THE decision by ANZ's Mike Smith to pull the pin on Chimaera's securities lending business and seize control of a $260 million portfolio of shares and property could create a mini Opes Prime disaster, triggering legal action, margin calls and hedge fund attacks as the bank systematically liquidates about $200 million worth of illiquid small and mid-cap shares.
The move to put Chimaera into receivership is expected to wreak havoc on the small to mid-cap sector over the next few weeks as ANZ retrieves its money by liquidating stock in a $365 million portfolio of Australian shares filled with stocks including Luminus, Water Wheel, UXC, IDT Australia, Cabcharge, Bill Express and Octaviar.
It is not known who Chimaera has these securities loans with but any directors of companies that have margin loans out will need to come forward and declare their margin-loan exposure.
Any stockbrokers who have been dealing with Chimaera will also need to alert the ASX to any potential breaches of liquidity requirements that might be caused by the ANZ's decision to throw receivers into the company.
An examination of a statement put out by ANZ in May outlines all the securities ANZ had a relevant interest in as a result of transactions under securities lending agreements with Opes Prime, Tricom and Chimaera. This list of 90 companies suggests that many of the stocks in Chimaera's share portfolio are in the lower end of the market.
This does not bode well for the sort of money ANZ will get for them. This partly explains why ANZ is anticipating a $50 million loss on its $260 million security.
Chimaera used a similar stock-lending model to Opes Prime and Tricom Securities, in which the legal title to securities lodged as collateral is transferred from the clients (lenders) to the broker. In turn, the title then passes from the broker to their financiers, which in all three cases was ANZ.
The behind-the-scenes saga at Chimaera is nothing short of flabbergasting and highlights another botched handling by ANZ, which is expected to result in legal action against the bank and further damage to its already tarnished image.
Sources close to Chimaera date the sorry tale back to January when MFS shares collapsed, reducing Chimaera's stock value by about $240 million and exposing ANZ to the tune of $165 million.
The result: ANZ could have paid Chimaera $165 million or enter an agreement to take security over Chimaera's assets in return for a co-operation deed that included a moratorium and certain conditions.
The timing of this arrangement coincides with trouble in other brokers that specialise in securities lending, including Tricom and Opes Prime. In all cases, ANZ was involved.
ANZ appointed Khorda Mentha to do due diligence on Chimaera and last Monday the bank put out a statement saying: "By media release dated 23 April, Chimaera said ANZ was expected to invest $55 million following the completion of due diligence. ANZ today announced that following the completion of the due diligence review, it has decided not to proceed with any investment in Chimaera." However, a Chimaera client said he had been told by representatives at Chimaera that Khorda Mentha had completed the due diligence successfully. A source close to Chimaera confirmed that in May, independent due diligence advisers made positive recommendations to ANZ.
A source also alleges that at the same time as ditching its rescue plan, ANZ issued a margin call for $3.4 million. "Chimaera disputed the margin call, Chimaera personnel believe that the correct position is $3.6 million in surplus. ANZ advises that all accounts must now be brought into credit immediately." Whatever the case, it indicates that Chimaera was either in margin call or close to it.
A spokeswoman for ANZ said at the weekend that one of the main reasons ANZ decided to appoint receivers to Chimaera was due to the deterioration of the market in the past seven days. "A lot of this has to do with the movements in the market," she said. "The options they were coming up with, we didn't think they could come up with the cash," she said.
Discussions between Chimaera principals and ANZ went to the highest levels at ANZ. This can only mean that Mike Smith was actively involved in this and cannot hide behind the shield of "I'm new and know nothing about this terrible securities lending business".
Receivers were appointed to Chimaera on Friday afternoon, resulting in two companies, Luminus Systems and Blue Energy, calling for an immediate trading halt in their shares.
Others are expected to follow suit.
The reason is simple: Chimaera's portfolio includes a lot of small to mid-cap stocks, so much of the securities lending it did was in the less liquid end of the sector, where most damage can be caused when hedge funds short the stock.
It is not known who, ultimately, owns these shares but if it is the directors of companies, they will need to put out statements to the ASX immediately alerting the market that they have margin loans.
Brokers expect there will be a lot of "bargains" in the small-cap sector in the next two weeks as ANZ cuts and runs.
This will add to the volatility in the stock market and no doubt trigger more margin calls on these types of stocks.
There is also expected to be a lot favouritism given to ANZ's clients who will be given opportunities to buy shares at a discount in off-market transactions, similar to what it did with its liquidation of stocks held over Opes Prime.
Others who have accounts with ANZ will try to do deals to try and get their money back. A few Chimaera clients with substantial sums of money are planning to see if they can pay ANZ money and get their securities lending accounts back. ANZ is understood to have already spoken to a few saying they will be "looked after".
ANZ's decision to put Chimaera's stock-lending business into receivership after spending more than two months doing due diligence on the company raises big questions about the sudden change of mind.
That such a big decision was made while its chief executive Mike Smith was away raises even more questions.
A source close to Chimaera said the past week had been nothing short of bizarre. "Senior executives at ANZ abandoned Chimaera, with no notice," he said.
A few of the bigger clients are understood to be talking to their lawyers about taking out an injunction against ANZ to stop it selling shares. Injunctions rarely succeed, so other courses of action are also being considered.
One client said he stuck with Chimaera because he believed even though ANZ was not pursuing its rescue package, Chimaera had a recapitalisation plan in place. "This is now in doubt due to ANZ's decision to put it into receivership," he said.
"We were told that a recapitalisation plan was in place with two Asian banks interested in injecting capital. On Wednesday, we started to put together a syndicate to pay out our loan. That syndicate is formed and we had hoped to put it to the ANZ this week but if they start selling shares, we will be in a terrible situation and face big losses."
The problems at Chimaera continue to highlight the need for regulation of the securities lending industry in Australia, which has one of the deepest lending markets in the world because stock lending is so cheap. For a few basis points, super funds were able to lend their shares out to the likes of Chimaera and Opes Prime, who then on-lend to the hedge funds, who use the borrowed stock to short it, and decimate the very funds that super funds are meant to manage for Australians.
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