million.
Typically, the notes were subscribed to by income funds and pensioners or retirees looking for a steady but unspectacular payment of interest until redemption. They have received anything but.
However the granting of security by Allco to the banks on May 6 has had a terrible effect on their position. Instead instead of ranking equally with the senior debt holders, they now rank behind them. Instead of sharing any return they will only get to see the crumbs left over after the banks have fed, if there are any crumbs to be had.
While the granting of security was permitted under the terms of the note, noteholders could hardly have anticipated that this would have occurred just ten months after the notes were issued.
Banks' security
As for the issue of the banks' security being voidable by a liquidator within the six-month period, this issue is paramount for the board of Allco.
The senior debt holders provided no additional advance in exchange for their first-ranking debenture but have simply used their superior negotiating position to oblige the issuance of the debenture security at a time when Allco was still complying with its obligations under the lending agreements.
By doing so, they have been elevated from being unsecured creditors to holding first ranking security. Their win is a noteholders loss.
Against this background, you can bet the banks will bend over backwards in their speed to grant Allco an extension of time to meet a revised debt repayment plan. The banks need only wait till November 6 and their security will be perfected.
The Allco directors should seriously consider whether an extension is in the interest of the stakeholders of the company. Are noteholders and shareholders better served by placing the company into liquidation? It would appear so.
The economic havoc has only got worse. It will persist for some time as asset values come under further pressure amid the rush to deleverage.
Shipping rates have reduced significantly in the face of looming global recession and airline leasing faces a harsh operating environment. Property prices are unlikely to recover for years.
Unless this logic is faulty it would appear the best option for Allco directors would be to file for a wind-up.
(20min delay)