MFS appears to have so much to hide - Peacock must be so...

MFS appears to have so much to hide - Peacock must be so grateful that Scott has assisted his convenient and fay dignified 'Dame Lady Melba' farewell tour. Unprecedented behaviour by ASX and ASIC - and no comment by ASX and ASIC.

Bryan Frith | March 20, 2008
TROUBLED property financial services group MFS is one company which has conspicuously ignored the recent reminder by the ASX and ASIC in relation to the possible need for disclosure of directors' margin loans.

On February 29, the ASX released a "companies update" on its continuous disclosure requirement, listing rule 3.1, which imposes a statutory obligation on listed companies to disclose immediately any information which a reasonable person would expect to have a material effect on the price or value of the company's securities.

ASIC co-operated with the ASX in the release of the update, which was aimed at ensuring that listed companies were aware of their continuous disclosure obligations, particularly in the current environment of high market volatility.

The update pointed out that the ASX listing rules require companies to disclose the shareholdings (notifiable interests) of directors, within five days of their appointment or resignation, or whenever there is a change in their holdings.

It also pointed out that information about shareholders and their shareholdings can be material under 3.1 and, therefore, require immediate disclosure.

The update nominated information obtained by companies in response to tracing notices issued to establish the beneficial ownership of shareholdings as one instance where disclosure may be required under 3.1.

On margin loans, it says that, where a director has entered into a margin loan or similar funding arrangements for a "material" number of securities, 3.1 may require the company, in appropriate circumstances, to disclose the key terms of the arrangements, including the number of securities involved, the trigger points and the right of the lender to sell unilaterally. Whether a margin loan arrangement is material under 3.1 is a matter which the company must decide "having regard to the nature of its operations and the particular circumstances of the company".

So what does that mean? What it doesn't mean is that there is a wholesale need for the disclosure of margin loans held by directors, and the details of those loans.

But what it does mean is that companies need to ensure that they take steps to require all directors to provide the details of any margin loans they have. Those details would be the private information of the company, and disclosure would only be required if it was, or became, material.

Materiality depends on the case by case circumstances, but, as a general rule, it's arguable that disclosure should not be required for margin loans over less than 5 per cent of a company's securities. That's the disclosure level for substantial shareholdings, although it can be lower for tracing notices, and the ASX considers that disclosure of tracing notices information can be sometimes required.

In the case of Allco, there were margin loans over 14 per cent of the capital, with 6 per cent of the capital sold and the remainder of the shares seized by the bank lenders. In ABC Learning, margin lenders sold 8 per cent of the capital held by Eddy Groves and his wife Le Neve. Clearly they were material.

So while there is a case for disclosure, there is room for disagreement over the level of disclosure which the ASX and ASIC consider may be needed. In particular, the disclosure of the margin loan's trigger point. Arguably, such disclosure would play into the hands of short sellers, who would know how far they have to push the share price down in order to trigger margin calls.

Since the ASX-ASIC update, a number of companies have made disclosure in relation to margin loans, mainly by companies where the directors either don't have margin loans, or have loans over a relatively small number of shares and have the resources to cover the loan.

But MFS has been mute. Yet it's an open secret that Michael King and Phillip Adams -- the co-founders and both former managing directors -- have margin loans over their shares in MFS, which can be triggered if the share price falls below $1.80. King holds 32.48 million shares, or 6.9 per cent of the capital, and Adams holds 31.5 million shares, or 6.7 per cent -- 13.6 per cent in aggregate.

MFS shares haven't traded since January 18, when MFS spooked the market by announcing a proposed $550 million rights issue, together with the spin-off of 65 per cent of the Stella tourism business. In one day the share price plunged almost 70 per cent, from $3.19 to 99c -- well below the $1.80 margin loan trigger.

MFS shares have now been suspended from trading for more than nine weeks, initially for what were only flimsy reasons. However, the company is now late with the release of its half-yearly results and the ASX won't allow trading to resume until those results have been released.

But unless King and Adams have been able to take advantage of the suspension to come to an arrangement with their lenders, then there will be a large share overhang when trading resumes, and the likelihood that more than 13 per cent of the capital will be dumped on the market.

It's true that Adams and King are no longer directors of MFS. Adams stepped down in June last year when he moved to Dubai to spearhead a push by the company into the Middle East. He was replaced by King, who resigned and quit the board after the January 18 debacle.

But non-disclosure of the margin loans would be a case of form over substance. The ASX should ensure the market is adequately informed on this matter.

SO Tom Hedley's Hedley Leisure & Gaming Property Fund is now reviewing its strategic options after several parties have indicated an interest in acquiring part, or all, of the fund's assets.

And HLG has also entered into agreements to sell two pubs for $25 million and is investigating the possible sale of more pubs.

HLG said that contrary to press speculation the pub sales had not been conducted at the request of the fund's lenders or to comply with debt covenants.

That may be so, but this commentator maintains that the ASX should query HLG about its statement on Monday that it was finalising a number of divestment transactions "in order to reduce the fund's debt" only a week after telling the ASX that it didn't know of any reason for a sharp fall in price of HLG securities, and the fund didn't have any information that hadn't been announced, but which, if known, would explain the price movement. At the same time, HLG disclosed that it had put on hold the acquisition of another seven pubs and was reviewing its pub acquisitions strategy and portfolio.

HLG did not disclose yesterday why it has decided to reduce debt; whether it's simply a matter of prudence or there is some other reason. HLG securities have plunged almost 70 per cent since January 1, from $2.84 to 84c. They rallied 6c, or 7 per cent, yesterday to 90c, after sales up to $1.05.

That must be encouraging for the CEO Tom Hedley. His private company TWH (Qld) owns 77 million HLG securities, or 56 per cent of the securities on issue. Following recent guidance from ASX and ASIC, he has disclosed margin loans over 20.6 million of those securities. That's 15 per cent of HLG and it's clearly material.

The margin loan has a trigger point of 50 per cent, at which point the lender has a right of unilateral sale. Hedley is seeking to renegotiate the loan.

[email protected]