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Taking Stock 31 May 2012

No investor should overlook the achievements of Ryman Healthcare, an operator in the retirement village and healthcare sector.

Its recent profit figure of $81m, its increase in dividends, its continued progress and growth rates, and its retention of industry respect have enabled it to achieve the status of one of New Zealand’s greatest home-grown companies – celebrated by its clients and its owners.

It has grown at impressive rates yet retained a reputation for quality, its management of its many villages clearly focused on its primary task of providing quality facilities and services for its residents and patients, with minimal use of debt.

In essence Rymans is a business model that works lucratively if you get the management right, and allow your residents to be your marketing force. Word of mouth will always be the most effective form of promotion.

Ryman would fail if its focus was on dividends, cost cutting, under rewarding the wonderful nursing staff or other corporate objectives.

If residents are treated respectfully and kindly, a retirement village operator will succeed, the key to financial success being the real estate, but the real estate being worth nothing if no-one wants to live in it.

What Rymans now has is an exclusive perpetual right to sell thousands of homes for a 30% (or greater) fee, at regular intervals.

It charges a fee to enter the village and it gains at least 20% of the proceeds, sometimes 40%, when a villa or apartment is on-sold. Sales occur regularly because its residents, by definition, are in the older age brackets.

This latter sale fee is pre-ordained as the initial purchaser has agreed to sell the licence to occupy the unit back to Ryman for 80% of the initital cost price, when the purchaser departs, often for an apartment where more care is available.

Even if the cost price never rises through inflation or natural demand, Rymans has had an initial fee of 10%, and a minimum 20% gain when the house is resold.

If 3,000 Ryman units were worth $300,000 each, then Ryman would control $900 million worth of houses that might change ownership every five years, so it might be selling about $180 million of real estate every year, for a margin of at least 20%, probably 40% if the villas rose in value each year. That is what provides its profits. Forty per cent of $180 million is $72 million. And Ryman is still growing.

As well it runs apartments and care centres, from which it might or might not make a little, but that figure would be irrelevant.

Ryman is a client-focussed company, with good management, so it succeeds, for as long as there is growth in the numbers of older people wanting or needing care, in a retirement village/rest home environment.

Similarly Summerset, equally well managed and client-focussed, is bound to succeed, it being a follower of the same model, though its scale is smaller. It also has exclusive selling rights in perpetuity, at real estate brokerage margins that would be the envy of the normal real estate chains like Harcourt.

I guess the effort of Metlifecare to merge with Retirement Villages Ltd and Vision Senior Living is an attempt to obtain scale and improve its debt ratios but its future is not as clear to me, though it has the same perpetual selling rights as Rymans and Summerset.

Metlifecare has had many ownership changes, often with corporate rather than Community focus. It has rarely achieved industry respect for its management, and does not seem to enjoy the same levels of enquiry as its competitors, resulting in slow turnover of its vacant villas.

Metlifecare’s share price suggests that it has work to do, to gain the same respect as Rymans and Summerset.

That the turnover of its properties seems to take longer than its competitors, and vacancy rates higher, may imply less “word of mouth” marketing and imply its relationships with its residents have sometimes been fractious.

Having said that, there will be hundreds of residents who enjoy their life in Metlifecare villages, regardless of corporate matters.

But it is Rymans and Summerset that set the pace, proving, in my opinion, that excellent management and staff are the key to a business model that sheds cash when scale has been achieved.

Disclosure: 1. I own shares in Ryman and Summerset.

2. I have chaired for two decades Parkwood Retirement Village which

 competes with Rymans and Summerset in Waikanae. Parkwood is an established mature village with no debt, is community-owned, and has a low density of housing, affordable as it has no commercial imperatives. It was New Zealand’s first retirement village, and is amongst the best, in the chairman’s opinion! It does not require residents to sell at a figure related to the original price. Vendors are paid 90% of the actual sale price.


The recent media focus on nursing and care staff at rest homes is absolutely justified.

The high standards of skill and compassion displayed by nursing and care staff are the core of what makes a retirement village or rest home popular with its residents, and the families of residents.

The better organizations do not adhere to minimum wage levels but there are still ridiculous gaps between what society pays real people, and what they pay those who have more power.

Care staff are often able to work part-time, fitting their work in with the family obligations they face, but this should not be an excuse to minimize their pay.

For example, the award rate of $14.35 per hour is significantly lower than the minimum rate paid in places like Parkwood, where the absolute minimum is $16.35 per hour, plus additional penal rates of $5.00 per hour for weekend or public holidays.

Those organizations who focus on the minimum award rate must find it very hard to compete for staff, in a world where demand for staff is growing, and where the average age of nursing staff continually rises, with far fewer people seeking nursing careers, when they leave school.

These are real issues, and pose a challenge to those who provide services to the ageing.

The likes of Ryman and Summerset will undoubtedly have ample ability to reward their staff fairly.


The tongue-in-cheek suggestion that the Financial Markets Authority should make use of former participants in the finance sector, perhaps by using them to seek compensation for investors, may not have been as frivolous as it seemed.

Just last week investors learned that a previous chief executive of Perpetual Trust has played a role in helping investors in the failed Nelson finance company, F & I, a tiny company that collapsed in 2007 under a swathe of bad lending and illogical loan-for-share swaps.

Investors in F & I may benefit by several million as a result, at the expense of another Nelson finance company, LDC.

The fight for investors has been led by Stephen Eaton, who became chief executive of Perpetual in the 1990s.

Eaton was chief executive of PGC Trust in the mid 1990s.

He had overseen the PGC takeover from AMP of Perpetual Trust in 1998. Perpetual subsequently was merged with PGC Trust. Perpetual then went on a charge for growth, seeking corporate trust work even with grubby little companies like Lombard, Capital & Merchant Finance, and perhaps MFS and Dominion Finance. Perpetual has yet to pay for the cost of these errors.

Eaton was succeeded by Peter Baynes, who was replaced by Louise Edwards, who was replaced by Matthew Lancaster and Patrick Middleton, the incumbents at Perpetual Trust today, fighting fires on many fronts with what looks like low quality garden hoses.

It was during Eaton’s watch that much of the growth occurred. Everyone else has tried to cope with it.

To be fair to him, it probably looked easy to everyone, in 1998.

Time has shown that Perpetual did not understand the risk it was taking, in signing up to govern poor companies with trust deeds that allowed them to sidestep proper controls.

For example the seedy Lombard deed allowed Lombard to borrow money via capital note issues, pledging to repay these notes on specific short-term dates, yet allowed to classify them as “capital” and then leverage off this “capital”. (CMF and Bridgecorp did the same.)

Effectively this meant Lombard had gearing ratios at unsustainable levels, a fact its directors and chief executive did not seem to understand. Nor did Perpetual’s local manager, Stephanie McGreevey seem to understand this. It remains hard to believe that PGC and CEO Brian Jolliffe failed to understand the hazards they were embracing.

Eaton had led Perpetual for some years, presumably not appreciating the risk at Lombard of combining a hopelessly inept chief executive, with an unworldly and inept board of politicians, operating from an utterly deficient trust deed, overseen by an amateurish trust company, weakly managed in Wellington. What a mix!

In recent years Eaton has spent many, many months fighting for investors to overcome some poor finance company work, in Nelson.

Whatever his motivation – probably linked to family interests – the outcome is excellent.

How many more exiles from the finance sector are there out there, with knowledge of what went wrong, of bad processes, of boardroom errors, of cynical, self-serving behaviour, of crazy projects tilted to favour a few at the expense of the public?

Are they prepared to blow whistles and help put things right, as Eaton has done?


Lombard’s directors will soon hear the outcome of their appeal against their criminal conviction for inadequate prospectus disclosure.

The appeal may focus on some court processes, relating to the timing of evidence and the cross examination timing.

Whatever the outcome of the appeal it should not alter the strength of civil claims against the directors, the trustee and the auditors. The claims MUST proceed.

The directors were found guilty of not divulging details of liquidity concerns.

The Crown prosecution in my opinion failed to fully describe the failures of lending processes, did not discuss some of the investor grievances relating to contributory mortgages, and did not focus sufficiently on Lombard’s Blue Chip involvement, nor the issues relating to the registration extension of its December 2007 prospectus, nor the rights issue, nor the investor tea parties, with their “trust me” theme.

The judge did not rule on any of these matters, perhaps accepting that in a criminal case the burden of “beyond reasonable doubt” was too tough. Perhaps the judge was careful to leave open the doors to civil claims.

Perhaps the prosecution was not well briefed on all of the known errors.

The evidence considered in the criminal case may have been incomplete but civil claims are assessed on the basis of the balance of probability, not “beyond reasonable doubt”.

A civil case might succeed with a 51/49 ratio of probability where a criminal case must achieve close to a 100/0 certainty.

My conclusion is that whatever the outcome of the appeal against criminal conviction, the civil cases should proceed with confidence.

The ultimate target will be the insurance policies that cover directors, trustees and auditors, when negligence is proven.

Lombard investors, indeed investors in any finance company that failed, should not lose hope.

They should seek to gird the loins of receivers, or should seek to introduce liquidators (who would need no girding) or replace the trustees.

There must never be a repeat of the gutless receivership response to a crime such as occurred when a director/shareholder of another finance company returned to the office, obtained the cheque book, and paid out $1 million to his father, hours after the finance company went into receivership.

That act has never been prosecuted or publicized, though the receiver must have known.

Such an un-heroic response from a receiver should never recur, and will not recur if investors, helped by a litigation funder, ensure all failed companies are properly examined.

When we will see another John Tuck, the gutsy receiver who rescued the investors of Registered Securities Ltd in the 1980s by sueing the auditors?


What is it that Ron Brierley does not understand about the word “no”?

The GPG company he helped create in a different era failed the test of time, producing good returns for its initial punters, and ghastly returns for all those who bought into the company later in its life.

Brierley, fresh from his failure to keep Brierley Investments Ltd on track, surrounded himself in the 1990s with directors who have made lifetime fortunes from GPG, while retail investors lived on penny-a-year dividends and a nonsensical series of bonus shares, worth nothing if markets had priced GPG shares logically.

Many great philosophers have cautioned that one should judge people by their friends.

Brierley was hero-worshipped by unfocussed New Zealand investors during the crazy bull markets of the early 1980s.

If he said a sixpence was actually worth a florin, the masses believed him, whatever the arithmetic said.

Today Brierley is in his 70s. His GPG company made the same obvious and fatal errors as Brierley Investments. He is no Warren Buffet.

Years ago, the shareholders of GPG booted out the board, brought in some stoic people to clean up the mess, yet still Brierley wants to defy the shareholders, wanting to retain his seat on the board while the GPG carcass is prepared for burial.

His 50 million shares in GPG would be his motivation but he must know that he cannot stop the orderly sale of the scraps. He is simply not wanted on the board by most shareholders, yet is back on, winning by a margin many tens of millions less than his voting power gives him.

To me GPG will be remembered as the company which obtained value from Turners and Growers, Turners Car Auctions and Tower, while the share prices of those companies were slumping permanently.

They made an astonishing gamble when buying Coats, a company destroyer for GPG.

Brierley wanted to buy all of Tower at around $5.30 per share. I rather suspect any hapless shareholder in Tower today would wish they had sold out to that offer.


The failure of the Facebook share offer to hold on to its claimed US$38 “worth” will be no surprise to anyone who has watched founders of a company cash up by way of a public issue.

To me the only surprising aspect of this saga is that two broking firms with a fragile hold on public confidence – Morgan Stanley and Goldman Sachs – were prepared to risk further reputational damage for some more millions of fees.   The public issue was handled poorly, and seems certain to be tested in court.

Facebook can be valued in two ways that are real.

It is worth a multiple of what dividend it can sustain.

(Potential dividend 20 cents, real value might be $3 - $6.)

It might be worth what someone else (bigger fool?) will pay for it. Someone else might believe he can buy it, improve its revenue stream (selling advertising that no-one clicks into), and then sell it to an ever bigger fool.

Like children’s playgrounds, Facebook will provide lots of people with fun, and will have a presumably passing effect on social interaction, but like a child’s playground it will lose its sheen when it becomes tired, and is surpassed by better playgrounds, and no longer attracts sponsorships from Coca-Cola, Wendy’s or Barbie dolls.

Children’s playgrounds are not worth anything much unless they generate revenue, like Disneyland or McDonalds.

What would you rather own? Disneyland, McDonalds or Facebook? (or none of the above.)


The former NZX general manager Mark Weldon has been quoted as saying there was no conflict of interest in allowing the NZX to be the provider of NZX services, the supervisor of its members, a listed participant on its own exchange AND the market regulator.

There was no conflict of interest, Weldon said, because there was no revenue for the NZX in performing the regulator’s role.

Utter balderdash!

The new NZX chief Tim Bennett will display a more intelligent understanding of the issue, one hopes.

We should not need a Queen’s Counsel’s report to bring about change.

The NZX should save us all money and time by handing this responsibility to the FMA.

Chris Lee


Chris Lee & Partners Ltd


Travel plans

I will be in Christchurch on June 5 and 6 (Tuesday, Wednesday) at a new venue as the Chateau at the Park has closed its boardrooms for earthquake- related repairs. My new venue is Huntley Lodge, 67 Yaldhurst Road. I have four unclaimed appointment times, at the time of writing.

I am also planning to be in Hastings and Nelson in June, before I leave for Europe.

Clients or investors in these areas are welcome to record their interest in an appointment and we will contact them once dates are confirmed.


Our quarterly newsletter to advised-clients will be mailed out next week & will explain access to a new advisory section of our website available to clients who have authorised us to offer advice.

The new section will be fully tested and operational in June.

Taking Stock 24 May 2012

In approximately six weeks time, the Financial Markets Authority will announce the names of the trust companies to be re-licensed to act for investors should they invest in managed funds or debt securities, in the future.

The FMA has had applications from the five existing companies, Perpetual, Covenant, NZ Guardian, Public Trust and Trustees Executors.

In the last decade, all of these five have been guilty of failure to warn investors of looming catastrophes, all five guilty of employing inadequate people, and accepting inadequate trust deeds, in their haste to sign up with corporate clients, for what they will now realize was inadequate reward.

The company with the worst track record is Perpetual, but others have been not “worser” but still pretty poor.

The FMA is being asked to license these companies to enable them to carry on with their three tasks.

1. Acting as trustees for investors in securities like debentures and managed funds.

2. Acting as statutory supervisors, for the likes of residents in retirement villages.

3. Acting as trustees for a more obscure range of entities, such as forest partnerships.

Trust companies do not need the same licence to preside over wills and estates. This is lucky for the trustees as their work in this area is arguably the most disgraceful of all, with ample evidence of brand-selling, self-service and abuse of powers. (My advice: regard trust companies like lenders of last resort. Run like the wind!)

If market whisper is to be believed, the FMA will re-licence three of the five applicants, but may offer only short-term licences to the other two applicants, who will be asked to exit the industry, if not as sacrificial goats, certainly as goats.

If the whisper is right, New Zealand will then want to attract an Australian trust company to set up a branch here, to offer better standards and to apply better processes with better staff.

Perhaps the Australian entrant could ultimately be the catalyst for a prosecution of NZ trust companies that failed investors.

Investors would need to see the trustee replaced, enabling a new trustee to instruct the receiver to investigate the culpability of the previous trustee. Investors will need to participate in an expulsion vote.

The only realistic alternative is to find a New Zealand trust company willing to tackle this task.

It was put to me recently that Trustees Executors might be prepared to replace Perpetual Trust, their being little affection for each other, but this hope looks faint to me.

Trustees Executors are controlled by John Grace, of Stirling Grace, also a major shareholder in Tourism Holdings Ltd.

Grace lives in America, is part of a wealthy American family, and owns some property in New Zealand.

He first came to notice in New Zealand when he helped the financial selling company Spicers position itself for sale to AXA. He and the management contracts holder George Kerr presented Spicers to AXA and pulled off the deal of the 90s, selling an annual income stream of a few million dollars to AXA for a capital sum of nearly a quarter of a billion.

This absurd purchase may have put an end to the careers of a few AXA people and is probably the biggest of a series of blunders made by AXA that resulted in their demise here, merged within AMP.

But that is another story.

Grace and Kerr made a killing from AXA’s misuse of its policyholders’ money.

Today, Grace owns TEA and Kerr owns Perpetual. I presume they remain friends.

Would TEA agree to replace Perpetual and then prosecute it for its dismal performace?

When the FMA announces its licence renewals it might make matters clearer by tagging the licences of Perpetual and Covenant, instructing them to exit the business as soon as possible.

That would open the door for the Australians but their licensing would take time.

The statute of limitations looms. We do not want to watch a forward pack sit on the ball for 20 minutes, winding down the clock!

Trust companies make their profits by acting as trustee not for finance companies, or retirement villages, but from overseeing managed funds.

Any reader may recall how last week Taking Stock disclosed that the toxic First Step fund paid its trustee (Calibre) $4 million over a period of a few years.

First Step was treated as a managed fund. (It should have been treated as a grossly “mis-managed” fund.)

By contrast, Strategic Finance paid Perpetual, over the same period, much less than one million.

Perpetual is now getting its revenge. It is charging its fees for Strategic and St Laurence, as though both companies were still functioning, and had assets of hundreds of millions. Perpetual’s fees are being bundled up by the receiver of Strategic amongst a group of other costs, including legal fees, (presumably to save ink).

If Perpetual were overseeing, say, the Tower managed fixed interest fund (if there is such a thing) it might be paid 0.35% p.a. of the gross assets, by Tower’s (hapless) investors.

If such a fund had $500m from (unwise) investors then the trustee fee would be $1.75 million per annum.

There would be very little required of the trustee, providing Tower was honest and competent.

It is for this reason that trustee companies want a licence – some activities grossly over-subsidize others.

Most other tasks are insignificant, incurring, as they do, significant risk for insignificant returns.

But managed funds are the key to Fort Knox, grossly over-rewarding the trustees.

Perhaps a new Australian entrant might bring sharpened pencils to these little rorts.

Of course trust companies also make obscene sums from controlling the investments of the estates and family trusts unwise enough to allow this.

Fees are grossly excessive, poorly communicated and imply skill levels that may never have existed in trust companies, and certainly do not exist now.

An illustration of these problems might be visible when PGC, which owns Perpetual, reveals the exact transactions that led to PGC’s auditor (KPMG) resigning over disagreements about related party loans.

If Perpetual’s Mortgage Fund, or cash fund, supplied by the estates and trusts, had been used to allow PGC to meet its needs or aspirations with its various Torchlight Property Holdings, then you might sympathize with KPMG.

Trust and estate funds should be, but rarely are, invested with respect to the wishes of the settlors and beneficiaries of the trusts and estates.

NZ Guardian Trust, Public Trust, Trustees Executors and Perpetual all have their own branded products, each subject to a good-sized ticket-clipper.

Mysteriously each company, making its “neutral” decisions, find that its brand is the most appropriate for the available funds supplied by its managed estates and trusts.

They cannot all be right, when they neutrally select the “best” fund.

All of this should illustrate the importance of the FMA’s announcement in July.

Two outcomes of this announcement are essential.

1. Trust companies must improve their performance and be accountable for their role in finance company losses.

2. Investors must be provided with a trust company that will be available to take over from any poor-performing trust, and will prosecute that poor performance.

Investors who have been rorted by incompetent and/or dishonest directors, incompetent and/or negligent trustees and auditors, and, in some cases, crooked financial advisers, must be allowed to seek compensation, as well as retribution.

Insurance companies collect their premiums to cover these events.

Now is the time for the insurers to honour the policies they sold.

The FMA, and perhaps litigation funders, will provide the key to the vault. How altruistic will our receivers be?


The FMA is also on the verge of an announcement resulting from its investigation into Strategic Finance.

Of all of the finance company collapses, the most worrying is Strategic’s.

To recap, Strategic claimed its capital in 2008 represented around 20% of its loans, meaning bad debts would need to be 20% before investors lost money. (Capital Merchant Finance capital was around 2% of its loans.)

Strategic’s chairman, Denis Thom, was previously chairman of Phillips Fox, a national law firm, chairman of Wellington Airport, and a director of Kirkcaldies & Stains, the Wellington retailer.

He had displayed his feathers in property, being a founder in the 1980s of Jones’ public company, and a chairman of the Hodges company, Waltus/Urbus.

Around him at Strategic, he had David Wolfenden, former CEO of Countrywide Bank, the late Jock Hobbs, Brian Fitzgerald (ex Equiticorp), Graham Jackson and Marc Lindale (regular property investors) and CEO Kerry Finnigan was a former KPMG accountant.

Strategic’s joint lending partners often included the BNZ and Bank of Scotland International, both AA banks at the time.

Strategic’s credit rating from Rapid Ratings (Ron Keene) was claimed to be higher than either SBS or TSB bank.

And for years Strategic claimed its bad debts were much less than 1% of its lending.

It also claimed much of its lending was with first mortgage security. Sounds good! How, from these lofty heights, can the result be so disgraceful!

We now hear that Strategic’s collectible loans might return less than Lombard’s, whose capital, board skills, CEO and business partners (Blue Chip) were risible, indeed shameful.

Strategic secured debenture investors seem unlikely to receive much more than 10 cents in the dollar.

There has to be accountability and it must be achieved in a public forum.

Some guess that Strategic shared its “first” mortgages with BOSI and a group of high nett-wealth investors whose money was invested through Strategic Nominees.

Strategic Nominees had no capital and was intended to be a vehicle for rich investors                who took the most risk and effectively paid Strategic Finance to manage the investment.

Imagine that Strategic debenture investors put money into 9% 1-year securities, and had that money on-lent to a hotel development, the loan secured by first mortgage.

Strategic lent at 20%, and used money for the initial loan belonging to the debenture investors and the wealthy people investing in Strategic Nominees, all secured by a first mortgage.

The wealthy folk were paid 18% and they took second place in the queue, sharing the first mortgage security.

When more money was needed for the development along came BOSI and it lent at 15%, also covered by the all-embracing first mortgage.

Perhaps at this stage the “first” mortgage’s most secured bit belongs to the investors, the middle bit to BOSI and the third bit to the wealthy folk chasing 18%.

But say that even more money is needed (sales are slow), and the retail investors have stopped supporting Strategic so it has no money to lend.

Perhaps BOSI and the wealthy investors might have put in more money to “save” the troubled deal, demanding the debenture investors cede their pole position and go to the end of the queue.

If Strategic and its trustee believed this was the best solution, and had the authority to do this (and disclosed this), then the solution might have been logical, if highly risky for the debenture investors.

Sadly if the property development collapses, the security might be worth barely half of its estimated value, so the people at the back of the queue might get back only a few cents in the dollar, if anything.

It is speculation to hypothesize that this might have happened but it would explain the disgraceful outcome (10c in the dollar).

What else explains the outcome?

Nonsensical valuations? Idiotic lending? From these clever people, overseen by a trustee and a “big four” auditor?

If the problem was caused by splicing and dicing the “first” mortgage, and seeking to accommodate new lenders to “save” a project, disclosure would have been automatic.

Trustee intervention and communication, and audit tags, would also have been automatic.

Likewise, if those who personally guarantee loans, and do not have their guarantees called up, will be under suspicion. (Pray tell, receiver/trustee.) I think of the Strategic loan on Bendemeer, guaranteed by Phil Burmeister and David Pritchard, as an unsolved issue.

The FMA, after a lengthy investigation, will announce soon whether it believes any further pursuit of these matters in Strategic is necessary.

I believe that whatever the FMA decides, Strategic investors need a much fuller explanation than has so far emerged.

Strategic’s losses did not occur because its board lacked experience and skill, as was clearly the case with Lombard, Bridgecorp, Capital & Merchant Finance, Nathans, MFS and sundry others.

Something caused Strategic’s loan book of around $400 million to produce only the expected $20 – 30m for secured investors, (and nothing for the bond and preference share investors). Something caused the difference between what was still being promised in May 2008, and the reality.

What was that something?


Another set of investors awaiting an explanation are those who took up Macquarie’s invitation to buy into a George Kerr initiative, the EPIC fund, created to buy roughly 1% of Thames Water.

This fund paid 9% for roughly three years, has paid nothing since, and is now, according to EPIC, worth 45 cents in the dollar. The investors have been cuckolded.

Indeed the value is less than 45 cents as EPIC has just rewarded Kerr’s fund management company with around 10 million shares, to salute the retaining of any value at all, an achievement hardly of monumental merit.

I have rarely heard of such nonsense – a “success” fee for destroying value in a fund where fees had been generous and where negotiated terms and conditions had benefited every party except the investors.

EPIC is now internally managed by many of the same people who managed it before, same board, more or less.

The exit fee for Kerr will be paid with roughly ten million shares if a special meeting approves this.

The only relevant remaining asset – a holding in Moto (Thames Water has been sold) – will now sit in isolation, praying that someone will buy it for a giant premium. (Briscoes has a special on prayer mats.)

The apologists will argue that EPIC was a good idea, sabotaged by the global financial crisis.

Others will argue that it was a fund created to provide convenience to Macquaries, an income stream for all sorts of third parties, with no real end-play unless equity markets continued to rise, and banks continues to allow record-breaking leverage.

The issue asked investors to trust the designers of EPIC to pay 9% per annum for five years and list the shares then, at a premium.

Investors trusted them as they were asked.

The “reward” for that trust is likely to colour the investors’ behaviour should any of those “designers” and “fund managers” ask for such faith in the future.

My never-again list which we will publish next month on the new advised clients-only section of our website, is now long, and in heavy ink.

In my next life, I expect to see that “termination” fees will be negative, when performance is negative.

And I expect to see inappropriate people, who have failed to preserve value through elementary errors, (like using excessive leverage), will be directed to have no hand in governing public companies or investing other people’s money.

Never-again lists will then be etched in the sky.

(For now, our clients only website page of never-again lists will have to suffice.)

Chris Lee


Chris Lee & Partners Ltd


Travel plans

Mike will be in Auckland on Monday 28 May.

Chris is planning to be in Christchurch on June 5 and 6 at a new venue as the Chateau at the Park has closed its boardrooms for earthquake-related repairs. His new venue will be Huntley Lodge, 67 Yaldhurst Road.

He will be in Nelson and Hastings in June, available to investors/clients.

Anybody wanting to arrange an appointment is welcome to contact us.

Taking Stock 17 May 2012


They did not result from JP Morgan’s horrendous US$2 billion derivative-related loss last week.

Rather they related to a natural response over three decades of financial market excesses. I am talking about massive white collar job losses, totaling several hundred thousand, from the over-fed financial markets, where the sense of entitlement (to revolting wage packets) knows no boundaries, in many parts of the globe.

Job losses in London financial markets alone have exceeded one hundred thousand. Thank goodness!

In New Zealand the job losses from finance companies alone have exceeded a thousand.

So what does the world plan to do with all these once highly-paid, narrowly-focussed people who speak in a weird jargon, often, with affected tones (think Michael Fay)?

I have the answer, to solving this fraction of the unemployment problem.

Put them all to work in the Financial Markets Authority. Put them all on contract on a small base salary, given incentives based on how much they can recover for investors, by investigating any crooked behaviour of their former mates.

Heaven knows the FMA needs more hands to investigate all the strange behaviour of the last decade.

I have nothing but admiration for the executive staff at the FMA, who for many years will face the conflicting responsibilities of prosecuting previous behaviour while restoring confidence in the current financial markets.

The FMA will need all the investigative help it can get, and what would provide access to more “shortcuts” than engaging those who sat amidst any cheating, and have no loyalty to those who employed cheats. Use one to catch one (or two).  

What else does one do with a sacked derivative trader, or property development lender, or corporate trustee or redundant auditor? Who would want these people in today’s austere world where retribution and compensation are the major topics?

I conjured up this solution to white collar unemployment when I read a superbly constructed formal complaint made this month to the FMA, about the conduct of the appalling First Step fund, created by Douglas Lloyd Somers Edgar, Gerald Siddall and Russell Tills, of Money Managers and NZ Funds Management, the latter also the creator of an appalling CDO-laced, sub-prime mortgage “super yield” fund.

A Hawke’s Bay retired professional person constructed the complaint to the FMA.

The author of the complaint about First Step has spent thousands of hours of research, demonstrating that First Step was marketed incorrectly, inaccurately and incompetently, to the extreme cost of investors.

The losses it created are less than Bridgecorp created but more than Lombard or Nathans, probably on a par with the moronically-managed Capital & Merchant Finance and MFS/Octavius finance companies.

First Step investors were wooed with cynical marketing of a tax-structured product that sought public money with which to lend to those who could not borrow from established moneylenders.

First Step lending promised to split money into a number of different lending vehicles, offering higher returns for each division, as risks rose. I think the worst division tried to pay 2% more than the “least worst” division.

First Step alleged that it made insignificant levels of related party loans, and it alleged that its lower-yielding vehicles were dominated by first mortgage securities, yet it lent to staff to buy their Money Managers First Step franchises. (Related parties?)

[As an aside, the belief that a “first mortgage” is low risk by definition is an absurdity. A “first mortgage” loan over a mansion belonging to a crook has less value than an unsecured loan to an honest man.]   

Several analysts, commentators and media outlets spent a great deal of time trying to warn the public that First Step was over-filled with toxic waste, and that its structure grossly over-rewarded its owners and the myriad of ticket-clippers they created, and under-rewarded those prepared to take their chance.

For example First Step paid around 7% to investors, and a tax-levy of 2%, meaning around 7.15% gross, when banks were paying nearly 7% gross.

Banks had billions of capital to offset losses.

First Step not only had no capital to offset losses, but they also paid out millions in fees to themselves before the investor saw any of his money back.

First Step lent its investors money at bucket shop rates, taking bucket shop risks, but rewarded its trusting investors at bank-like rates.

Consumer Magazine, with some discreet help, warned the public of the dangers.

Money Managers/First Step sought, in its rebuttal of Consumer, to convince people that it had virtually no related party loans and that its various trusts were carefully differentiated by risk.

In truth it lent more than 10% of all First Step money to a grubby car lot partly-owned by Douglas Lloyd Somers Edgar, and its biggest, and arguably worst, loan was spread amongst all of its trusts, from the “most secure” trust, paying the least return, to its least secure trust, paying a slightly greater return. There was no risk differentiation visible in this transaction. Consumer was exactly right.

Of course the First Step returns were theoretical. Unless investors were quick enough to exit before Edgar froze the funds, there were no “returns” at all, except of those investors’ own capital who escaped early on. The fund was frozen, not given to a receiver, because its small print rules provided for this outcome.

Frankly, I regarded First Step as the most toxic financial provider I had seen, worse even than Bridgecorp, which at least had an independent trustee, and was subject to professional supervision, even if we know now that the trustee, auditor, independent directors and market authorities in New Zealand were spectacularly inept in exercising their supervisory roles with Bridgecorp.

Well, the aggrieved investor, having spent thousand of hours plotting all the blowfly-like behaviour of First Step, has now submitted his case to the FMA.

Pity the FMA! First Step has been carefully crafted in the hope that it can fend off all attacks.

The ghastly fund “retired” in 2006, and now is in effect in liquidation, having revealed that around half of the capital is lost, not to speak of the interest.

One group of participants will not regard First Step as a failure.

From First Step these participants have had income at spectacular levels. Some are still collecting, perhaps at the rate of a million or so a year.

They deserve to be identified, having benefited from the misuse, possibly abuse, of other people’s money.

According to the research sent to the FMA these people are the “winners” if you define “winning” as those who have left the scene with a profit.

Paid to Edgar, Tills & Siddall: $33.3 million

Paid to Money Managers: $22.2 million (largely owned by Edgar)

Paid to Management Fees: $24.0 million (partly owned by Edgar)

Paid to Auditors: $2.2 million

Paid to Calibre Trustees (till recently owned by Tills & Siddall): $4.2 million

Total = $86 million – roughly 15% of the money invested in First Step.

Edgar, Tills & Siddall have done rather well, it is fair to note.

The public, who were duped by the inaccurate, incompetent and incorrect marketers, have lost hundreds of millions.

Meanwhile Edgar has retired and now plays golf most days in the northern suburbs of Auckland, having sold out of Money Managers & MMG Advisers, neither now operating, to the best of my knowledge (and hopes).

Money Managers was sold to NZ Funds Management which for a short while tried to resuscitate the ghastly grouping under the name of MMG Advisers.

Siddall & Tills have reduced their holding in NZ Funds Management. They play tennis quite often. How nice!

Many Money Managers franchise holders have quit the industry.

All that now awaits decision, is whether the FMA has the resources and determination to decide whether investors were misled by the marketing of First Step or by the responses to criticism.

I admire the FMA’s determination, its state of mind evident in the way it has pursued complex issues.

If it lacks the resources, I have given it a potential solution.

Employ some of the many former financial market participants on the basis of a $30,000 salary and a bonus related to the recovery levels achieved for investors.

These people will be used to bonuses. They have been quite good at collecting them.

Let them now use this remuneration structure for the benefit of financial market victims.


The FMA is also under pressure to demand that market participants reveal their relevant history.

Money Managers, like Vestar, Broadbase and Reeves Moses Hudig, no longer exists but the victims still exist.

It would be completely appropriate for all former employees of these organizations to be required to disclose their industry relevant employment history, such as with these groups, in the same way that the directors of failed finance companies should be required to highlight their histories, when seeking consultancy work or directorship.


While the victims of Money Managers/First Step and many failed finance companies wait for the FMA to process complaints, the First Step paper recently-received, and superbly-researched, the victims of finance company rorts are getting older, and are now desperate to see progress in compensation claims.

First Step, of course, was not a company so is simply being liquidated, without a receivership.

Investors in many finance companies are being held up by an unjust process, which begins with the trustee, supposedly looking after investors but perhaps looking after shareholders, appointing a receiver. Note, the trustee selects the receiver who once appointed, has 24-hour access to the cheque book, his bills almost never contested.

Is the receiver going to attack the trustee if he detects historical negligence by the trustee?

Receivers seem to believe that groups of investors should commission such an attach via a class action.

The receiver is usually a large accounting firm.

Will the receiver find it easy to bring action against the auditors, often another large accounting firm?

So how does one unblock this, if there is any sign of “blockage”? Industrial investors may feel that the cost of a class action is beyond them.

Well, there is an answer.

If 10%, (by value invested) of investors requisition a special general meeting (sgm) they can vote to dismiss the trustee.

Next problem? They must find another trustee willing and able to replace the sacked trustee.

The investors would then hope to have a trustee who would use retrieved funds, or a litigation funder, to examine the role of the previous trustee, with a view to compensation.

If such an examination detected “issues” there might be a court case to decide guilt, or there might be an insurance company, having agreed to cover trustees for failures leading to compensation claims, lurking in the background, perhaps happier to settle out of court than to fight, if that is what eventuated.

None of this is easy but it is possible to reach a point where settlements are achieved. Inevitably a sued trustee would blame the auditors and directors. Then there might be three sets of insurers in the argument.

A winning case might be very effective. Cases in Australia have been won, often in the last few years.

One obvious problem is finding a new trustee.

The cleanest trustee company in New Zealand is the Public Trust, if you define clean as having the least number of failures, in trustee-supervised debt issuance.

The Public Trust – NZ Permanent Trustees – was hopelessly inept in its supervision of the complex Credit Sails offer but I can think of no other failure in its debt stable.

By contrast NZ Guardian Trust oversaw the Hanover group, while Trustees Executors oversaw South Canterbury Finance. Covenant oversaw Bridgecorp, Nathans, Belgrave, National, North South Finance and Western Bay Finance.

Perpetual Trust oversaw Capital & Merchant Finance, MFS, Dominion, Lombard, Allied Nationwide, St Laurence, Strategic Finance and Provincial.

If you want to quantify their failures they look like this to me:

Public Trust - $90 million (losses for investors)

NZ Guardian Trust - $450 million

Covenant - $650 million

Trustees Executors - $1.2 billion (paid by the Crown)

Perpetual Trust - $1.6 billion

Hmm. The “best” was Public Trust (because it was smallest). Perhaps we will know more in July when the regulators re-licence trust companies, and may then show their view of who was best or worst. Some may be de-licensed.

Lets assume investors want to boot out the worst (Perpetual) and replace it with Public Trust, irrespective of the regulator’s views.

Public Trust’s chairman is Trevor Janes, quite well respected, obviously well connected, and by all accounts a decent fellow.

One small problem. He was for some years a director of Capital & Merchant Finance, a company cretinously managed by Owen Tallentine, directed by people, after Janes wisely retired in 2006, now facing criminal charges.

Janes would be pleased he resigned when he did.

I except Janes would step up, offering Public Trust’s services to be the good guys to take over from other, more deeply exposed trustee companies.

Perhaps John Key will give Janes the signal that this would be a good task for the Public Trust.

Nothing ever was simple.

If, for example, the investors in Lombard, or Strategic, or Dominion wanted to call a special general meeting (sgm) to boot out Perpetual and appoint Public Trust, they would need a focal point to arrange this. Possibly, I might offer to act as a focal point.

Possibly Perpetual might graciously retire and arrange it without a meeting.

If it needs an sgm, the simple one to get matters rolling would be Strategic Finance, where one investor, Bank of Scotland International (BOSI), had and may still have, 16% of  the outstanding debentures.

BOSI is unlikely to be an admirer of Perpetual Trust.

Perhaps BOSI might like to call an sgm, vote its 16% in favour of a trustee change, and save all the small investors the trouble.

Perhaps this would set the trend for all others.

We might then hasten the process of examining whether the directors, the auditors and the trustees failed in their duty of care to investors, examining each of the failed companies.

Perhaps then we might get the subject of compensation into clear focus.

Time is running out. I am meeting with various parties to expedite this.

Any readers of this website who want to add their shoulder to this issue are welcome to email me.


Any reader doubting the sensitivity or relevance of the relationship between auditors and trustees should read the views of the chief executive of the Institute of Chartered Accountants, Terry McLaughlin.

He wrote recently in The Dominion that trustees of finance companies should have to pay auditors if they wanted to rely on auditors.

“In hindsight, the collapse of finance companies in New Zealand raises questions about how effective corporate trustees have been,” he concluded.

A reasonable interpretation of this view is that auditors and trustees expect to be under scrutiny, as compensation claims are processed eventually.


The new NZX CEO Tim Bennett began his new task this week, taking over from the controversial swimming medalist Mark Weldon, who now heads off to Cromwell to develop a vineyard in the private sector, where he will get to practise his people skills.

Weldon and his wife will face challenges in a small town where skilled contractors will be important to the Weldon’s aspirations.

Bennett faces a much bigger challenge.

The NZX has widened its revenue streams and been aggressive in its pursuit of income and dividends, but it has not developed our capital markets and has not brought unity or harmony to its sharebroking members.

Arguably it has failed to improve standards. Unarguably it should not have any role in enforcing the law on its members. It should have no regulatory role.

The NZX membership still is a disparate group, with only a tiny number of its members dedicated to research-based advice, or skilled corporate advisory work.

First NZ Capital has won top broking firm for six of the last 10 years. Goldman Sachs (3) and Craigs had also have won this accolade.

In the non-advisory sector Direct Broking (ANZ) has excelled and has growing market significance, and both UBS and Macquaries have roles in major deals, like the imminent Mighty River Power float of a Crown enterprise.

Tim Bennett will know all of this and will know that in a world where corporate deals are fewer and revenues are down, those opportunities for development will not be funded easily, by levies on its members.

Sharebrokers relying for revenue on 1% (or more) fees based on retail client wealth will have growing difficulty in justifying their fees, if clients are going to see 3% to 6% long term returns, occasionally damaged by unexpected losses.

Client walk-out will build insidiously, and then be destructive.

So the revenues of the members will bring attention to costs. NZX costs are far too high, resulting in fewer listed companies and membership discord. NZX           costs must come down.

Some in the NZX believed the main blockage has been over-vigorous requirements of issues like continuous disclosure.

Bennett may soon develop a more insightful view.

The next decade will be characterized by angst, by vigorous regulation, by low margins, but improving technology, and hopefully by improvements in communications and disclosure, and eventually, I hope, as an optimist, by more sustainability and a more planet-conscious attitude toward growth and sustainability.

I have a further hope that the quality of the NZX board of directors will match the mores of the times.

I also hope to see a reversal of the trend of grossly over-rewarding executives, with bonuses, and salaries, and a reversal of the American trend to spend company money on frippery, displaying an attitude of  “have the cheque book, will indulge”.

First class luxuries will not sit well with an era of austerity.

Tim Bennett, one hopes, will be tuned in to the need to engender confidence in investors by displaying leadership, management skills and by being in tune with the people who fuel capital markets with their savings.

He may well be the right man, arriving at the right time. I hope he finds he gets surrounded by the right people at board level to support him in his important tasks.

Chris Lee


Chris Lee & Partners Ltd




Mike will be in Auckland on Monday 28 May.

I am planning to be in Christchurch on June 5 and 6 at a new venue as the Chateau at the Park has closed its boardrooms for earthquake-related repairs. My new venue is yet to be confirmed.

Anybody wanting to arrange an appointment is welcome to contact us.

Taking Stock 10 May 2012

Its awakening has come too late to avoid the incineration of several hundred million of tax-payers money, but it is a pleasure to report that Treasury now appears to have grasped the need to douse the bonfires at South Canterbury Finance.

The late Allan Hubbard’s company will have cost tax-payers rather more than a billion when the final arithmetic is done, half a billion more than the Prime Minister calculated, half a billion more than its retired chief executive Samford (Sandy) Maier Junior understood, and at least a few hundred million more than might have been the case had the clean-up process been handled skilfully.

The good news is that Treasury now seems to understand the need to focus on this liability.

Whether this is because it has been overwhelmed by the undeniable evidence, or whether it is because the Minister of Finance has intervened, is not something on which I can adjudicate.

What I can guarantee is that Bill English has been provided with irrefutable evidence of inept and inappropriate transactions.

And I can say that Treasury has now reacted, better late than never.

The proof is in Treasury’s belated awakening in its selection process for the new Treasury role of selling the residual assets reclaimed from failed finance companies like SCF. The successful candidate is unlikely to be carelessly chosen.

Treasury is now applying the fit and proper person test when appointing directors to the state-owned enterprises to be partly sold to the public. This is further proof.

Treasury is now taking over from McGrathNicol, whose management of the SCF receivership has been unsatisfactory, in my opinion.

All of this late flurry of activity I interpret as an acknowledgement that the SCF Crown underwrite was handled poorly, failing to enforce Crown standards on a private sector model which had a voracious appetite, as did the Roman patricians when they stuffed themselves to death during the fall of the Roman Empire.

Clearly, having seen the evidence, Treasury must now close down the remaining SCF asset recovery team, it must stop all the clocks that have ticked away, and it must write a manual to ensure there will never again be such a succession of blunders.

If the Crown were ever again to guarantee the private sector, it must limit its guarantee, it must ensure Crown standards are met, disallowing private sector gluttony, it must have supervisory structures that include possession of the cheque book, and it must have formal processes that ensure complete transparency and commercial logic in all sales of all assets.

Perhaps the time to publish a chronicle of the events that should never have happened is yet to come but as examples of bad decisions that have cost the tax-payers at least a hundred million I offer this list.

1. SCF was allowed, under Maier, to discount asset sales to prolong its life. Many full-value assets were sold off cheaply. Cost: tens of millions.

2. SCF was allowed to raise vast sums of money at high rates, under the Crown guarantee. The Crown simply underwrote the lot. Cost: tens of millions.

3. SCF was allowed to employ consultants and an advising sharebroker, at a cost of several millions in fees, seeking a solution that all parties, who had read 2009 auditor analysis, knew was impossible. The Crown knew SCF was insolvent in 2009. Regrettably, the analysis was secreted. Cost: tens of millions.

4. SCF was allowed to appoint a receiver whose apparent goals (the re-birth of SCF) were demonstrably improbable, and whose strategies have cost tax-payers far more money than any changes to student loans might save. Cost: tens of millions.

5. SCF, governed, in effect, by a board too closely connected to its advising broker, did not align its plans with the interests of its guarantor (the Crown), in my opinion.

6. SCF, under its receiver, was allowed to sell what were by then legally Crown assets without adequate Crown supervision, and to continue lending, effectively of Crown money, without Crown supervision. Some lending was inane. Cost: tens of millions.

7. When SCF was forced to repay a large USA-based loan facility, the Crown allowed a George Kerr fund to part fund the transaction, and to claim a prior position to the Crown. Kerr, in turn, received distress-level interest rates and was able to put in place penalty provisions that ultimately the Crown has paid.

The Crown eventually was forced to pay out every SCF debt investor, rather than just those investors specified by the guarantee. Americans, Asians, professional investors, overseas-controlled trusts – they all received a windfall, never having had an expectation that the guarantee would be widened to embrace all investors.

Why was this guarantee widened, retrospectively? Was it because the Crown could not decline to clear all debt without leaving Kerr/Torchlight in pole position to dominate the receivership? Cost: possibly hundreds of millions.

The end result has been horrific – an enormous waste of Crown money. Some examples of unsatisfactory behaviour are listed below:-

a) After the receiver was in charge, SCF approved tens of millions of new consumer loans, and millions to DataSouth, whose principal was simply running a Ponzi scheme to feed his taste for expensive women, liquor and nightlife. He was sentenced to eight years in jail. The new consumer loans (“good loans”) were soon after sold to Nomura Securities for about 80c per dollar lent! Nomura has profited by at least $20 million. The DataSouth lending suggests inept moneylending skills. Would you not think the receiver might have been a little more competent?

b) The receiver sold a portfolio of industrial loans to GE Money for about 80c in the dollar. The five biggest loans were repaid in full to GE Money within weeks, all refinanced by the banks. GE Money appears to have profited by more than $20 million. What advantage to the Crown did this sale bring?

c) Before the receiver arrived a property development in Ashburton was sold off at an inexplicable discount, resulting in the buyers making almost immediate windfall profits. The same sort of transaction occurred in Christchurch after the receivership. The sales were conducted without publicised tenders or auctions, and appear to have been made on terms that are unexplained and seem uncommercial, one to a former business associate of the head of SCF’s asset recovery team. The Crown’s losses have kept mounting.

d) Helicopter NZ Ltd was subject to a $220 million unconditional bid in 2009. SCF was advised by Forsyth Barr not to sell. HNZ Ltd was sold two years later for tens of million less.

Treasury must now know all the details of these transactions. Certainly Bill English knows.

What I have offered is but a small sample of many inexplicable transactions.

SCF’s toxic state was created during a crazy period when it sought extraordinary growth, in pursuit of profits and dividends, without enough attention to survival. This occurred under a chief executive, Lachie McLeod, and a chief operations manager, Peter Bosworth, whose aspirations were not matched by their foresight or skills.

It is ironic that McLeod, who has knowledge of the rural sector (he now owns three cattle or dairy farms) focussed on property lending, where his skills were not obvious.

The dreadful lending was not disclosed as property development lending and the growing loan problems were secreted.

The late Allan Hubbard, aided by his fellow director, Timaru lawyer Ed Sullivan, encouraged this high risk growth, Sullivan documenting some of the worst loans. The other directors, Bob White and Stu Nattrass, could fairly be said to have found the pea in their whistle too late, resigning, rather than being dumped, in September 2009.

SCF’s adviser, Forsyth Barr, through Neil Pavior Smith and Eoin Edgar, exacerbated the growing problems by advising Hubbard not to sell assets and shrink the business, but instead sought to take charge of the impossible task of selling to the public shares in a toxic company, dressed as an icon.

The information memorandum issued by Forsyth Barr in December 2009 to raise $27 million of a targeted sum of $100 million new capital, will go down as one of the most improbable and amateurish marketing documents I have ever seen.

It was prepared AFTER a highly controversial prospectus had edged past the Companies Office and the Securities Commission in October 2009, and after at least two major accounting firms had identified, in private, massive problems in the SCF loan book. Did Forsyth Barr not know of these reports when the December information memorandum was being prepared?

Forsyth Barr, with Treasury’s consent, then imposed Maier, but not his wife, on Hubbard after Maier and his wife, a personnel consultant, had written in two days a paper on SCF describing it as insolvent by around $400 million, in December 2009. Their paper was not published. Did Forsyth Barr not read the paper?

Hubbard knew so little about Maier that he told me Maier was aged “about 80”. (He was 59.)

Despite all these reports, the SCF accounts were signed off at December 31, 2009, claiming SCF had $200 million of nett assets.

Maier then began an eight-month crusade to sell SCF with a Treasury (Crown) subsidy of several hundred million, with Maier to gain a $5 million bonus if he could sell SCF. Maier’s focus was then on keeping the company alive till he could sell it. He sold assets at significant discounts to buy time. Selling SCF, in the words of one informed observer, required “putting lipstick on a pig”.

One potential buyer of SCF told me the selling technique was akin to “one careful lady driver selling car, as new”. Due diligence suggested otherwise.

Wealth was incinerated as the selling process progressed, with little or certainly inadequate supervision by Treasury.

To cap off this litany of disasters, SCF’s trustee, Trustees Executors, knowing that Korda Mentha had analysed SCF’s loan book and knew it intimately, inexplicably selected McGrathNicol to run the receivership after SCF collapsed at the end of August 2010, Maier failing in his bid to sell.

McGrathNicol under Kerryn Downey and William Black, announced it would rehabilitate SCF, resume lending, re-establish its brand, continue to employ 90 staff, incentivised with large bonuses for a year, in pursuit of what I would call “sorcerors’ magic”. Their concept was crass, in my opinion undeliverable. I said so at the time, by then knowing what the directors and advisors should have known by late 2009.

The new lending was later flogged off cheaply, or written off, the staff released with bonuses after one year, and the assets liquidated, fees payable to receivers, lawyers, investment bankers, travel agents, public relations people and probably itinerant fortune tellers. The Crown paid.

Can anyone believe that this litany of errors was scripted by anyone other than Basil Fawlty? Okay – perhaps Spike Milligan.

Well, the facts will one day be published. Put a fiver on that.

Treasury and Bill English now appear to have recognised that the farce must stop. Thank heavens for that.

So when will the full enquiry be announced? Is a figure of several hundred million of unnecessary losses more important than the non-disclosure of donations to a meaningless politician who in a previous life may have been married to Mrs Malaprop?

Will the enquiry be before or after the Serious Fraud Office and the Financial Markets Authority complete their several investigations, many yet unannounced?

An enquiry would have to confirm that misjudgements by Forsyth Barr, Maier, the SCF board, Trustees Executors and McGrathNicol have cost the taxpayer an amount far exceeding $100 million; perhaps several hundred millions.

Remember that it was the Prime Minister who told us that final losses would be around $600 million. We now all know losses will exceed a billion.

Remember it was SCF chief executive Maier, whose knowledge of the loan book appears to have been, at best, cursory, who told us that SCF’s “good bank” was “around $900 million”, comprising “mostly rural loans repaid monthly”. He said this the day SCF collapsed. (The “good” bank seems to have been nearer $400 million, with almost no rural loans, and certainly no instalment repayment lending to the rural sector.)

It was Maier who told the NZX and holders of listed SCF securities, including preference shares never repaid, that SCF was in break-even mode in May 2010, had no more known loan shortfalls, and had a bright future.

Some preference shareholders assumed Maier’s announcements were accurate, and declined to sell their shares as a result.

Investors are now writing to the FMA querying the accuracy of these statements. Justice Dobson has set guidelines on the need for accuracy and completeness of information provided to investors.

The FMA is replying, telling investors to keep their files intact.

The saga is scarcely credible.

What would Sybil say?


A great irony in the SCF saga is that the man who came close to putting a cap on SCF’s cost to the Crown, George Kerr, is now himself in the spotlight (at PGC).

It was Kerr who in 2009 was the centre of a transaction that, had it not been stopped by Forsyth Barr (Edgar and Pavior-Smith) and Hubbard, might have capped Crown losses in return for a Crown investment in SCF of $250 million.

The proposal may or may not have worked out as intended but the capping of the loss would have made the architects of the plan modern-day heroes.

Kerr headed the team of architects.

He was also the key figure in the recapitalisation of Marac, with a piece of financial engineering that itself may have saved the Crown from more losses under its guarantee scheme. Marac survived. Kerr was a major investor and was the energy behind the transaction.

Marac, today a part of Heartland, was provided with the capital to offset its hidden losses, merge with two building societies, and now emerges as a candidate for a banking licence, profitable, properly governed, liquid and with a competent chief executive.

For this recovery the country owes a vote of thanks to Kerr and First NZ Capital, who combined to arrange the recovery.

Kerr, however, now finds himself in a quagmire, wearing heavy gumboots.

As part of his Marac rescue, he wisely de-linked Marac from PGC, leaving PGC with a vulnerable and weak residual base of assets. It describes itself as a wealth manager. I hope it does not become a wealth destroyer.

PGC today comprises an untransparent, unsuccessful trust company (Perpetual) and has management contracts over an untransparent fund that seeks to buy distressed assets at huge discounts, to sell off later at profits, or to nurture back to health.

Perpetual Trust was the worst of the finance company trustee companies and will now be preparing to defend itself, as its failure to protect investors inevitably heads for the courts.

This is problematical enough.

The news is worse for Kerr.

KPMG, a “big four” auditor, has very publicly, most unusually, and antagonistically resigned as PGC’s auditor, citing unresolvable problems with what it describes as related party loans within the PGC book and it raises financial governance questions. PGC has offered to disclose the transactions if it cannot convince KPMG that disclosure is unnecessary.

One imagines this means that Perpetual Mortgages, required to be the epitome of propriety, has lent to projects that KPMG think may connect to PGC people or other related parties.

Usually this sort of discussion never gets aired outside a boardroom unless it is unresolvable.

PGC and Kerr do not need this attention.

The company has struggled to achieve a full complement of independent directors, it has amassed enormous losses in recent years, its million dollar managing director John Duncan resigned last month, its share register is awfully lop-sided, and the FMA is now casting an eye over some transactions.

PGC must cut its costs, especially its salaries, as well as address transparency, if it is to remain a public company.

Kerr has a history in property development, and an involvement in the likes of Jack’s Point in Queenstown, where land prices are well below the figures the developers had originally sought.

Many organisations have lost money in such developments.

Kerr probably wants to fix the PGC share register but may need agreement from his lenders to achieve it.

He and an American partner (Baker Street) own 76% of PGC, having failed to achieve a full takeover with a low-ball offer that closed six weeks ago.

Holding 76% of PGC places Kerr & Baker Street in no-man’s land.

They have control but they have antagonistic parties who will use the courts should they believe that PGC is not being managed in the manner that the minority shareholders would want.

The law provides for such action.

Kerr needs to get to 90% so he can compulsorily take over the minorities, de-list PGC, and then manage it as he sees fit, using money in whatever way he thinks can produce profits, in whatever time frame he imagines to be appropriate. Privatised, PGC can do what it likes, once it has sold Perpetual Trust, which is subject to trust company laws.

Kerr needs to get to 90% and ultimately he will need to satisfy his various stakeholders, particularly those trusts and estates who have assigned their money over to Perpetual/PGC.

A cash offer now at 50c might get Kerr to his 90% goal.

Such an offer would cost Kerr around $30 million, and solve many problems, though it might not necessarily stave off client walk-out, a real threat given auditor issues.

How accessible is $30 million?

Kerr may be contemplating the enormous benefit he achieved when the Crown decided to pay Torchlight out in full (principal, interest and early payment penalties) for the money he lent at distressed-loan rates to SCF when it was still imagining it could be rehabilitated.

If all that gain is still available to him, perhaps a new takeover bid is imminent. (Why did the Crown ever allow Kerr to achieve pole position with SCF?)

Such a bid would bring an end to his public company directorship responsibility, though his presence on the Marac/Heartland register would mean he still would have a public profile, something that fits awkwardly with his temperament.

My guess is that George Kerr will have a fairly full schedule, for a fair while, but ultimately he should revert to doing business without accountability to the public. If he cannot privatise PGC soon, his gumboots risk being stuck in a very sticky quagmire, a poor place to be in a duckshooting season.


Investors in the collapsed Credit Sails listed security are being asked to assign over to a litigation fund the remaining cash left in their CS fund.

The residual assets total a fraction of one cent in the dollar, in sum a few thousand dollars.

The fund wants the money to pursue resolution of any blame for the failed product.

Meanwhile the Commerce Commission has completed a very full investigation and has published its findings to an audience restricted to parties who might have an interest in the report.

I take this to mean that the Commerce Commission is offering those parties an opportunity to offer to compensate CS investors for any shortcomings in the security and the marketing of it.

The relevant parties have been given till July to react to the CC report.

Such a timetable suggests to me that the report does not praise the product design, does not applaud those who marketed it as capital-guaranteed, or applaud those who knew but did not disclose that a legal opinion said the underlying “assets” were not suitable investments for a retail issue.

July might be an interesting month for Credit Sails investors and for its principal promoters, Calyon and the Dunedin broking firm, Forsyth Barr.


This week: SCF, PGC, Credit Sails. Next week: Money Managers. I will disclose whose pockets received $86 million of the roughly $250 million lost by investors sold into the First Step fund, created by Douglas Lloyd Somers Edgar, and by the founder of NZ Funds Management, Gerald Siddal and Russell Tills. First Step was sold as an alternative to bank accounts. I guess a partly submerged log is an alternative to a cruise ship, for someone looking for a ride to Australia.

I will also discuss a strategy to speed up the process of pursuing directors, auditors and trustees who might have failed in their duties to finance company investors. Do investors need to sack the existing trustee and appoint a new one?

Chris Lee


Taking Stock May 3, 2012


Sport often provides us with examples of excellence and when a successful model is on display we should all pay attention and take the opportunity to learn from other people’s achievements.


Winning back to back Australian NBL titles has been an outstanding achievement by the NZ Breakers, and not surprisingly, they attribute much of their winning formula to a strong team culture.

Their club values are built around the “Team is everything.”

One Team + Courage + Integrity = Champions

How very true and also very evident whenever this team is either on the court or in front of the media or general public.

The players, coaches and management come across as very professional but humble, feet on the ground and very customer focussed (fans and sponsors).

Talent is definitely a factor but at the sharp end of all professional sports the defining factor will usually be the team environment and culture, not the difference in the ability of the players.

Paul Blackwell, owner of the NZ Breakers, was asked recently how they have managed to mould such a strong team culture around their talent and for him the answer was simple, “there are no Dick-Heads”.

Professional basketball is a business, selling entertainment and return to sponsors, supporters and other stakeholders.

NZ is a country made up of small and medium sized businesses and there are many success stories.

Often these businesses are family owned operations, or a small group of shareholders, who provide the governance, management, and most importantly, the capital.

If they’ve got a product that people need, look after their staff, create a happy work environment and make good business decisions, they should enjoy success.

There are also many good examples amongst our larger companies including the likes of Briscoes, Hallenstein Glasson and The Warehouse.

These companies have all grown, in different ways, from small businesses under private ownership to large public companies.

Most importantly the founders or original owners are still the major shareholders, and from the outside anyway, it appears that their growth and transition to shared ownership has not damaged the strong traditional values on which these businesses were built - hard work and look after your stakeholders.

All appear very staff, customer and shareholder focussed and all have succeeded in the retail sector, which is a tough business.

Good governance will be a factor as will their sensible pay levels at the top.

Modest directors’ fees, and modest but fair salaries are consistent with a successful and sustainable private business model.

Only 21 employees of Hallenstein Glasson and only 38 employees at the Briscoe Group (includes Rebel Sport), earn in excess of $100,000.

So often excessive salaries and bonus packages at the head of an organisation leads to internal resentment, which is negative for both the culture and the performance of a company.

Financial institutions, especially finance companies, have provided the poorest examples of business values in NZ and their cultures have been built around greed, selfishness, incompetence and poor governance.

Unlike some of the businesses I have mentioned above it was largely not their own money at risk, rather that of investors.

No ‘skin in the game’ and playing with other people’s money, often for personal gains.

The same principles apply in all businesses so why is it that so many of our large corporates struggle to achieve the same level of success and client satisfaction, even when their products are often essential items or in some cases near monopolies.

Certainly the larger the business the harder it is to establish the “One Team” culture but I think the salaries and bonus packages offered to many of our top executives is largely to blame. The business leaders become very self-focussed, driven by their own potential rewards, and a healthy culture will seldom be achieved when selfishness and greed are prominent at any level of an organisation.

The other frequent error is to focus on short-term gains, rewarding short term successes.

I believe that business values and culture are always established at the top of an organisation, and filter their way down.

Good or bad they never work their way from the bottom up.


Is your bank treating you fairly?

An area of frequent disappointment for me is the treatment of investors by their trading banks.

Most retirees and income investors hold some level of bank term deposits, more so since the demise of the non-bank sector and poor performance of other investment products.

Everyone needs a deposit taking trading bank for transactional services, and in many cases for investment, and although they each compete for market share, their behaviour is so similar they have established a near monopoly position, which can be very negative in terms of client service and client satisfaction.

It shouldn’t take 3 days, 4 phone calls and written proof of a rate offered by another bank to get a 0.05% enhancement on a $300,000 term deposit, less so when the person has been a client of the bank for 50 years and carrying similar amounts in other investment accounts.

I also question the wisdom of letting a $500,000 investment leave to another bank for the sake of 0.10% difference, especially when the money has been rolled over on a semi-annual basis for the past 3 years and likely to stay indefinitely. Once again, a long-standing client of the bank was a victim of this.

It is all too common to hear of deposits being rolled automatically at “carded rates” which just happen to be well below what you will get if you ask!

Sadly there are similar examples almost daily and I can’t understand the Bank’s thinking.

Are they using the psyche that older people are unlikely to shop around and will find it too much hassle to shift their money to another bank?

Probably a bit of both although I think that in the banking sector there is a disconnect between the overpaid senior executives and the ‘coal-face’ of the business.

There is no sense shooting the ‘indians’, but who gives them their brief.

I have to qualify this criticism by saying that there are small pockets of bank staff who exercise discretion, use common sense, make quick decisions and seemingly have no barriers to providing the client with excellent service and a fair result.

These may just be examples of competent front-line staff rather than corporate direction but it hardens my view that if one branch or group can deliver the others should move to follow, instead of trying to hide behind their head offices.

If asking for a bit more is not your strong point or if you’re unsure about the competitiveness of a rate offered to you by a bank, we are always happy to assist and make a few calls on your behalf.

Don’t just hand up to them. NZ bank profits jumped more than 19% to 3.3 billion in 2011, largely as a result of fewer bad debts and increasing their average interest margin.

Don’t let them squeeze you.

Basel lll is coming

Basel is a city in Switzerland and home for the head office of the Bank for International Settlements (BIS).

The mission of the BIS is to serve the world’s central banks in their pursuit of monetary and financial stability.

January 1, 2013 sees the introduction of Basel lll, a global regulatory standard on bank capital adequacy, stress testing and market liquidity risk, with the objective of improving banking standards and creating more resilient banks and banking systems, throughout the world.

Basel lll will require banks to hold 4.5% common equity (up from 2%) and 6% of Tier 1 capital (up from 4%), of assets weighted for risk.

A capital conservation buffer of 2.5% will also be introduced, comprising Common Equity Tier 1, above the minimum capital requirement, meaning 7% common equity including the buffer.

Banks whose capital falls within the buffer zone will face restrictions on paying dividends and discretionary bonuses.

What will be significant for many NZ investors is that Basel lll introduces a requirement that all regulatory capital instruments must be capable of absorbing losses.

Existing Bank perpetual securities that don’t meet the Reserve Bank’s loss absorbency requirements will be classified as non-qualifying from 1 January 2013.

The Reserve Bank proposes that capital recognition for non-qualifying instruments will be phased out (grand-fathered) over a 3 year period, or from the first available call date.

The Securities that we believe will no longer qualify as Tier 1 capital because they do not have the required principal loss absorption mechanism include:

1) Both BNZ Income Securities perpetual non-cumulative shares – BISHA and BNSPA

Call dates for these securities are 28 March 2013 and 30 June 2014 respectively, meaning that as from these dates these securities will have no capital recognition.

2) Both ASB Capital perpetual preference shares – ASBPA and ASBPB

Both securities have already passed their call dates, meaning no capital recognition from 1 January, 2013.

3) ANZ National Bank perpetual callable subordinated bonds – ANBHA

Call date 18 April 2013 and no capital recognition from this date.

4) Both Rabobank perpetual capital securities – RBOHA and RCSHA

Call dates are 8 October 2017 and 18 June 2019, meaning grand-fathering from 1 January 2013.

Capped at 67% on 1 January 2013, 33% on 1 January 2014, and no capital recognition as from 1 January 2015, in NZ, but can be used under other jurisdictions.

5) Kiwi Capital perpetual preference shares – KCSHA

Call date 4 May 2015, meaning grand-fathering from 1 January 2013.

6) Credit Agricole, perpetual deeply subordinated notes – CASHA

Call date 22 December 2017, meaning grand-fathering from 1 January 2013.

So what does all this mean for holders of these bank securities?

The issuers have two options, they can either repay the securities as or when they lose capital recognition or simply treat them as debt on their balance sheets and continue to roll them over.

The dilemma for the banks is that many of these instruments were issued at very low issue/credit margins before the GFC and they now provide the banks with very cheap sources of funding.

The flip side is that they now provide many retail investors (especially those who purchased the securities at issue), with returns well below rates offered on more senior securities.

Issue or credit margin is the rate or premium an issuer must pay above the benchmark rate in order to attract investor support.

The strength of the issuer is a major factor in determining the credit margin, as is the ranking of the security, ie. senior or subordinated.

What has also changed the attractiveness of these securities is that the benchmark rates (wholesale rates or swap rates), on which they are issued and reset, are now lower than equivalent bank term deposit rates.

When most of these securities were issued this was not the case and wholesale rates in NZ were always higher than term deposit rates, meaning that investors were getting at least bank term deposit rates, plus a margin.

For example, today, the one year bank term deposit rate is about 4.50%, whereas the one year wholesale rate (one year swap rate) is about 2.65%.

Because of the low rates now on offer for some bank securities they have been re-priced and some now trade at discounts. (RBOHA @ 81 cents, ASBPA @ 73 cents, ASBPB @ 67 cents).

 RBOHA currently pays an interest rate of just 3.70% p.a. and resets annually at a margin of 0.76% above the one year swap rate

ASBPA currently pays 4.00% p.a. and ASBPB 3.80% p.a. and the reset margins are only 1.30% and 1.00% respectively, so all of these securities are costing the bank less than a one year term deposit.

Rising interest rates won’t alter the fundamental cost benefits of these securities for the banks nor will it improve the fundamental weaknesses for investors. It is the credit or reset margins, not the interest rates that are now disproportionate to the perceived risk and willingness of investors.

Quite simply investors in these securities are taking a security position behind senior debt holders (like term deposits) for a lower return.

Only an increase in the issue/credit margin, not interest rates would improve their position and restore the value of these securities, and unfortunately, that is not going to happen.

So, original subscribers to these securities have been faced with the prospect of either, accepting lower returns or selling the securities at a loss.

Basel lll now offers those investors, who have hung in, with some hope of redemption (at par).

It has been interesting to observe the trading activity on some of these bank instruments over recent months as investors and financial intermediaries take a view on future yields and perhaps the likelihood of repayment, post the introduction of Basel lll next year.

Investors who have being buying the two ASB securities between 60-70 cents will be yielding between 5.50% – 6-50% p.a., which is a reasonable premium over a one year term deposit rate.

However the nearly 20% increase in their trading prices during March/April suggested that some buyers had taken a view on possible repayment and had their eyes on the 30 odd cents of capital gain on offer.

There has also been steady trading in the BNZ’s BISHA, in recent months.

Investors who have bought these securities at a price between $0.95 - $1.00 will do very well if the securities are repaid in March next year, receiving quarterly dividends at 9.89% p.a. and a small capital gain.

Sellers might feel that they have done better if the securities are rolled over for a further 5 year at a rate of around 5.60% p.a.

We have an opinion on the possible repayment timeframes for the bank perpetual securities and we are happy to discuss our views with clients who have authorised us to provide them with advice.

There is a market expectation as to how the banks will deal with these securities, but much will depend on the individual bank’s ability to repay them, as they become non-qualifying.

In the case of some of the securities I have mentioned it is an opportunity for the banks to release investors from securities that are now seriously mispriced and no longer providing the purpose for which they were designed.

If one or two of the banks exercise good judgement, and repay their perpetuals, it will bring a lot of pressure to bear on the others, to follow suit.

For example if the BNZ repays BISHA on 28 March 2013 there will be an expectation that the ANZ should follow suit 3 weeks later when ANBHA reaches its call date, and also loses all capital recognition.

At today’s interest rates ANBHA would reset at under 5.50% (for 5 years), yet another example of mispricing in today’s market. Even if they have good intentions the challenge for the ANZ Bank might be finding $860 million to repay what was a very large issue.

For the sake of clarity perpetual securities issued by the non-bank sector are not affected by the introduction of Basel lll.

Certainly perpetuals issued by Infratil (IFTHA), Origin Energy (OCFHA) and to a lesser extent Quayside Holdings (QHLHA) are also examples of reset instruments that now offer lower returns for risk and this is reflected in their secondary market pricings.

There are events that would trigger the repayment of these securities but unfortunately Basel lll isn’t such an event.

Sir Colin


I don’t know what you thought, but I was very surprised and disappointed to see Colin Meads fronting a TV advertisement for Ssang Yong NZ’s new Sports Ute.

Colin Meads fronted TV advertising for Provincial Finance with the well-remembered line “Safe as, I’d say.”

I know a lot of people whose only reason for investing in Provincial Finance was because Colin Meads endorsed the company on their TV advertisements.

In my opinion it displays very poor judgement by Meads and shows a lack or respect for those investors who lost money as a result of Provincial’s failure.

Kevin Gloag

South Island Manager

Chris Lee & Partners

Travel Plans

Mike is planning to be in Auckland again during late May, probably the 28th or 29th.

Kevin will be in Christchurch on 18 May.

Anybody wanting to arrange an appointment is welcome to contact us.

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